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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________________ to ____________________
Commission File Number 1-12994
THE MILLS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1802283
(State or other jurisdiction of (I.R.S. Employer
incorporate or organization) Identification No.)
1300 WILSON BOULEVARD 22209
ARLINGTON, VA (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (703) 526-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, NEW YORK STOCK EXCHANGE
$0.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: None
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 periods that the
registrant was required to file such report(s)) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10K or any amendment to this Form 10-K. / /
As of March 10, 1997, the aggregate market value of the 16,308,744
shares of Common Stock held by non-affiliates of the registrant was
$413,834,379, based upon the closing price ($25.375) on the New York Stock
Exchange composite tape on such date. (For this computation, the registrant
has excluded the market value of all shares of its Common Stock reported as
beneficially owned by executive officers and directors of the registrant and
certain other shareholders; such exclusion shall not be deemed to constitute
an admission that any such person is an "affiliate" of the registrant.) As
of March 10, 1997, there were outstanding 16,923,236 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1997 are incorporated by reference into Part III.
THE MILLS CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE NO.
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 31
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . 32
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . .35
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . 43
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 44
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 46
Item 12. Security Ownership of Certain Beneficial Owners and Management . 47
Item 13. Certain Relationships and Related Transactions. . . . . . . . . 47
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Item 14. Exhibits, Financial Statements, Schedules and Reports and
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
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PART I
ITEM 1. BUSINESS
CAUTIONARY STATEMENT
Certain matters discussed in this Form 10-K and the information
incorporated by reference herein contain "forward-looking statements" for
purposes of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1933, as
amended (the "Exchange Act") relating to, without limitation, future economic
performance, plans and objectives of management for future operations and
projections of revenue and other financial items, demographic projections and
federal income tax considerations, 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.
THE COMPANY
The Mills Corporation (the "Company") owns, develops, redevelops, leases
and manages a portfolio currently consisting of five super-regional, value
and entertainment oriented malls (the "Mills") and 11 community shopping
centers (the "Community Centers," and, together with the Mills, the
"Properties"). The Company is a fully-integrated, self-managed real estate
investment trust (a "REIT") with approximately 900 employees as of December
31, 1996 and provides all development, redevelopment, leasing, financing
management and marketing services with respect to all Properties currently in
operation. The Mills comprise the primary focus of the Company's operations,
with approximately 7.9 million square feet of gross leasable area ("GLA") in
five states, of which approximately 900,000 square feet is owned by certain
anchor and tenants.
The Company was originally incorporated in Virginia on January 2, 1991.
In 1994, the Company was reincorporated in Delaware. On April 21, 1994, the
Company consummated an initial public offering ("IPO") of 14,380,000 shares
of its common stock, par value $.01 per share (the "Common Stock"). The net
proceeds of the IPO ($310.0 million) were used primarily to repay certain
mortgage and other indebtedness and to purchase interests in the partnerships
that owned the Properties. In connection with the IPO, the Company was
authorized to issue 20,000,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock"). As of December 31, 1996, there were no shares
of Preferred Stock outstanding. Upon completion of the IPO, the Company
became the sole general partner of The Mills Limited Partnership (the
"Operating Partnership") and currently owns 50.9% of the outstanding
partnership interests ("Units") therein. Units (other than those owned by
the Company) are exchangeable under certain circumstances for Common Stock
or, at the option of the Company, the cash equivalent thereof. As the sole
general partner of the Operating Partnership, the Company has the exclusive
power to manage and conduct the business of the Operating Partnership,
subject to certain limited exceptions. The Operating Partnership either
holds title to the Properties or directly or indirectly holds 100% of the
general and limited partnership interests in the partnerships that own the
Properties (the "Property Partnerships"), except for the Property
Partnerships that own Franklin Mills and Ontario Mills, in which the
Operating Partnership holds 77.6% (which represents 100% of the current
income and cash flow from Franklin Mills) and 50%, respectively, as of
December 31, 1996. The Operating Partnership has also formed joint ventures
to develop additional properties.
The Company conducts all of its business through the Operating
Partnership and the Operating Partnership's various subsidiaries (the
"Operating Subsidiaries"), which include: (i) Management Associates Limited
Partnership (the "Management Partnership"), which provides leasing and
management services for the Properties, and (ii) MillsServices Corp. (the
"Third-Party Services Corporation"), which provides management services to
properties in which the Operating Partnership does not own an interest and
provides development services for the Properties and new properties acquired
by the Company. The Operating Partnership owns 100% of the interests in the
Management Partnership and 99% of the non-voting preferred stock
(representing a 99% economic interest) and 5% of the voting common stock of
the Third Party Services Corporation. In addition,
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Herbert S. Miller, a director of the Company, and an affiliate of Kan Am U.S.,
Inc. ("Kan Am", which owns approximately 39.9% of the outstanding Units in
the Operating Partnership) each own .5% of the non-voting preferred stock
(representing, in the aggregate, a 1% economic interest) and 47.5% of the
voting common stock of the Third-Party Services Corporation.
BUSINESS STRATEGY
The Company intends to increase its cash flow and the value of its
portfolio through active management of its existing Properties, expansion and
remerchandising of existing Mills and the development of new Mills.
OPERATING STRATEGIES
The Company intends to pursue the following operating strategies:
MODIFY AND EXPAND EXISTING MILLS. The Company leases vacant and newly
developed space with a view towards creating the most effective tenant mix
and maximizing rental income. The Company is planning expansions of Potomac
Mills, Sawgrass Mills and Gurnee Mills and is presently in the process of
remerchandising Gurnee Mills and Franklin Mills, at an aggregate cost of
approximately $115 million over the next three years. These expansion and
remerchandising programs will result in new entertainment zones and, where
appropriate, an upgrade of the tenant mix. The Company believes that the new
entertainment zones will complement the Mills and will enhance productivity
by attracting more shoppers and extending the shopping day.
POTOMAC MILLS: The Company is planning to add an entertainment zone to
Potomac Mills. The Company anticipates that construction will begin in late 1997
for a late 1998 or early 1999 opening. In anticipation of the expansion, the
Company is upgrading the tenant mix in the corridor near the expansion and is
negotiating to lease expansion space to AMC Theatres and a variety of themed
restaurants and other entertainment oriented tenants.
SAWGRASS MILLS: In November 1995, the Company completed the Phase
II expansion of Sawgrass Mills. This expansion added approximately 136,000
square feet of GLA, which opened at 100% occupancy. The expansion cost
approximately $24 million. In the third quarter of 1998, the Company expects
to open Phase III of Sawgrass Mills to coincide with the opening of the new
Florida Panthers Sports Arena located across the ring road from Sawgrass
Mills. The Phase III expansion will consist of an approximately 270,000
square foot entertainment zone expected to be anchored by a 30-screen Cobb
Theater. The Phase III expansion, which is presently in the pre-development
stage, will be owned by a partnership formed by the Operating Partnership
(50%) and Kan Am (50%) in which Kan Am has agreed to fund 100% of the
project's initial required equity, for which Kan Am will receive a 9% annual
preferred return. Under the terms of the partnership agreement, the Company
has the right to buy out Kan Am's interest in this partnership prior to
December 30, 1999, at 120% of Kan Am's capital contributions and accumulated
preferred returns under certain terms and conditions set forth in the
partnership agreement. The Company would provide all development, management
and leasing services for the expansion, subject to the approval of Kan Am of
certain major decisions, including a sale or refinancing of the project and
the approval of the development and annual budgets. The Company would
guarantee completion of the expansion within the parameters of the approved
development budget.
GURNEE MILLS: As part of the Gurnee Mills expansion and
remerchandising initiative, the Company expects to expand Gurnee Mills by over
150,000 square feet of GLA in addition to upgrading the tenant mix. The
expansion will feature a 125,000 square foot Bass Pro Shops Outdoor World upon
which construction began in early 1997. In addition, the Company expects to open
two other anchor stores by the end of 1998. In 1996, Rainforest Cafe opened at
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Gurnee Mills. The Company has signed a lease with another themed restaurant,
Planet Hollywood, to open in 1997. In addition to these tenants, the Company
expects to add additional entertainment type uses within the existing mall
over the next two years.
FRANKLIN MILLS: The Company began its efforts to remerchandise
Franklin Mills in 1996 by upgrading its tenant mix with such tenants as Tommy
Hilfiger, Brooks Brothers and Nautica. In addition, the Company has signed
leases with DKNY, Talbots, The Gap Outlet and Polo and has obtained a
commitment from General Cinema for an 18-screen theatre on which the Company
expects to begin construction by the second quarter of 1997. The theatre will
be the cornerstone for an entertainment zone that will include at least two
other entertainment concepts, such as themed restaurants and interactive
entertainment venues.
CREATE ENTERTAINMENT ZONES. The Company intends to expand and reconfigure
its first four Mills projects to include new entertainment zones. The
entertainment zone at Ontario Mills, the Company's newest Mills, is the
prototype for future Mills entertainment zones. Such entertainment zones will
include multiplex theaters, virtual reality game rooms, educational
environmental habitats, themed restaurants and participatory retailers in which
the consumer is given the opportunity to test the products in a real-life
setting. Ontario Mills currently includes a 30-screen AMC Theatres and a Virgin
Megastore. Scheduled to open in 1997 are a Sega Gameworks, Dave & Busters and
American Wilderness Experience. Phase III of Sawgrass Mills is expected to
include a Cobb Theatre expanded from 18 to 30 screens. Franklin Mills has
received a commitment from General Cinema for an 18-screen theater. Gurnee Mills
opened a Rainforest Cafe in 1996 and plans to open a Planet Hollywood and a Bass
Pro Shops Outdoor World in 1997. The Company believes these entertainment zones
will lead to significant incremental customer traffic at the Mills, extend
consumers' shopping day and lead to the creation of additional destination
sites.
WORK WITH TENANTS TO DEVELOP NEW RETAIL CONCEPTS. The Company intends to
continue to work with existing tenants and potential tenants to develop new
retail concepts. This strategy has worked for retailers who have performed well
in traditional retail formats but wanted to develop and expand into the outlet
format. Ann Taylor, Calvin Klein, Last Call from Neiman Marcus and Saks Fifth
Avenue are examples of retailers that opened their first outlet stores in a
Mills and that later expanded their outlet format in other Mills. Ontario Mills
is the site for Bernini's first Off Rodeo Drive outlet. In addition, the Mills
also provide traditional urban retailers a growth vehicle for expanding into
non-urban markets. Examples include Virgin Megastore, which opened its first
non-urban location in Ontario Mills and Planet Hollywood, which has committed to
open at Gurnee Mills in 1997.
BUILD BRAND NAME RECOGNITION FOR THE MILLS. The Company intends to
continue to build brand name recognition for the Mills. The Company has created
brand name recognition by developing a distinctive retail environment which
offers innovative retail formats, value shopping and entertainment concepts that
attract a wide variety of tenants and consumers. The Company coordinates its
advertising programs to increase brand name recognition in its primary markets
and to attract high a volume of consumers. The Company believes that its brand
name recognition has not been duplicated within the shopping center industry in
any U.S. market.
MAINTAIN STRONG TENANT RELATIONSHIPS. The Company intends to continue to
maintain strong relationships with its existing tenants and high occupancy
rates. The success of this strategy is evidenced by both its high tenant
retention rate, with approximately 77% of expiring specialty store GLA being
renewed upon lease expiration during 1996 and by the existing Mills being 95%
leased as of December 31, 1996 (excluding Ontario Mills). One hundred and
eighty-three of the Mills' tenants have stores located in more than one Mills,
including Ontario Mills. Of the total GLA of each of the five existing Mills at
December 31, 1996 (excluding GLA owned by anchor store tenants), 77% of Gurnee
Mills, 67% of Potomac Mills, 67% of Sawgrass Mills, 62% of Ontario Mills, and
53% of Franklin Mills consist of tenants common to at least one other Mills.
The Company has generated goodwill among many retailers who commit to future
Mills projects years in advance of their completion. As of February 11, 1997,
Grapevine Mills was approximately 55% pre-leased including nine executed leases
and six lease commitments from anchor store tenants and Arizona Mills was
approximately 62% pre-leased including nine executed leases and three lease
commitments from anchor store tenants.
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ACTIVELY MARKET PROPERTIES TO CONSUMERS. The Company intends to continue
to actively market its Properties by formulating marketing plans based on
research and tailored to each specific Property. Such plans include print, radio
and television advertising, public relations, special events and the development
of tour and travel programs. The Company believes that an aggressive marketing
effort allows the Properties to maintain a loyal shopper base and attract new
consumers.
PROVIDE ACTIVE PROPERTY MANAGEMENT SERVICES. The Company intends to
continue to provide pro-active site management. The on-site property management
team controls every aspect of the day-to-day needs of the Mills including
operations, maintenance, security and merchant relations in order to enhance
productivity and profitability. Further, where desirable and possible, such
management team attempts to terminate the leases of under-performing tenants and
renegotiate existing leases to expand, relocate or assemble space for more
productive tenants.
DEVELOPMENT STRATEGIES
The Company's strategic business plan primarily consists of developing and
opening an additional five Mills over the next three years with an aggregate of
approximately 7.2 million square feet of GLA, including finishing construction
on Grapevine Mills and Arizona Mills and developing three additional Mills,
Mills City at Orange, Houston Mills and Meadowlands Mills. The Company also
intends to pursue the development of Mills-type projects in selected
metropolitan markets and has identified approximately 20 additional markets in
the U.S. that could currently support a Mills project. The Company is also
exploring the feasibility of developing additional Mills-type projects in
selected international major metropolitan markets as a long-term growth
strategy. The Company is focused on selected markets, where management believes
population growth exceeds national rates, land is relatively abundant and
development and entitlement processes are comparatively streamlined. Two
projects are currently under construction and scheduled to open in the fourth
quarter of 1997, Grapevine Mills, which will serve the Dallas/Fort Worth
metropolitan market and Arizona Mills, which will serve the Phoenix metropolitan
market. The remaining three sites under development, Mills City at Orange,
Houston Mills and Meadowlands Mills, are in the early stages of development and
are scheduled to open in 1998, 1999 and 1999, respectively.
To finance this rapid growth strategy, the Company has aligned itself with
certain joint venture partners, including Kan Am, Simon DeBartolo Group, Inc.
("Simon) and Taubman Realty Group Limited Partnership ("Taubman"), and has
reached an agreement in principle to form one or more such joint ventures with
Cambridge Shopping Centres Ltd. of Canada ("Cambridge"). Additionally, the
Company, subject to shareholder approval, is negotiating the terms of an
agreement with Kan Am whereby Kan Am will provide approximately $50 million in
preferred equity capital on what the Company believes would be attractive terms.
There can be no assurance, however, that any such agreement will be entered into
or that shareholder approval will be obtained. The Company believes that these
alliances are very beneficial to the Company for the following reasons: (1) such
joint ventures represent a clear endorsement by the Company's joint venture
partners of the Mills concept and the Company's management, and its development,
leasing and property management capabilities and (2) the joint venture partners
provide the Company with additional sources of equity and additional financial
strength and, as a result, facilitate construction and permanent financing.
Although the Company believes it is now well-positioned to develop future
projects on its own, it will continue to evaluate joint venture arrangements as
a financing alternative. In addition, the Company will develop projects with
Simon when required under the terms of the Simon Agreement. See "Simon
Agreement." In connection with these joint ventures, the Company receives fees
or reimbursements for its leasing, management, development and financing
services.
In addition to the five projects currently under development, the Company
or its joint venture partners control and are conducting due diligence on sites
in Charlotte, North Carolina, Monee, Illinois, Columbus, Ohio and San Francisco,
California, and is exploring many other locations, including Atlanta, Georgia,
Cleveland, Ohio, Baltimore, Maryland, Tampa Bay, Florida, St. Louis, Missouri
and San Diego, California. Furthermore, through its proposed alliance with
Cambridge, the Company plans on beginning development of Mills projects in
Canada. The Company is exploring Toronto, Ontario as the first site to be
developed by this future venture.
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MILLS UNDER DEVELOPMENT
ACTUAL/ ESTIMATED ANCHOR
ANTICIPATED ANTICIPATED COMPANY AGGREGATE STORE
METROPOLITAN CONSTRUCTION OPENING APPROXIMATE OWNERSHIP PROJECT TENANT
NAME/LOCATION AREA SERVED START DATE DATE(1) GLA(2) --------- COST(3) COMMITMENTS
- ------------- ------------ ------------ ----------- ----------- ------- -----------
(IN MILLIONS)
Grapevine Mills. . . . Dallas/Fort 3rd Q '96 4th Q '97 1,500,000 37.5% $203 15
Grapevine, TX Worth
Arizona Mills. . . . . Phoenix 3rd Q '96 4th Q '97 1,200,000 36.8% $183 12
Tempe, AZ
Mills City . . . . . . Los Angeles/ 2nd Q '97 4th Q '98 800,000 50.0% $167 3
at Orange Orange County
Orange, CA
Houston Mills. . . . . Houston 1998 1999 1,600,000 (4) (4) N/A(5)
Houston, TX
Meadowlands New York City/ 1998 1999 2,100,000 (4) (4) 10
Mills. . . . . . . . Northern New
Carlstadt, NJ Jersey
- ------------
(1) Anticipated Construction Start Dates and Opening Dates may be subject to
adjustment as a result of factors inherent in the development
process, some of which may not be under the direct control of the Company.
(2) Approximate GLA includes space that may be owned by certain anchor store
tenants.
(3) Estimated Aggregate Project Cost as of December 31, 1996 is based on the
Company's best estimate of the underlying components, many of which may
not be under the direct control of the Company.
(4) The ownership structure and budgets for these properties have not yet been
determined.
(5) Leasing activity has not yet commenced for Houston Mills.
Following is a description of the five projects currently under development
by the Company.
GRAPEVINE MILLS-GRAPEVINE, TEXAS. Development of Grapevine Mills commenced
in the third quarter of 1996 on a 175-acre site in the City of Grapevine, Texas,
two miles north of the Dallas/Fort Worth Airport. The project is expected to
include approximately 1.5 million square feet of GLA of both retail space and
large entertainment facilities. As of February 11, 1997, Grapevine Mills was
approximately 55% pre-leased, including nine executed leases with anchor store
tenants (Off 5th-Saks Fifth Avenue, Burlington Coat Factory, Bed, Bath and
Beyond, Group USA, Rainforest Cafe, Books-A-Million, Sega Gameworks, American
Wilderness Experience and AMC Theatres) and lease commitments from an additional
six anchor store tenants for a total of approximately 661,000 square feet of GLA
and has executed leases for approximately 157,000 square feet of specialty store
space.
Grapevine Mills is being developed by a limited partnership consisting of
the Operating Partnership (37.5%), Simon (37.5%) and Kan Am (25%). The Company
is providing development, management and leasing services for the project,
subject to the approval of Simon and Kan Am for certain major decisions, such as
changes to the plan of development, the annual operating budget for the project
and any proposed sale or refinancing. Kan Am has agreed to contribute 50% of the
initial required equity capital. The Operating Partnership and Simon are
responsible for the balance of the initial required equity capital on a pro rata
basis and have agreed to guarantee any project cost overruns not funded by the
initial equity capital and construction financing. The project is expected to
cost a total of $203 million. In July 1996, the venture obtained a commitment
from NationsBank to provide $140 million of construction financing, and expects
this commitment to be increased to $155 million. The loan will have a term of
four years, subject to a one-year extension at the Company's option, and will
bear interest at a rate equal to the 30-day LIBOR ("LIBOR")
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plus 165 basis points (subject to reduction to 135 basis points if certain debt
service ratios are achieved). Development costs incurred through December 31,
1996 were approximately $34 million (net of tax increment financing).
Under the terms of the limited partnership agreement, after the tenth
anniversary of the project's opening, any partner can exercise certain buy-sell
provisions by which the offering partner can require the other partners to sell
to the offering partner their respective interests in the partnership or
alternatively, purchase the interest of the offering partner in the partnership.
ARIZONA MILLS-TEMPE, ARIZONA. Development of Arizona Mills commenced in
the third quarter of 1996 on a 115-acre site located 20 minutes from downtown
Phoenix, at the intersection of Interstate 10 and Superstition Freeway
(Highway 60). Anticipated to open in the fourth quarter of 1997, Arizona
Mills is expected to contain approximately 1.2 million square feet of GLA of
both retail space and large entertainment facilities. As of February 11,
1997, Arizona Mills was approximately 62% pre-leased, including anchor store
tenant leases with Burlington Coat Factory, Off 5th-Saks Fifth Avenue,
Oshman's, Harkins Cinema, J.C. Penney, Rainforest Cafe, Group USA, Hi-Health
and Sega Gameworks, and commitments had been obtained from an additional
three anchor store tenants for a total anchor store tenant commitment of
approximately 553,000 square feet. The Company has executed leases for
approximately 216,000 square feet of GLA for specialty stores as of February
11, 1997.
Arizona Mills is being developed by a joint venture consisting of the
Operating Partnership (36.8%), Taubman (36.8%) and Simon (26.4%). The Company is
providing construction management, property management, marketing and leasing
services for the project. Major decisions such as a sale or refinancing of the
project and approval of annual budgets require approval of all joint venture
partners. All joint venture partners are obligated to contribute required equity
capital on a pro rata basis. The project is expected to cost approximately $183
million. In January 1997, the joint venture entered into a $145 million
construction financing loan with United Bank of Switzerland. The loan has a term
of five years and bears interest at a rate equal to LIBOR plus 130 basis points
(subject to reduction to 115 basis points upon obtaining a rating of A- or
better from a nationally recognized rating agency). Development costs through
December 31, 1996 were approximately $54.7 million (net of tax increment
financing).
Under the terms of the joint venture agreement, following the fifth
anniversary of the project's opening (or, if later, the date that 90% of the
project has been leased), if the joint venture partners are unable to agree upon
certain major decisions, any joint venture partner can cause the project to be
sold pursuant to certain required procedures. Upon such a sale, the proceeds
would be distributed to the joint venture partners on a pro rata basis.
MILLS CITY AT ORANGE-ORANGE, CALIFORNIA. Mills City at Orange is proposed
for development on an approximately 85-acre site located at the intersection of
the Santa Ana Freeway (I-10), the Garden Grove Freeway and Orange Freeway
(Highway 57) in the City of Orange, California, three miles from Disneyland.
This project will be developed on the site of an existing shopping center
located in what management believes to be one of the wealthiest areas and
strongest retail markets in the country. The redeveloped Mills-type project will
consist of an approximately 800,000 square foot open air shopping center that
will feature a 30-screen AMC Theatres included in approximately 330,000 square
feet of entertainment and dining facilities in addition to upscale value-retail
stores. In addition to AMC Theatres, the Mills has obtained commitments from Off
5th-Saks Fifth Avenue and Borders Books.
The Company expects to begin demolition of the existing shopping center in
the first quarter of 1997 and to open the project in the fourth quarter of 1998.
The project is expected to cost approximately $167 million (net of tax
increment financing). Development costs through December 31, 1996 were
approximately $9 million.
The project will be owned by a partnership between the Operating
Partnership (50%) and Kan Am (50%). The Company would provide all development,
leasing and management services for the project, subject to the approval of
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Kan Am for certain major decisions, including a sale or refinancing of the
project and approval of annual budgets. The Company would guarantee completion
of the project within the parameters of an approved budget. Kan Am has committed
to fund up to $45 million (which represents 100% of the estimated equity
required for this project) after the receipt of construction loan financing in
the amount of $122 million.
Under the terms of the limited partnership agreement, following the tenth
anniversary of the project's opening, either the Operating Partnership or Kan Am
can exercise a buy-sell provision whereby the Operating Partnership, if it is
the offeror, can require Kan Am to transfer its entire interest in the
partnership or Kan Am, if it is the offeror, can require the Operating
Partnership to acquire Kan Am's entire interest in the partnership.
HOUSTON MILLS-HOUSTON, TEXAS. The Company has acquired an option to
acquire a 500-acre site located at the intersection of Katy-Fort Bend Road and
I-10 in Fort Bend and Harris Counties. The approximately 1.6 million square foot
project planned for this site will consist of a combination of specialty
retailers, cinemas and themed restaurants. The Company expects to open this
project in 1999.
MEADOWLANDS MILLS-CARLSTADT, NEW JERSEY. The Company has acquired a
mortgage interest in a 595-acre site located on the New Jersey Turnpike (I-95)
adjacent to the Meadowlands Sports Complex and approximately five miles from New
York City and has signed certain preliminary agreements with Empire Ltd., the
current owner of the site, concerning the development of Meadowlands Mills. The
approximately 2.1 million square feet project planned for this site will combine
more than 200 specialty retailers, cinemas and themed restaurants. Ogden
Entertainment, DeBartolo Entertainment and Virgin Entertainment Group have
agreed in principle to plan and jointly develop the entertainment component of
the project which will occupy approximately 600,000 square feet. On November 19,
1996, the Company announced commitments from ten anchor store tenants, including
Off 5th-Saks Fifth Avenue, The Sports Authority, Group USA, Off Rodeo Drive and
Rainforest Cafe. The Company currently expects to open the project in 1999.
The preliminary agreements with the site owner contemplate that the project
will be developed by a joint venture to be formed among the Operating
Partnership (82%), Empire Ltd. (13%) and Bennett S. Lazare, an individual
affiliated with Empire Ltd. (5%). The agreements further provide that upon
receipt of a final fill permit for the project, the site is to be conveyed to
the new joint venture, and the Operating Partnership is to contribute 75% of its
mortgage interest to the new joint venture and is to receive a credit to its
capital account in the amount of $12 million plus certain other predevelopment
costs advanced on behalf of the project. The preliminary agreements also provide
that the interests of the three joint venture partners may be diluted by as much
as 50% if an additional equity partner is admitted to the joint venture. If all
other permits required to develop the shopping center shall not have been
obtained within two years following the receipt of the final fill permit, then
the Operating Partnership shall have the right to sell the site, subject to
certain buy/sell provisions.
SIMON AGREEMENT. The Operating Partnership entered into an agreement
with Simon pursuant to which Simon and the Operating Partnership have agreed
to examine the feasibility of joint development and ownership of Mills-type
shopping centers in various metropolitan markets (the "Simon Agreement").
The Simon Agreement provides, generally, that Simon and the Operating
Partnership would hold equal interests in each joint venture entity and
contribute needed capital on a pro rata basis. Three joint ventures have
been formed as of December 31, 1996 in connection with the development of
Ontario Mills, Grapevine Mills and Arizona Mills and the parties have
announced their intention to form a new joint venture in connection with the
development of a site in Charlotte, North Carolina. The Operating
Partnership generally acts as the managing member or managing general
partner, as the case may be, of each entity. Primary responsibility for the
development, management and leasing of each joint venture project formed as
of the date hereof has been undertaken by the Operating Partnership. The
Simon Agreement restricts Simon until December 2003 from competing with the
Operating Partnership by developing or acquiring Mills-type projects, and
places additional restrictions on Simon's ability to hire employees of the
Operating Partnership or its affiliates and to acquire stock in the
9
Company above certain specified levels. In addition, the Operating Partnership
has agreed that until December 2003 it will not develop a Mills-type shopping
center within certain designated metropolitan areas without affording Simon a
first right to jointly develop such project.
FINANCING STRATEGIES
The Company intends to continue to reduce its exposure to refinancing risk
and interest rate fluctuations. Prior to the Potomac Mills-Gurnee Mills
securitization (at December 1, 1996), the Company's debt portfolio consisted of
48.3% variable rate debt ($349.0 million), most of which was subject to tiered
caps, and the portfolio had a weighted average maturity of 2.5 years. Following
this refinancing (at December 31, 1996), only 10% of the Company's debt
portfolio, or $72 million, was variable rate debt, and the weighted average
maturity of the debt portfolio was extended to 4.5 years. In addition, the
Company expects to refinance the $165 million mortgage on Franklin Mills in the
first half of 1997, extending its maturity through a fixed rate securitization.
The Company has also taken steps to increase its liquidity. In October 1996, the
Company obtained a $40 million line of credit from Credit Suisse First Boston
for the purpose of funding development activities and general working capital
(the "Line of Credit") which has a variable interest rate equal to LIBOR plus
300 basis points and matures on October 31, 1998 (with an option for a one-year
extension). The Company expects to increase the size of the Line of Credit in
the second quarter of 1997. Through its refinancing efforts and the Offering,
the Company will have significantly improved its balance sheet by lowering the
Company's leverage, extending debt maturities and fixing interest rates.
Over the last two years, the Company formed joint ventures to finance the
development of certain Mills projects. The Company has established certain joint
ventures with Kan Am, Simon and Taubman and has reached an agreement in
principle to form one or more such joint ventures with Cambridge. While the
Company has utilized such joint ventures in the past, the Company may or may not
continue to use joint ventures in the future as a financing vehicle, except when
required under the terms of the Simon Agreement.
COMPETITION
There are other companies that are engaged in the development or
ownership of value retail properties that compete with the Company in seeking
tenants. This results in competition for acquisition of prime locations and
for tenants who will lease space in the value retail properties that the
Company and its competitors own or operate. The development of new
super-regional outlet malls or other value retail shopping centers with more
convenient locations or better rents may attract the Company's tenants or
cause them to seek more favorable lease terms at or prior to renewal, and may
accordingly adversely affect the business, revenues or value of the
Properties. In addition, traditional retailers may increase their competition
with value retailers for the limited pool of consumers by engaging in
marketing and selling activities similar to those of value retailers, thus
blurring the distinction between traditional retailers and value retailers.
SEASONALITY
The regional shopping center industry is seasonal in nature, with mall
tenant sales peaking in the fourth quarter due to the Christmas season. As a
result, a substantial portion of the percentage rents are not paid until the
fourth quarter. Furthermore, most new lease-up occurs towards the later part of
the year in anticipation of the holiday season and most vacancies occur toward
the beginning of the year. In addition, the majority of the temporary tenants
take occupancy in the fourth quarter. Accordingly, cash flow and occupancy
levels are generally lowest in the first quarter and highest in the fourth
quarter. This seasonality also impacts the quarter-by-quarter results of net
operating income and FFO, although this impact is largely mitigated by accruing
minimum and percentage rents on a straight line basis during the year in
accordance with GAAP.
TAX STATUS
The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986 (the "Code"). The Company
believes that it was organized and has operated in such a manner to qualify as a
REIT, and the Company intends to continue to operate in such a manner, but no
assurance can be given that it has operated in a manner so as to qualify, or
will operate in a manner so as to continue to qualify as a REIT. If the Company
qualifies for taxation as a REIT, the Company generally will not be subject to
Federal income tax to the extent it distributes at least 95% of its REIT taxable
income to its shareholders. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to certain state and local taxes on its income and property and to
federal income and excise taxes on its undistributed income and gains from
certain property sales. The Third-Party Services Corporation, which provides
management services to properties in which the Operating Partnership does not
own an interest and provides development services for properties which are not
100% owned by the Operating Partnership, is subject to corporate-level federal,
state and local corporate income taxes on its income.
ENVIRONMENTAL MATTERS
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company is not aware of any environmental
condition which the Company believes would have a material adverse effect on the
Company's financial condition or results of operations (before consideration of
any potential insurance coverage). Nevertheless, it is possible that there are
material environmental liabilities of which the Company is unaware. Moreover,
no assurances can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Properties have not been or will not be affected
by tenants and occupants of the Properties, by the condition of properties in
the vicinity of the Properties or by third parties unrelated to the Company.
10
Phase I environmental reports or updates thereof were completed by
independent environmental consultants on all Properties within the last four
years. These reports did not reveal any material environmental concerns except
as noted below with respect to the Western Hills Community Center. Concerns
were raised in a September 1993 Phase I report on the Mount Prospect Plaza
Community Center as to two offsite leaking underground storage tanks, but were
rated as minimal on additional investigation performed for a February 1995
update. Since Phase I environmental reports do not involve invasive procedures
such as soil sampling and underground analysis, no assurance can be given that
these reports reveal all potential environmental liabilities.
Limited quantities of asbestos containing materials ("ACMs") are present
in certain of the Properties. The ACMs found are generally non-friable
(meaning that the ACMs are not easily crumbled and thus are less likely to
release asbestos fibers into the air), in good condition and are unlikely to
be disturbed. With certain exceptions, these ACMs will be removed by the
Company in the ordinary course of renovation or reconstruction. Prior to
removal, these ACMs will be monitored and maintained by the Company in
accordance with procedures established by the Environmental Protection
Agency, the Occupational Safety and Health Administration and other
applicable governmental authorities.
The Phase I environmental assessment prepared for the Western Hills
Community Center revealed that leaking underground storage tanks were removed
from an adjacent BP service station. The site investigation BP's consultant
conducted after the removal determined that groundwater contamination
attributable to the BP site exists. The groundwater flow direction generally is
cross-gradient to the Western Hills Community Center. The Phase I report noted
that there is a potential that the southeastern corner of the Property that is
closest to the BP station may have been contaminated by the leaking tank at the
BP site. As a result, a recommended Phase II assessment of the Property was
conducted in December 1993 which did not encounter groundwater and thus found no
evidence of groundwater contamination. The Phase II assessment concluded that
although low levels of petroleum hydrocarbons were detected in the soil, those
levels were well below Ohio action levels.
UNINSURED LOSS
In February 1993, the Property Partnership that owns Sawgrass Mills
filed a lawsuit against various parties seeking damages for the repair and
replacement of the heating, ventilating and air conditioning systems (the
"HVAC") at Sawgrass Mills as a result of the excessive corrosion of HVAC
pipes. The partnership's insurance policy may not cover this loss.
Currently, the Company believes that remediation or replacement of the HVAC
systems may be phased in over several years. The partnership has established
a cash reserve of $1.5 million pursuant to the terms of the Sawgrass Mills
securitized debt financing. The reserve is pledged as additional security
for the Sawgrass Mills debt and is required to be used in its entirety by no
later than January 18, 2000 and only to fund the replacement of cooling water
piping used in the HVAC systems. In December 1996, the partnership settled
its claims for an aggregate sum of $2.8 million, the net proceeds of which
have been accrued as a reserve to fund such repair or replacement.
CORPORATE HEADQUARTERS
The Company's executive offices are located at 1300 Wilson Boulevard,
Arlington, VA 22209. The Company's telephone number is (703) 526-5000.
11
ITEM 2. PROPERTIES
THE MILLS
The following tables set forth certain information relating to the Mills as
of December 31, 1996. The Company either holds title to the Properties or
directly or indirectly holds 100% of the general and limited partnership
interests in the Property Partnerships, except for the Property Partnerships
that own Franklin Mills and Ontario Mills, in which the Company holds 77.6%
(which represents 100% of the current income and cash flow from Franklin Mills)
and 50%, respectively, either directly or indirectly, of the partnership
interests.
12
THE MILLS
GROSS LEASABLE AREA
(SQ. FT.) PERCENT LEASED (3)
------------------------ -------------------
YEAR LAND TOTAL
COMPLETED/ AREA ANCHOR SPECIALTY TOTAL ANCHOR SPECIALTY PERCENT
PROPERTY EXPANDED (ACRES) STORES(1)(2) STORES GLA (2) STORES STORES LEASED(3)
- --------- --------- ------- ------------ --------- ------- ------ --------- ---------
Potomac 1985/1986 161 1,005,942 632,921 1,638,863 100% 93% 97%
Mills 1993
Franklin 1989 170 1,155,303 606,923 1,762,226 100% 83% 93%
Mills
Sawgrass 1990 150 1,193,683 684,726 1,878,409 98% 97% 97%
Mills 1995
Gurnee 1991 233 827,872 639,742 1,467,614 94% 91% 93%
Mills
Ontario 1996 165 684,346 512,375 1,196,721(5) 95% 85% 90%
Mills
----- ---------- ---------- ---------
Totals/
Weighted
Averages 879 4,867,146 3,076,687 7,943,833 98%(7) 91%(7) 95%(7)
--- --------- --------- ---------
--- --------- --------- ---------
SALES PER SQ. FT.
ANNUALIZED NUMBER -----------------
BASE OF ANCHOR SPECIALTY
RENT(4) STORES ANCHOR STORE TENANTS STORES STORES
------- ------ -------------------- ------ ---------
Potomac Mills $20,103,649 229 AMC Theatres, Books-A-Million, Burlington $185 $289
Coat Factory*, Daffy Dan's, Everything
Rubbermaid, IKEA, J.C. Penney Outlet,
Linen's N'Things, Marshalls, Nordstrom
Rack, Off 5th-Saks Fifth Avenue, Outlet to
the Far East, Spiegel Outlet, Syms, The
Sports Authority, TJ Maxx and Waccamaw
Pottery
Franklin 15,471,871 225 Bed, Bath & Beyond, Burlington Coat 182 254
Mills Factory,Filene's Basement, J.C. Penney
Outlet, Last Call from Neiman Marcus,
Marshalls, Nordstrom Rack, Office Max,
Pharmor*, Ports of the World**, Off 5th -
Sakes Fifth Avenue, Sams Wholesale Club*,
Spiegel Outlet, Syms and TJMaxx
Sawgrass 23,681,050 256 Beall's Outlet Store, Bed, Bath & Beyond, 329 407
Mills Books-A-Million, BrandsMart, Burlington
Coat Factory, Cobb Theatre, J.C. Penney
Outlet, Last Call from Neiman Marcus,
Loehmanns, Marshalls, Off 5th - Saks Fifth
Avenue, Rainforest Cafe, Service
Merchandise*, Spec's Outlet, Spiegel
Outlet, The Sports Authority, TJ Maxx,
Target Greatland*, VF (Vanity Fair) Outlet
Marketplace* and Waccamaw Pottery
Gurnee 15,094,795 218 Bed, Bath & Beyond, Burlington Coat 151 252
Mills Factory*, J.C. Penney Outlet, Marcus
Theater*, Marshalls, Off 5th-Saks Fifth
Avenue, Rainforest Cafe, Spiegel Outlet,
The Sports Authority, Syms, TJ Maxx, Value
City* and Waccamaw Pottery
Ontario 14,797,592 174 AMC Theatres*, Bed, Bath & Beyond, N/A(6) N/A(6)
Mills Burlington Coat Factory, Foozles, Group
USA, J.C. Penney Outlet, Marshalls, Mikasa
Factory Store, Off 5th-Saks Fifth Avenue,
Off Rodeo Drive, The Sports Authority,
TJ Maxx, Totally For Kids
----------- -----
Totals/
Weighted
Averages $89,148,957 1,102 $ 218 $ 307
----------- -----
----------- -----
13
- -------------------------
*Tenant owns store within the Mills
**Ground Lease
Notes:
(1) Anchor stores include all stores occupying more than 20,000 square feet.
(2) Includes 914,947 square feet of GLA owned by certain anchor store tenants
as follows: Potomac Mills-80,000 square feet of GLA; Franklin Mills-208,602
square feet of GLA; Sawgrass Mills-281,774 square feet of GLA;
Gurnee Mills-219,571 square feet of GLA, and Ontario Mills-125,000 square
feet of GLA.
(3) Percent Leased is defined as all space leased and for which rent was being
paid as of December 31, 1996, excluding tenants with leases having a term
of less than one year.
(4) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
(5) Ontario Mills, upon completion of space for eight anchor store tenants
containing approximately 500,000 square feet of GLA, will contain
approximately 1.7 million square feet of GLA, including GLA owned by
certain anchor store tenants.
(6) 1996 Sales Per Square Foot information is not available for Ontario Mills
which has not completed its initial lease-up.
(7) Excludes Ontario Mills which opened on November 14, 1996 and has not
completed its initial lease-up.
14
AVERAGE ANNUAL EFFECTIVE RENT
The following table sets forth, for the past five years, certain
information regarding minimum and percentage rents for the Mills (excluding
Ontario Mills).
AVERAGE ANNUAL EFFECTIVE RENT PER SQUARE FOOT (1)
POTOMAC MILLS FRANKLIN MILLS SAWGRASS MILLS GURNEE MILLS
--------------- -------------- ---------------- -------------
1996 $ 14.00 $ 11.40 $ 16.55 $ 13.62
1995 13.30 11.33 15.66 12.89
1994 13.00 11.64 14.54 12.83
1993 11.99 12.59 15.69 13.86
1992 12.02 12.92 14.70 13.76
- --------------
(1) Average annual effective rent per square foot is based on annual minimum
rent and percentage rent dividend by average occupancy within each center.
The lease expirations, operating trends and rental rates for each Mills
individually and the Community Centers in the aggregate follow this section. The
Operating Trends and Rental Rates tables for existing Mills exclude Ontario
Mills which opened on November 14, 1996 and has not yet completed its initial
lease-up.
EXISTING MILLS LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations during each of
the next ten years and thereafter of leases for stores at the existing Mills
including Ontario Mills in the aggregate, assuming that none of the tenants
exercises available renewal options. At December 31, 1996, the average remaining
lease term was 7.4 years for anchor store tenants and 4.8 years for specialty
store tenants.
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE ----------------------------- ANNUALIZED BASE RENT (1)
NUMBER OF TENANT APPROXIMATE PERCENT -----------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------ -------- -------- --------- ----- ------ ----- -----------
1997 . . . 125 1 409,657 6% $ 7,607,438 9% $18.57
1998 . . . 82 3 337,609 5% 6,044,233 7% 17.90
1999 . . . 96 6 593,676 9% 8,452,596 9% 14.24
2000 . . . 168 6 754,704 12% 13,443,086 15% 17.81
2001 . . . 236 7 1,204,207 19% 18,827,758 21% 15.63
2002 . . . 62 4 304,174 5% 4,886,336 5% 16.06
2003 . . . 51 9 619,431 10% 6,531,772 7% 10.54
2004 . . . 22 6 278,702 4% 3,293,205 4% 11.82
2005 . . . 23 3 322,136 5% 3,418,705 4% 10.61
2006 . . . 57 10 580,621 9% 8,632,942 10% 14.87
After 2006 34 15 1,021,079 16% 8,010,886 9% 7.85
- --------------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
15
EXISTING MILLS OPERATING TRENDS
The following table sets forth, for the last three years, certain
information regarding operating trends with respect to the existing Mills in the
aggregate.
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ------------ ------------- ----------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996. . . . . 94.1% $78,313,084 $13.97 $22,409,034 $6.80 $55,904,050 $24.21
1995. . . . . 94.7% 74,571,076 13.31 21,809,106 6.57 52,761,970 23.09
1994. . . . . 95.7% 73,471,573 12.99 21,706,046 6.56 51,765,527 22.08
- -----------
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
EXISTING MILLS RENTAL RATES
The following table sets forth, for each of the last three years, the
average base rent per leased square foot of store openings and closings during
the given year with respect to the existing Mills in the aggregate.
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $18.54 91,653 $12.95 74,453 $5.59 43.17%
1995 11.00 45,158 8.36 152,790 2.64 31.58%
1994 7.46 469,699 5.90 377,949 1.56 26.44%
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $22.76 290,825 $19.97 311,250 $2.79 13.97%
1995 22.71 318,320 20.38 271,597 2.33 11.43%
1994 21.41 250,602 21.34 249,068 0.07 0.33%
- -----------
(1) The releasing spread is calculated as the difference between per square
foot openings and per square foot closings.
POTOMAC MILLS - WOODBRIDGE, VIRGINIA
Potomac Mills contains approximately 1.6 million square feet of GLA, of
which approximately 80,000 square feet is owned by one anchor store tenant.
Potomac Mills opened in 1985 with a total of approximately 630,000 square feet
of GLA. As a result of customer demand, Potomac Mills was expanded to
approximately 1.2 million square feet of GLA in 1986. The Phase III expansion of
Potomac Mills opened on September 30, 1993 and increased total GLA by
approximately 355,208 square feet. The Company anticipates that construction of
a new entertainment zone will begin in late 1997 with an opening in late 1998 or
early 1999. Real estate taxes paid in 1996 totaled approximately $2.5 million,
representing a tax rate of 1.6%. Potomac Mills has 17 anchors, including: IKEA,
J.C. Penney Outlet, Waccamaw Pottery, Marshalls, Spiegel Outlet, AMC Theatres,
The Sports Authority, Off 5th-Saks Fifth Avenue, TJ Maxx, Syms and Nordstrom
Rack. Potomac Mills is situated on approximately 161 acres located approximately
20 miles southwest of Washington, D.C. Potomac Mills is adjacent to Interstate
95, which serves as one of the transportation backbones of the Washington
metropolitan area. This location strategically positions Potomac Mills between
the Washington/Baltimore metropolitan market to the north and Richmond,
approximately 90 miles to the south. The Company owns 100% of Potomac Mills.
16
POTOMAC MILLS LEASE EXPIRATIONS
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997 . . . . . 25 - 88,337 6% $ 1,731,670 9% $19.60
1998 . . . . . 33 1 115,026 8% 2,600,022 13% 22.60
1999 . . . . . 24 1 122,696 8% 2,009,180 10% 16.38
2000 . . . . . 33 1 122,303 8% 2,370,316 12% 19.38
2001 . . . . . 27 1 98,177 7% 1,928,661 10% 19.64
2002 . . . . . 14 1 57,702 4% 970,556 5% 16.82
2003 . . . . . 27 3 181,448 12% 2,637,903 13% 14.54
2004 . . . . . 8 2 123,422 8% 1,295,836 6% 10.50
2005 . . . . . 8 2 222.128 14% 1,644,682 8% 7.40
2006 . . . . . 6 2 225.995 15% 1,839,353 9% 8.14
After 2006 5 2 146,816 10% 1,075,470 5% 7.33
- -----------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
POTOMAC MILLS OPERATING TRENDS
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ---------------------------- ---------------------------- ----------------------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996 . . . . 95.6% $20,865,975 $14.00 $6,142,999 $6.76 $14,722,976 $25.32
1995 . . . . 96.2% 19,905,334 13.30 5,839,132 6.57 14,066,202 23.14
1994 . . . . 98.2% 19,840,738 13.00 5,766,085 6.47 14,074,653 22.17
- -----------
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
POTOMAC MILLS BASE RENTAL RATES
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $11.43 33,406 $11.55 15,178 ($0.12) (1.04%)
1995 8.74 20,048 8.61 78,572 0.13 1.51%
1994 10.22 54,494 5.38 40,857 4.84 89.96%
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $23.64 83,594 $21.80 66,607 $1.84 8.44%
1995 24.91 49,135 18.89 82,912 6.02 31.87%
1994 22.06 58,200 20.82 57,859 1.24 5.96%
- -----------
(1) The releasing spread is calculated as the difference between per square
foot openings and per square foot closings.
17
FRANKLIN MILLS - PHILADELPHIA, PENNSYLVANIA
Franklin Mills opened in 1989 and contains approximately 1.8 million square
feet of GLA, of which approximately 209,000 square feet is owned by certain
anchor store tenants. The Company began remerchandising Franklin Mills in 1996
by upgrading its tenant mix and plans to begin construction on an entertainment
zone, including themed restaurants and interactive entertainment venues in the
first half of 1997. Real estate taxes paid in 1996 totaled approximately $3.9
million, representing a tax rate of 2.6%. Franklin Mills has 18 anchors,
including: Bed, Bath & Beyond, Filene's Basement, Last Call from Neiman Marcus,
Marshalls, Nordstrom Rack, Office Max, Off 5th-Saks Fifth Avenue, Spiegel
Outlet, Syms and TJ Maxx. Franklin Mills features, what the Company believes is,
the largest concentration of outlet retailing in the Delaware Valley. With
access from U.S. Highway 1 and the Pennsylvania Turnpike, Franklin Mills is
strategically positioned approximately 15 miles northeast of Philadelphia's
Center City and just west of Interstate 95, a major thoroughfare serving the
greater Philadelphia/Wilmington metropolitan market. The Operating Partnership
owns 77.6% of the partnership interests in the partnership that owns Franklin
Mills (which represents 100% of the current income and cash-flow from Franklin
Mills) and has signed agreements to acquire the remaining partnership interests
in April 1997, in exchange for 195,295 Units.
FRANKLIN MILLS LEASE EXPIRATIONS
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997 . . . . . 36 - 117,181 9% $2,108,190 14% $17.90
1998 . . . . . 11 1 54,689 4% 720,841 5% 13.18
1999 . . . . . 41 4 362,091 29% 4,082,949 26% 11.28
2000 . . . . . 28 2 206,163 16% 2,922,832 19% 14.18
2001 . . . . . 33 1 160,214 13% 2,381,264 15% 14.86
2002 . . . . . 10 1 51,400 4% 724,403 5% 14.09
2003 . . . . . 4 2 165,106 13% 886,814 6% 5.37
2004 . . . . . 4 1 54,556 4% 414,195 2% 7.59
2005 . . . . . 2 - 9,803 1% 194,996 1% 19.89
2006 . . . . . 4 1 49,443 4% 578,561 4% 11.70
After 2006 2 1 36,718 3% 456,826 3% 12.44
- -----------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
FRANKLIN MILLS OPERATING TRENDS
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ---------------------------- ---------------------------- ----------------------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996. . . . . 92.0% $16,318,689 $11.40 $5,291,698 $5.67 $11,026,991 $22.16
1995. . . . . 95.5% 16,837,997 11.33 5,401,107 5.69 11,436,890 21.29
1994. . . . . 97.0% 17,565,102 11.64 5,485,679 5.78 12,079,423 21.54
- -----------
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
18
FRANKLIN MILLS BASE RENTAL RATES
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $10.41 18,247 $10.25 20,000 $0.16 1.56%
1995 - - - - - 0.00%
1994 6.10 2,471 - - 6.10 100.00%
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $20.08 73,880 $18.61 115,416 $1.47 7.90%
1995 19.49 46,453 21.90 77,713 (2.41) (11.00%)
1994 20.74 82,255 21.80 97,245 (1.06) (4.86%)
- -----------
(1) The releasing spread is calculated as difference between per square foot
openings and per square foot closings.
SAWGRASS MILLS - SUNRISE, FLORIDA
Sawgrass Mills, which opened in 1990, contains approximately 1.9 million
square feet of GLA, of which approximately 282,000 square feet is owned by
certain anchor store tenants. As a result of customer demand, Sawgrass Mills was
expanded by approximately 136,000 square feet of GLA in 1995. The Company
expects to open a Phase III expansion of Sawgrass Mills in the third quarter of
1998 consisting of an approximately 270,000 square foot entertainment zone. Real
estate taxes paid in 1996 totaled approximately $5.2 million, representing a tax
rate of 3.8%. Sawgrass Mills has 21 anchors, including: Beall's Outlet Store,
Burlington Coat Factory, Last Call from Neiman Marcus, Loehmanns, Rainforest
Cafe, Spiegel Outlet, The Sports Authority and Waccamaw Pottery. Sawgrass Mills
is located in Florida's "Gold Coast" market approximately 11 miles west of Fort
Lauderdale. The site lies adjacent to both the Sawgrass Expressway and Flamingo
Road, between Sunrise and Oakland Park Boulevards. The entire South Florida
region is linked by the road network of the Sawgrass Expressway, Interstate 75
and Interstate 595, which intersect at an interchange located less than two
miles southwest of Sawgrass Mills.
The Company owns 100% of Sawgrass Mills. The Phase III expansion will be
owned by a partnership formed by the Operating Partnership (50%) and Kan Am
(50%) in which Kan Am has agreed to fund 100% of the project's initial required
equity for which Kan Am will receive a 9% annual preferred return. Under the
terms of the partnership agreement, the Company has the right to buy out Kan Am
prior to December 31, 1999 at 120% of Kan Am's equity contributions and
accumulated preferred returns, under certain terms and conditions set forth in
the partnership agreement. The Company would provide all development, management
and leasing services for the expansion, subject to the approval of Kan Am of
certain major decisions, including a sale or refinancing of the project and the
approval of the development and annual budgets. The Company would guarantee
completion of the expansion within the parameters of the approved development
budget.
19
SAWGRASS MILLS LEASE EXPIRATIONS
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997. . . . . 23 1 63,069 4% $ 1,325,497 6% $21.02
1998. . . . . 19 - 56,209 4% 1,297,187 5% 22.19
1999. . . . . 12 1 46,352 3% 1,008,910 4% 21.77
2000. . . . . 93 3 391,619 25% 7,427,118 31% 18.97
2001 .. . . . 52 2 295,010 19% 4,650,139 20% 15.76
2002. . . . . 11 1 46,638 3% 808,960 3% 17.35
2003. . . . . 7 1 122,393 8% 1,429,659 6% 11.68
2004. . . . . 7 3 96,340 6% 1,455,729 6% 15.11
2005. . . . . 10 1 68,718 5% 1,168,472 5% 17.00
2006. . . . . 5 2 95,966 6% 1,608,068 7% 16.76
After 2006 . 4 3 264,143 17% 1,551,311 7% 5.87
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
SAWGRASS MILLS OPERATING TRENDS
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ---------------------------- ---------------------------- -------------------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996. . . . . 97.6% $25,787,924 $16.55 $7,150,346 $8.03 $18,637,578 $27.90
1995. . . . . 95.3% 22,738,214 15.66 6,670,486 7.68 16,067,728 27.58
1994. . . . . 94.9% 20,889,138 14.54 6,467,454 7.56 14,421,684 24.83
- -----------
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
SAWGRASS MILLS RENTAL RATES
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $26.39 20,000 $14.86 39,275 $11.53 77.59%
1995 12.80 25,110 - - 12.80 100.00%
1994 7.86 307,486 6.29 251,643 1.57 24.96%
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $29.63 58,904 $22.24 57,770 $7.39 33.23%
1995 24.58 173,744 23.11 55,108 1.47 6.36%
1994 25.55 37,167 20.95 30,785 4.60 21.96%
- -----------
(1) The releasing spread is calculated as the difference between per square
foot openings and per square foot closings.
20
GURNEE MILLS - GURNEE, ILLINOIS
Gurnee Mills opened in 1991 and contains approximately 1.5 million square
feet of GLA, of which approximately 220,000 square feet is owned by certain
anchor store tenants. The Company began construction of an expansion of over
150,000 square feet of GLA of Gurnee Mills to add entertainment venues to the
existing mall and is also remerchandising the project which the Company expects
will upgrade the tenant mix at Gurnee Mills. Real estate taxes paid in 1996
totaled approximately $2.7 million, representing a tax rate of 2.3%. Gurnee
Mills has 14 anchors, including: J.C. Penney Outlet, Waccamaw Pottery,
Marshalls, Spiegel Outlet, Bed Bath & Beyond, The Sports Authority, Off 5th-Saks
Fifth Avenue, TJ Maxx and Syms. Gurnee Mills is located adjacent to Interstate
94, the major north/south thoroughfare linking Chicago and Milwaukee. Gurnee
Mills is clearly visible from Interstate 94 and is situated directly across from
Six Flags Great America, one of the largest amusement parks in the Midwest.
GURNEE MILLS LEASE EXPIRATIONS
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997 . . . . . 40 - 137,731 12% $ 2,326,453 15% $16.89
1998 . . . . . 19 1 111,685 10% 1,476,183 10% 13.22
1999 . . . . . 14 - 52,622 5% 1,089,657 7% 20.71
2000 . . . . . 12 - 29,015 3% 607,545 4% 20.94
2001 . . . . . 69 3 425,307 37% 5,336,800 35% 12.55
2002 . . . . . 13 1 97,730 9% 1,312,505 9% 13.43
2003 . . . . . 6 3 127,075 11% 1,035,220 7% 8.15
2004 . . . . . 3 - 4,384 0% 127,445 1% 29.07
2005 . . . . . 3 - 21,487 2% 410,555 3% 19.11
2006 . . . . . 6 1 27,458 2% 856,717 6% 31.20
After 2006 1 1 105,248 9% 515,715 3% 4.90
- -----------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
GURNEE MILLS OPERATING TRENDS
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ---------------------------- ---------------------------- -------------------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996. . . . . 90.2% $15,340,496 $13.62 $3,823,991 $6.78 $11,516,505 $20.50
1995. . . . . 91.1% 15,089,531 12.89 3,898,381 6.36 11,191,150 20.08
1994. . . . . 92.1% 15,176,595 12.83 3,986,828 6.48 11,189,767 19.71
___________
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
21
GURNEE MILLS RENTAL RATES
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $30.00 20,000 $ - - $30.00 100.00%
1995 - - 8.08 74,218 (8.08) (100.00%)
1994 4.90 105,248 5.00 85,449 (0.10) (2.00%)
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $19.01 74,447 $18.63 71,457 $0.38 2.04%
1995 16.95 48,988 17.79 55,864 (0.84) (4.72%)
1994 19.53 72,980 21.29 63,179 (1.76) (8.27%)
- -----------
(1) The releasing spread is calculated as the difference between per square
foot openings and per square foot closings.
22
ONTARIO MILLS - ONTARIO, CALIFORNIA
Ontario Mills opened on November 14, 1996 with approximately 1.2 million
square feet of GLA (including space owned by certain anchor store tenants)
comprised of approximately 700,000 square feet of anchor space and approximately
500,000 square feet of specialty store space. The Company has plans to expand
the project to a total of 1.7 million square feet at completion. Ontario Mills
currently has 14 anchors, including: Off 5th-Saks Fifth Avenue Outlet, J.C.
Penney Outlet, Burlington Coat Factory, The Sports Authority, Marshalls, Bed,
Bath & Beyond, Mikasa, Off Rodeo Drive, TJ Maxx, AMC Theatres, Virgin Megastore,
Group USA, Foozles, and Totally 4 Kids. American Wilderness Experience and
IWERKS are scheduled to open by the third quarter of 1997 and an additional
three anchors have executed leases and are scheduled to open later in 1997.
Ontario Mills is located at the intersection of Interstate 10 and Interstate 15
in the heart of the Riverside/San Bernardino area known as the "Inland Empire."
Ontario Mills serves the Los Angeles/Orange County metropolitan market.
Ontario Mills is owned by a joint venture among the Operating Partnership
(50%) and affiliates of Kan Am (25%) and Simon (25%). The Company has the
right to manage the development, property management and leasing of the
Ontario Mills project, subject to the other joint venture partners' approval
of certain major decisions, including sale or refinancing of the project and
approval of an annual budget. The joint venture partners have agreed to
contribute equally all initial required equity capital; provided, however,
that the Company and Simon have agreed to guarantee any project cost overruns
not funded by initial required equity capital and the partnership's
construction financing. At any time following the tenth anniversary of the
project's opening, either the Company, Simon or Kan Am can exercise a
buy-sell provision whereby the Company or Simon, if it is the offeror, can
require Kan Am to transfer its entire interest in the partnership or Kan Am,
if it is the offeror, can require the Company or Simon to acquire Kan Am's
entire interest in the partnership. Estimated net construction costs are
approximately $150 million. In addition to its capital contributions from its
joint venture partners, in November 1995, the joint venture entered into a
construction loan for a $110 million loan that was funded in the first half
of 1996. This loan was refinanced in February 1997 with a permanent loan of
$120 million which matures in February 2002 with two one-year extensions. The
interest rate is variable at LIBOR plus 100 basis points for the first $70
million and LIBOR plus 125 basis points for the remaining 50 million, and the
Company has the right to fix the interest rate at any time.
ONTARIO MILLS LEASE EXPIRATIONS
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997. . . . . 1 - 2,739 0% $ 115,628 1% $42.22
1998. . . . . - - - 0% - 0% -
1999. . . . . 5 - 9,915 1% 261,900 2% 26.41
2000. . . . . 2 - 5,604 1% 115,275 1% 20.57
2001. . . . . 55 - 225,499 23% 4,530,894 30% 20.09
2002. . . . . 14 - 50,704 5% 1,069,912 7% 21.10
2003. . . . . 7 - 23,409 3% 542,176 4% 23.16
2004. . . . . - - - 0% - 0% -
2005. . . . . - - - 0% - 0% -
2006. . . . . 36 4 181,759 19% 3,750,243 25% 20.63
After 2006 . 22 8 468,154 48% 4,411,564 30% 9.42
- -----------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
23
THE COMMUNITY CENTERS
The 11 Community Centers contain a total of approximately 2.2 million
square feet of GLA and are located in Florida, Georgia, Illinois, Maryland, New
Jersey, Ohio, Pennsylvania, South Carolina and Virginia. The Community Centers
are open-air shopping centers containing traditional shopping center tenants,
such as grocery, drug, video and greeting card stores, as well as a strong
concentration of national value retailers. Anchor tenants of the Community
Centers include Giant Food, Krogers, Marshalls, Safeway, TJ Maxx and Walgreens.
24
COMMUNITY CENTERS
GROSS LEASABLE AREA
(SQ. FT.) PERCENT LEASED (2)
YEAR LAND ------------------------ -----------------------
COMPLETED/ AREA ANCHOR SPECIALTY TOTAL ANCHOR SPECIALTY
PROPERTY EXPANDED (ACRES) STORES(1) STORES GLA STORES STORES
- ---------- ---------- ------- --------- --------- ------- ------ ---------
West Falls 1982 7 37,841 47,726 85,567 100% 90%
Church Outlet
Center
Butterfield 1983 9 41,933 72,736 114,669 100% 89%
Plaza
Montgomery 1983 11 36,405 80,986 117,391 100% 90%
Village
Western Hills 1983 36 314,516 134,980 449,496 100% 92%
Plaza
Crosswinds 1984 11 120,821 23,298 144,119 100% 94%
Center
Germantown 1986 20 46,756 130,341 177,097 100% 92%
Commons
Fashion 1987 13 73,258 74,692 147,950 100% 53%
Place
Gwinnett 1987 10 97,547 96,827 194,374 100% 90%
Marketfair
Mount 1987 34 172,595 125,882 298,477 100% 92%
Prospect Plaza
Coopers 1994 20 158,556 14,953 173,509 100% 100%
Crossing
Liberty 1994 36 280,173 20,965 301,138 47%(4) 26%
Plaza
--- --------- --------- ---------
Totals/ Weighted
Averages 207 1,380,401 823,386 2,203,787 89% 86%
--- --------- --------- ---------
--- --------- --------- ---------
1996
SALES PER SQ. FT.
TOTAL ANNUALIZED NUMBER -----------------------
PERCENT BASE OF ANCHOR SPECIALTY
PROPERTY LEASED RENT(3) STORES ANCHOR STORE TENANTS STORES STORES
- ---------- ------- --------- ------ -------------------------- ------ ---------
West Falls 94% $788,446 18 Safeway Marketplace $ 414 $ 139
Church Outlet
Center
Butterfield 93% 1,421,526 18 Arvey Paper & Office, Kids R 153 202
Plaza Us
Montgomery 93% 1,342,826 24 Safeway Marketplace 385 214
Village
Western Hills 98% 2,648,237 46 Krogers, Marshalls, McAlpin's, 299 217
Plaza Media Play and Woolworth
Crosswinds 99% 759,573 14 Luria's, Marshalls and 127 233
Center Scotty's
Germantown 94% 2,004,861 40 Giant Food 567 155
Commons
Fashion 76% 810,630 25 Staples, Superpetz and TJ 140 136
Place Maxx
Gwinnett 95% 1,908,318 32 A&P, Marshalls and TJ Maxx 227 197
Marketfair
Mount 97% 2,128,608 37 Dominicks, Marshalls, TJ Maxx 229 164
Prospect Plaza and Walgreens
Coopers 100% 1,656,887 4 Marshalls, Pathmark and 113 129
Crossing Service Merchandise
Liberty 45% 1,488,408 5 Dick's Sporting Goods and N/A(5) N/A(5)
Plaza Service Merchandise
----------- ----
Totals/ Weighted
Averages 88% $16,958,320 263 266 184
----------- ----
----------- ----
- ----------
(1) Anchor stores includes all stores occupying more than 20,000 square feet.
(2) Percent leased is defined as all space leased and for which rent was being
paid as of December 31, 1996, excluding tenants with leases having a term
of less than one year.
(3) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
(4) The low total percent leased figures for Liberty Plaza are due to the
closing of Bradlees, a 149,000 square foot anchor store tenant, in October
1996 following its bankruptcy and one vacant 15,000 square foot specialty
shop.
(5) Tenants at Liberty Plaza are not required to report sales information.
25
NUMBER OF GROSS LEASABLE AREA
TOTAL ANCHOR STORE --------------------------- ANNUALIZED BASE RENT(1)
NUMBER OF TENANT APPROXIMATE PERCENT ------------------------------------------
LEASES LEASES LEASES GLA OF PERCENT OF AVERAGE
EXPIRING IN: EXPIRING EXPIRING (SQ. FT.) TOTAL AMOUNT TOTAL PER SQ. FT.
- ------------- -------- -------- --------- ----- ------- ----- ----------
1997. . . . . 40 1 143,454 8% $ 1,785,869 11% $12.45
1998. . . . . 37 4 254.515 13% 2,318,761 14% 9.11
1999. . . . . 33 - 92,587 5% 1,355,624 8% 14.64
2000. . . . . 18 1 95,811 5% 1,088,402 6% 11.36
2001. . . . . 30 1 142,921 7% 1,645,372 10% 11.51
2002. . . . . 11 1 63,993 3% 525,754 3% 8.22
2003. . . . . 9 1 58,901 3% 653,705 4% 11.10
2004. . . . . 5 1 149,658 8% 351,452 2% 2.35
2005. . . . . 12 8 371,319 19% 2,774,688 16% 7.47
2006. . . . . 5 - 26,628 1% 413,233 2% 15.52
After 2006 . 18 10 522,501 27% 4,045,460 24% 7.74
- -----------
(1) Annualized base rent is the base rent payable in December 1996 multiplied
by 12.
COMMUNITY CENTERS OPERATING TRENDS
MINIMUM RENT PLUS PERCENTAGE RENTS
--------------------------------------------------------------------------
AVERAGE TOTAL STORES ANCHOR STORES SPECIALTY STORES
PERCENT ------------ ------------- ----------------
LEASED(1) TOTAL PER SQ. FT. TOTAL PER SQ. FT. TOTAL PER SQ. FT.
--------- ----------- ----------- ----------- ----------- ----------- -----------
1996. . . . . 92.5% $18,492,347 $ 9.08 $ 8,956,215 $6.74 $ 9,536,132 $13.49
1995. . . . . 90.0% 17,933,643 9.03 8,692,927 6.78 9,240,716 13.13
1994. . . . . 91.3% 16,991,532 9.30 7,470,611 7.02 9,520,921 12.49
- -----------
(1) Average percent leased is defined as all space leased and for which rent
was being paid excluding tenants with leases having a term of less than one
year.
COMMUNITY CENTERS BASE RENTAL RATES
ANCHOR STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $ 9.60 104,586 $8.69 176,238 $0.91 10.47%
1995 6.19 48,958 - - 6.19 100.00%
1994 - - 1.15 42,000 (1.15) (100.00%)
SPECIALTY STORES
------------------------------------------------------------------------------------
STORE OPENINGS STORE CLOSINGS RELEASING
DURING YEAR DURING YEAR SPREAD(1)
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE
BASE RENT TOTAL BASE RENT TOTAL
PER SQ. FT. SQ. FT. PER SQ. FT. SQ. FT.
----------- ---------- ----------- ----------
1996 $14.63 58,130 $13.03 86,072 $1.60 12.28%
1995 13.77 45,077 13.07 42,954 0.70 5.36%
1994 11.31 40,249 12.18 81,813 (0.87) (7.14%)
- -----------
(1) The releasing spread is calculated as the difference between per square
foot openings and per square foot closings.
26
CAPITAL EXPENDITURES
The following tables set forth certain information regarding capital
expenditures for the Mills and the Community Centers combined, the existing
Mills and the Community Centers for each of the last three years.
EXISTING MILLS AND COMMUNITY CENTERS COMBINED
3-YEAR
1996 1995 1994 AVERAGE
---- ---- ---- -------
RECURRING CAPITAL EXPENDITURES
Annual . . . . . . . . . . . . . . . . . . . . . . . . . $ 328,974 $ 230,024 $ 504,039 $354,346
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.04 0.03 0.07 0.05
RECURRING TENANT IMPROVEMENTS/LEASING COSTS (2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 4,228,743(3) 2,043,279 5,750,945 4,007,656
Per square foot improved (5) . . . . . . . . . . . . . . 12.71 5.52 7.22 8.48
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.52 0.25 0.77 0.51
TOTAL RECURRING COSTS
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 4,557,717 2,273,303 6,254,984 4,362,001
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.56 0.28 0.84 0.56
NON-RECURRING TENANT IMPROVEMENTS/LEASING COSTS(2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 8,079,220 1,903,624(4) 5,892,942 5,291,928
Per square foot improved (6) . . . . . . . . . . . . . . 44.93 17.10 13.11 25.05
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.99 0.23 0.79 0.67
- -----------
(1) Includes annual costs divided by total GLA (excluding space owned by
certain anchor store tenants) of the Properties (excluding Ontario Mills).
(2) Tenant Improvements/Leasing Costs include tenant allowances and capitalized
internal leasing costs.
(3) Includes $1,487,754 incurred with respect to three significant tenants at
Potomac Mills totaling approximately 53,000 square feet of GLA.
Without these three tenants the per square foot improved and per square
foot Recurring Tenant Improvements/Leasing Costs would have totaled
$9.80 and $0.33, respectively.
(4) Sawgrass Mills Phase II expansion costs have been excluded from this
analysis.
(5) Calculated as Recurring Tenant Improvements/Leasing Costs divided by GLA of
all Recurring Store Openings (including spaces requiring no expenditures).
(6) Calculated as Non-Recurring Tenant Improvements/Leasing Costs divided by
GLA of all Non-Recurring Store Openings.
27
EXISTING MILLS
3-YEAR
1996 1995 1994 AVERAGE
---- ---- ---- -------
RECURRING CAPITAL EXPENDITURES
Annual . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,522 $ 191,613 $ 477,664 $ 305,266
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.04 0.03 0.08 0.05
RECURRING TENANT IMPROVEMENTS/LEASING COSTS (2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 3,549,312 1,488,391 5,017,749 3,351,818
Per square foot improved (5) . . . . . . . . . . . . . . 12.94 4.85 7.39 8.39
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.60 0.25 0.85 0.56
TOTAL RECURRING COSTS
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 3,795,834(3) 1,680,004 5,495,413 3,657,084
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.64 0.28 0.93 0.61
NON-RECURRING TENANT IMPROVEMENTS/LEASING COSTS (2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 7,746,906 1,636,001(4) 4,651,899 4,678,269
Per square foot improved (6) . . . . . . . . . . . . . . 50.00 21.69 11.83 27.84
Per square foot (1). . . . . . . . . . . . . . . . . . . 1.30 0.27 0.79 0.79
- -----------
(1) Includes annual costs divided by total GLA (excluding space owned by
certain anchor store tenants) of the existing Mills.
(2) Tenant Improvements/Leasing Costs include tenant allowances and capitalized
internal leasing costs.
(3) Includes $1,487,754 incurred with respect to three significant tenants at
Potomac Mills totaling approximately 53,000 square feet of GLA.
Without these three tenants the per square foot improved and per square
foot recurring Tenant Improvements/Leasing Costs would have totaled
$9.32 and $0.34, respectively.
(4) Sawgrass Mills Phase II expansion costs have been excluded from this
analysis.
(5) Calculated as Recurring Tenant Improvements/Leasing Costs divided by GLA of
all Recurring Store Openings (including spaces requiring no expenditures).
(6) Calculated as Non-Recurring Tenant Improvements/Leasing Costs divided by
GLA of all Non-Recurring Store Openings.
COMMUNITY CENTERS
3-YEAR
1996 1995 1994 AVERAGE
---- ---- ---- -------
RECURRING CAPITAL EXPENDITURES
Annual . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,452 $ 38,411 $ 26,375 $ 49,079
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.04 0.02 0.02 0.02
RECURRING TENANT IMPROVEMENTS/LEASING COSTS (2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 679,431 554,888 733,196 655,838
Per square foot improved (3) . . . . . . . . . . . . . . 15.06 9.54 6.65 10.42
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.31 0.25 0.48 0.35
TOTAL RECURRING COSTS
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 761,883 593,299 759,571 704,917
Per square foot . . . . . . . . . . . . . . . . . . . . 0.35 0.27 0.49 0.37
NON-RECURRING TENANT IMPROVEMENTS/LEASING COSTS (2)
Annual . . . . . . . . . . . . . . . . . . . . . . . . . 332,314 267,622 1,241,043 613,660
Per square foot improved (4) . . . . . . . . . . . . . . 13.35 7,46 22.56 14.46
Per square foot (1). . . . . . . . . . . . . . . . . . . 0.15 0.12 0.81 0.36
- -----------
(1) Includes annual costs divided by total GLA (excluding space owned by
certain anchor store tenants) of the Community Centers.
(2) Tenant Improvements/Leasing Costs include tenant allowances and capitalized
internal leasing costs.
(3) Calculated as Recurring Tenant Improvements/Leasing Costs divided by GLA of
all Recurring Store Openings (including spaces requiring no expenditures).
(4) Calculated as Non-Recurring Tenant Improvements/Leasing Costs divided by
GLA of all Non-Recurring Store Openings.
28
TENANTS
The following table sets forth certain information with respect to the
Company's ten largest tenants (as measured by 1996 base rent) at December 31,
1996:
PERCENT OF NUMBER
1996 PERCENT OF OF
TENANT BASE RENT TOTAL LEASED GLA STORES
- ------ --------- ---------------- ------
TJ Maxx Group (1) . . . . . . . . 4.7% 6.7% 16
J.C. Penney . . . . . . . . . . . 2.3% 4.7% 4
Spiegel Group (2) . . . . . . . . 1.8% 3.0% 4
Bed, Bath & Beyond. . . . . . . . 1.5% 2.0% 3
Melville (3). . . . . . . . . . . 1.4% 1.1% 10
Levi's. . . . . . . . . . . . . . 1.3% 0.7% 4
Waccamaw Pottery. . . . . . . . . 1.3% 3.7% 3
Service Merchandise . . . . . . . 1.2% 1.8% 3
The Sports Authority. . . . . . . 1.2% 1.4% 3
Off 5th - Saks Fifth Avenue . . . 1.1% 1.7% 4
----- ----- -----
Total . . . . . . . . . . . . . 17.8% 26.8% 54
----- ----- -----
----- ----- -----
- -----------
(1) Includes TJ Maxx, Marshalls and Hit or Miss.
(2) Includes Spiegel Outlet, Spiegel and Eddie Bauer Outlet.
(3) Includes Toy Works, Linens 'N Things, Footaction, KayBee Toys and Berman's.
INCOME PRODUCING PROPERTY - FEDERAL INCOME TAX BASIS
The following table sets forth certain information regarding federal
income tax basis and depreciation of income producing property for the Mills
(excluding Ontario Mills) as of December 31, 1996.
LAND LAND IMPROVEMENTS BUILDING
---- ----------------- --------
FEDERAL TAX FEDERAL DEPRECIATION FEDERAL DEPRECIATION
BASIS TAX BASIS METHOD LIFE (YRS) TAX BASIS METHOD LIFE (YRS)
----------- ------------------------------------------ ------------------------------------------
Franklin
Mills $ 28,188 $ 6,084 MACRS 15 $125,098 MACRS 39
Gurnee Mills 18,573 16,653 MACRS 15 142,497 MACRS 31.5,39
Potomac 15,908 26,815 MACRS 15 110,141 MACRS 31.5,39
Mills ACRS 15,18 ACRS 15,18
Sawgrass
Mills 12,801 8,855 MACRS 15 160,795 MACRS 31.5,39
FURNITURE, FIXTURE AND EQUIPMENT
------------------------------------------
FEDERAL TAX DEPRECIATION
BASIS METHOD LIFE (YRS)
------------------------------------------
Franklin
Mills $2,033 MACRS 5,7
Gurnee Mills 3,641 MACRS 5,7
Potomac
Mills 1,765 MACRS 5,7
Sawgrass
Mills 4,465 MACRS 5,7
29
ITEM 3. LEGAL PROCEEDINGS
KRAMER LITIGATION
Mr. Richard Kramer ("Kramer") and certain of his affiliates, the AJ 1989
Trust ("A.J.") and Portals Development Associates Limited Partnership ("PDA"),
filed an action on April 27, 1994, in New York state courts against the
Operating Partnership, Herbert S. Miller ("Miller"), Kenwood Plaza Limited
Partnership ("Kenwood") and Ernst & Young LLP for various alleged breaches of
contract, breaches of fiduciary duties, fraudulent acts, and other violations of
law relating primarily to the management and subsequent acquisition of the
Properties acquired in the IPO in which Kramer and his affiliates owned an
interest. The complaint sought damages from the Operating Partnership in excess
of $4.5 million, trebled under a RICO claim. That complaint also sought a
declaratory judgment that A.J. is entitled to retain $2.9 million sent to it by
mistake upon the closing of the IPO as an offset against its claimed damages,
and a declaratory judgment, specific performance and damages against Miller
relating to his failure to sign certain guarantee affirmations and debt
modifications with respect to PDA.
On May 10, 1994, the defendants removed this case from the New York state
courts to the United States District Court for the Southern District of New
York and the plaintiffs agreed to dismiss the claims against Ernst & Young
LLP. Thereafter, the court granted the defendant's motion to dismiss certain
of the complaint's claims and gave plaintiffs leave to replead. When the
plaintiffs served their amended complaint, they added the Company as a
defendant. In late February 1996, the plaintiffs moved to amend the amended
complaint to delete the RICO claim without prejudice and to remand other
claims to the state court for adjudication. Defendants crossmoved for
summary judgment (a) on their counterclaim seeking the return of the $2.9
million mistakenly transferred to A.J. and (b) dismissing the remaining
claims against the Company and the Operating Partnership. In addition, the
defendants are asserting that the RICO claim should be dismissed only on a
with-prejudice basis. These motions are still pending. Pending the outcome
of the litigation, the Company is withholding partnership distributions that
would otherwise be payable to A.J. from Kenwood as an offset against the $2.9
million mistakenly transferred to A.J. A.J. has filed an additional claim
seeking payment of those distributions. The Company, the Operating
Partnership and Mr. Miller intend to vigorously defend against whatever
claims remain. The Company believes that it is unlikely that the ultimate
outcome of the pending proceeding would have a material adverse effect on the
Company's financial condition or results of operations.
KENWOOD LITIGATION
On June 15, 1994, ICSC Partners Limited Partnership filed in the Court of
Common Pleas, Hamilton County, Ohio a derivative action on behalf of Kenwood
Plaza Limited Partnership ("Kenwood") against Mr. Miller, Western Development
("WDC") and the Company seeking the return to Kenwood of $6.3 million paid by
Kenwood to Mr. Miller, WDC and the Company, plus $5 million in punitive damages.
The plaintiff subsequently filed an amended complaint which included a RICO
claim that, if proven, would entitle the plaintiff to recover treble damages and
attorney's fees in addition to compensatory and punitive damages. The
defendants filed counterclaims against the plaintiff seeking $5.0 million in
compensatory damages and $10.0 million in punitive damages.
In 1995, the parties to the lawsuit reached a settlement that resulted in
no financial liability for the Company and no admission of liability by the
Company. See "--Indemnity Claim." The settlement was submitted to the court
for approval and sent to the non-party limited partners. A.J, a non-party
limited partner, objected to the settlement, and, on October 13, 1995, the court
entered an order and judgment overruling the objection and approving the
settlement. A.J. appealed the order to the Court of Appeals of Arlington County,
Ohio, which affirmed the trial court's approval of the settlement. A.J. has
filed a motion asking the Supreme Court of Ohio to accept jurisdiction in this
case. This motion is pending. The Company believes that it is unlikely that
the ultimate outcome of the pending proceeding would have a material adverse
effect on the Company's financial condition or results of operations.
30
HESS LITIGATION
On November 9, 1994, Gene E. Hess, a former officer of the Company whose
employment was terminated after the IPO, filed a complaint in the United
States District Court for the District of Columbia against the Company for
fraud, breach of employment contract, and breach of covenant of good faith
and fair dealing and against Mr. Miller for fraud and tortious interference
with contractual relations. In January 1997, without admitting liability,
the defendants agreed to settle the lawsuit in exchange for the issuance of
an additional 13,650 shares of Common Stock of the Company.
INDEMNITY CLAIM
The Company and the Operating Partnership have notified Mr. Miller,
Laurence Siegel, Harry Nick, Ronald Salerno and various Kan Am affiliates
(collectively, "Indemnifying Parties") that they may be liable to the Company
and the Operating Partnership due to the Kramer and Kenwood litigation under
indemnity agreements entered into at the time of the IPO. The Company and the
Operating Partnership have entered into a standstill agreement postponing a
decision on liability under the indemnity agreements in consideration for the
Indemnifying Parties creating an escrow account to fund the Company's cost of
defense. On November 1, 1995, the Operating Partnership and the Indemnifying
Parties entered into a Settlement Agreement whereby each Indemnifying Party
agreed to contribute its pro-rata share of the amounts payable under the Kenwood
Settlement, which was approved by the Court in October 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
31
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
MARKET INFORMATION
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "MLS". The following table sets forth the high and low closing
sale prices per share of Common Stock for the periods indicated as reported on
the NYSE and the distributions per share paid by the Company with respect to the
periods noted.
HIGH LOW DISTRIBUTIONS
---- --- -------------
1995:
First Quarter. . . . . . $19 5/8 $16 $.4725
Second Quarter . . . . . 20 4/8 15 1/2 .4725
Third Quarter. . . . . . 19 7/8 17 7/8 .4725
Fourth Quarter . . . . . 18 3/4 16 7/8 .4725
1996:. . . . . . . . . .
First Quarter. . . . . . $18 3/8 $16 5/8 $.4725
Second Quarter . . . . . 18 3/8 17 1/4 .4725
Third Quarter. . . . . . 20 5/8 17 5/8 .4725
Fourth Quarter . . . . . 24 3/8 19 4725
The last reported closing sale price on the NYSE on March 10, 1997 was
$25.375 per share. As of March 10, 1997, there were 16,923,236 shares of
Common Stock outstanding, held by 508 holders of record.
DISTRIBUTIONS
The Company has made consecutive quarterly distributions since the IPO. The
indicated annual distribution rate is $1.89 per share of Common Stock based on
the fourth quarter 1996 distribution. A portion of the Company's distribution
may represent a non-taxable return of capital and/or a capital gain dividend.
Approximately 65% of 1996 distributions of $1.89 per share of Common Stock was a
non-taxable return of capital. There were no capital gain dividends in 1996. The
Company's ability to make distributions depends on a number of factors,
including its 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.
Holders of Common Stock are entitled to receive distributions when, as and
if declared by the Board of Directors out of any funds legally available for
that purpose. The Company, as a REIT, is required to distribute annually to its
shareholders at least 95% of its "real estate investment trust taxable income,"
which, as defined by the relevant tax statutes and regulations, is generally
equivalent to net taxable ordinary income.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company, the Operating Partnership and their subsidiaries (including the Third
Party Services Corporation) for the periods after the IPO and combined
historical financial data of the entities which owned the Properties and
conducted the operations now performed by the Operating Partnership and its
subsidiaries (the "Mills Entities") for the periods prior to the IPO. The
historical financial data should be read in conjunction with the financial
statements and notes thereto included herein and the discussion set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
32
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THE MILLS CORPORATION THE MILLS ENTITIES
------------------------------------------ ------------------------------------------
FOR THE FOR THE
YEAR ENDED PERIOD PERIOD
--------------------------- APRIL 22 TO JANUARY 1 YEAR ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO APRIL 21, --------------------------
1996 1995 1994 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ------------
STATEMENT OF
OPERATIONS DATA:
REVENUES:
Minimum rent $ 94,678 $ 89,839 $ 62,174 $ 25,970 $ 78,134 $ 72,846
Percentage rent 4,216 4,460 2,575 1,366 5,143 4,313
Recoveries from tenants 45,761 44,267 28,283 12,611 37,952 33,753
Other revenues 7,616 6,537 3,966 976 2,863 5,091
Fee income 3,639 3,975 2,118 914 3,103 1,843
Interest income 2,850 2,431 1,556 402 1,361 1,609
----------- ----------- ----------- ----------- ----------- ------------
158,760 151,509 100,672 42,239 128,556 119,455
EXPENSES:
Recoverable from tenants 41,308 39,299 26,002 11,578 35,184 34,388
Other operating 6,170 5,231 3,069 3,629 4,460 5,782
General and administrative 8,725 7,808 5,272 3,031 6,125 6,083
Interest expense 45,885 43,947 28,349 17,992 60,245 61,561
Depreciation and amortization 39,020 40,815 28,805 10,686 34,670 34,506
----------- ----------- ----------- ----------- ----------- ------------
141,108 137,100 91,497 46,916 140,684 142,320
Other Income (Expense) 1,073 859 (1,881) 478 565 2,589
Equity in earnings of
unconsolidated joint ventures 2,661 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Income (loss) before extraordinary
items and minority interest 21,386 15,268 7,294 (4,199) (11,563) (20,276)
Extraordinary gain (loss) on debt
extinguishment (5,301) (419) (5,414) 46 3,225 3,547
Minority interest (7,904) (7,231) (915) - - -
----------- ----------- ----------- ----------- ----------- ------------
Net income (loss) $ 8,181 $ 7,618 $ 965 $ (4,153) $ (8,338) $ (16,729)
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Earnings Per Common and Common
Equivalent Share(1):
Income before extraordinary
items $ 0.64 $ 0.46 $ 0.22 N/A N/A N/A
Extraordinary loss on debt
extinguishments (0.16) (0.01) (0.16) N/A N/A N/A
----------- ----------- ----------- ----------- ----------- ------------
Net income per common and
common equivalent share $ 0.48 $ 0.45 $ 0.06 N/A N/A N/A
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
33
THE MILLS CORPORATION THE MILLS ENTITIES
----------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
AS OF DECEMBER 31, APRIL 22 TO JANUARY 1 AS OF DECEMBER 31,
-------------------------- DECEMBER 31, TO APRIL 21, --------------------------
1996 1995 1994 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ------------
OTHER DATA:
Cash flow provided by (used in):
Operating activities $ 63,262 $ 61,823 $ 34,095 $ 10,975 $ 16,347 $ (3,519)
Investing activities (67,468) (58,474) (146,613) (3,635) (43,299) 6,791
Financing activities ( 4,017) (8,856) 116,301 (2,622) 31,712 (5,233)
Funds From Operations(2) 56,250 50,030
Distributions paid per share 1.89 1.89 1.31 N/A N/A N/A
Weighted average Common and
Common Equivalent shares outstanding 17,009 16,906 16,906 N/A N/A N/A
Weighted average shares and Units
outstanding 33,341 32,964 32,964 N/A N/A N/A
PORTFOLIO DATA:
Total Owned GLA at end of period(3) 9,233 8,172 8,116 7,736 7,233
Number of Properties at end of period 16 15 15 14 14
BALANCE SHEET DATA:
Investment in real estate assets (before $ 947,621 $ 894,265 $ 855,049 $ 760,757 $ 724,823 $ 713,824
accumulated depreciation)
Total assets 862,624 853,057 853,889 749,472 731,320 771,942
Total mortgages, notes and loans 730,113 676,435 631,976 780,523 753,756 788,163
payable
Minority interest 43,975 66,839 90,466 N/A N/A N/A
Total stockholders' equity/owners' $ 45,525 $ 70,408 $ 95,295 $ (74,540) $ (68,805) $ (64,153)
(deficit)
- -----------------
(1) Per share data is reflected only for the Company. Per share data is not
relevant for the historical combined financial statements of the Mills
Entities since such financial statements are a combined presentation of
partnerships and corporations. Historical operating results, including net
income, may not be comparable to future operating results because of the
historically greater leverage of the Mills Entities.
(2) The Company generally considers Funds From Operations ("FFO") a widely used
and appropriate measure of performance for an equity REIT which provides a
relevant basis for comparison among REITs. FFO as defined by NAREIT means
income (loss) before minority interest (determined in accordance with
generally accepted accounting principles, referred to herein as "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 (as determined in accordance
with GAAP) for purposes of evaluating the Company's operating performance.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Funds From Operations."
(3) Excludes 125,000 square feet of GLA owned by one anchor store tenant.
Includes Ontario Mills at 1.1 million square feet which, upon completion of
space for eight anchor store tenants, will contain approximately 1.6
million square feet of GLA.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with the Consolidated
and Combined Financial Statements and Notes thereto.
The following discussion is based primarily on the consolidated financial
statements of the Company for the years ended December 31, 1996 and December 31,
1995, and for the period April 22, 1994 to December 31, 1994, and the combined
financial statements of the Mills Entities for the period from January 1, 1994
to April 21, 1994. The combined financial statements of the Mills Entities
include the balance sheet data and results of operations of the management and
leasing operations of the Management Partnership, the 15 Property Partnerships
that owned the Properties and certain other affiliated entities, which were
contributed to the Operating Partnership and are now consolidated in the
Company's financial statements. The Mills Entities are considered the
predecessor to the Company, and the combined financial statements do not include
the effects of the IPO. For purposes of the discussion below, the term
"Company" is used to refer to The Mills Corporation, the Operating Partnership
and their subsidiaries, and/or their predecessor, the Mills Entities.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Income before minority interest for the year ended December 31, 1996,
increased by approximately $1.2 million (8.3%) to $16.1 million as compared to
the year ended December 31, 1995. The increase was the result of an increase in
revenues of $7.3 million (4.8%), offset by an increase in expenses of $4.0
million (2.9%), an increase in equity of earnings of unconsolidated joint
ventures of $2.7 million, and an increase in the extraordinary loss on debt
extinguishment of $4.9 million.
REVENUES. Minimum rent for the year ended December 31, 1996, increased
approximately $4.8 million (5.4%) compared to the year ended December 31, 1995.
The increase was primarily due to the expansions of Sawgrass Mills and Liberty
Plaza and higher lease renewal rates across the Properties.
Percentage rents decreased $0.2 million (5.5%) compared to the year
ended December 31, 1995, due to fixed lease escalations in 1996 shifting
revenues from percentage rents to minimum rent and to decreased sales for
certain tenants which pay percentage rents, although aggregate tenant sales
have increased over 1995.
Recoveries from tenants for the year ended December 31, 1996, increased
approximately $1.5 million (3.4%) compared to the year ended December 31, 1995.
The increase was due to the expansion of Sawgrass Mills and increases in the
recoverable expenses across the remaining Mills mainly for real estate taxes .
Other revenue for the year ended December 31, 1996, increased $1.1 million
(16.5%) compared to the year ended December 31, 1995. The increase was
primarily due to increased revenues at the Company's pushcart program and in
income from tenants who occupy space on a temporary basis.
Fee income for the year ended December 31, 1996, decreased $0.3 million
(8.5%) compared to the year ended December 31, 1995. The decrease was due
primarily to lower fees earned on the sale of third party peripheral land.
Interest income increased by approximately $0.4 million (17.2%) for the
year ended December 31, 1996, compared to the year ended December 31, 1995.
This increase was primarily due to $0.5 million of interest earned on a note
receivable from an unconsolidated joint venture.
EXPENSES. Recoverable from tenants for the year ended December 31, 1996,
increased approximately $2.0 million (5.1%) compared to the year ended December
31, 1995. The increase was due to the expansion of Sawgrass Mills and increases
across the remaining Mills primarily for real estate taxes and snow removal.
35
Other operating expenses for the year ended December 31, 1996, increased
approximately $0.9 million (18.0%) compared to the year ended December 31, 1995.
This increase was primarily due to an increase in contributions to promotional
programs of $0.8 million, an increase in bad debt of $0.3 million at certain
properties, an increase of $0.3 million for the expansion of the Company's
pushcart program, and an increase of $0.1 million for other taxes at Franklin
Mills. These increases were offset by a decrease in non-recurring legal fees
of $0.7 million at Sawgrass Mills.
General and administrative expenses increased by $0.9 million (11.7%) for
the year ended December 31, 1996, compared to the year ended December 31, 1995.
The increase was due to a $0.5 million legal settlement with a former officer of
the Company and the Company's hiring additional employees in connection with
its projects under development.
Interest expense increased by approximately $1.9 million (4.4%) for the
year ended December 31, 1996, compared to the year ended December 31, 1995.
This increase was primarily due to additional debt associated with the Phase II
expansion of Sawgrass Mills which opened in November 1995, and interest expense
associated with the opening of Ontario Mills in November 1996 that was
capitalized prior to opening.
Depreciation and amortization decreased $1.8 million (4.4%) for the year
ended December 31, 1996, compared to the year ended December 31, 1995. The
decrease was due to a $1.4 million decrease in amortization of loan costs as a
result of refinancing of certain mortgage indebtedness secured by the Community
Centers and a $2.5 million decrease in depreciation relating to assets reaching
the end of their depreciable lives. The decrease is partially offset by a $1.3
million increase in depreciation related to the Sawgrass expansion and a $0.9
million acceleration of amortization of leasing costs at Liberty Plaza in 1996.
Equity in earnings of unconsolidated joint ventures increased to $2.7
million in 1996 as the Company recognized its equity in the earnings in the
Ontario Mills and Ontario Mills Residual joint ventures, which began operations
in 1996.
The extraordinary loss on debt extinguishment for the year ended December
31, 1996, increased $4.9 million compared to the year ended December 31,
1995. The 1996 loss was due principally to the write off of unamortized
deferred financing costs as a result of the refinancing of certain mortgage
indebtedness secured by the Community Centers in January 1996 and Gurnee
Mills and Potomac Mills in December 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
The following discussion compares the results of the Company for the year
ended December 31, 1995, to the results of the Company for the period April 22,
1994 to December 31, 1994, combined with the results of the Mills Entities for
the period January 1, 1994 to April 21, 1994. As a result of the IPO, the
Company's capital structure and leverage changed substantially. However, as the
effects of the IPO primarily impact other income and expense, such as interest
expense, the comparison of 1995 to combined 1994 results of operations provides
a reasonable basis for analysis of the results of recurring property operations.
The impact of the IPO on the analysis of other income and expense is noted
below.
Income before minority interest for the year ended December 31, 1995,
increased by approximately $17.1 million to $14.8 million compared to a loss
of $2.3 million for the year ended December 31, 1994. This increase was the
result of an increase in revenues of $8.6 million (6.0%), a decrease in
expenses of $1.3 million, an increase in other income of $2.3 million and a
decrease in extraordinary loss on debt extinguishment of $4.9 million.
REVENUES. Minimum rent for the year ended December 31, 1995, increased by
approximately $1.7 million (1.9%) compared to the year ended December 31, 1994.
This increase was partly due to contractual rent increases and lease renewals.
Additionally, the Company realized a full year of operations in 1995 of two
community centers
36
acquired in 1994, resulting in a $1.2 million increase in rents. These increases
were offset by the sale of one community center in 1994, resulting in a $0.4
million decrease in rents.
Percentage rents increased $0.5 million (13.2%) compared to the year ended
December 31, 1994, due to increased tenant sales in aggregate at the Company's
properties, particularly Sawgrass Mills.
Recoveries from tenants increased approximately $3.4 million (8.3%) for the
year ended December 31, 1995, compared to the year ended December 31, 1994. This
increase was due to a full year of operations of two community centers acquired
in 1994 resulting in a $1.1 million increase, a utility income billing rate
adjustment at Franklin Mills of $0.7 million, the elimination of management
imposed caps at Gurnee Mills and Franklin Mills and overall increases in
recoverable expenses.
Fee income increased by $0.9 million (31.1%) for the year ended
December 31, 1995, primarily as a result of development and leasing fees earned
from the Ontario Mills Limited Partnership.
EXPENSES. Recoverable from tenants for the year ended December 31, 1995,
increased approximately $1.7 million (4.6%) compared to the year ended
December 31, 1994. This increase was primarily attributable to an increase in
real estate tax expense of $1.7 million at Franklin Mills due to the expiration
of a tax abatement.
Other operating expenses for the year ended December 31, 1995, decreased
approximately $1.5 million (21.9%) compared to the year ended December 31, 1994.
This decrease was primarily due to greater advertising costs in 1994 at Gurnee
Mills of $1.4 million which were funded by contributions to a promotion fund.
Typically, advertising costs are funded solely by tenant contributions.
General and administrative expenses decreased by $0.5 million (6.0%) for
the year ended December 31, 1995, primarily due to non-recurring costs incurred
in 1994 combined with cost cutting measures implemented by the Company in 1995.
Interest expense decreased by approximately $2.4 million (5.2%) for the
year ended December 31, 1995, compared to the year ended December 31, 1994. This
decrease was primarily due to lower debt balances in 1995 (and subsequent to the
IPO in 1994) as a result of the application of a substantial portion of the
proceeds of the IPO to reduce outstanding borrowings.
Depreciation and amortization expense increased $1.3 million (3.4%) for the
year ended December 31, 1995, due to the two new community centers acquired in
1994, a step-up in certain asset bases as a result of the acquisition of certain
partnership interests at the time of the IPO and other increases in deferred
assets.
Other income and expense increased approximately $2.3 million (161.2%) for
the year ended December 31, 1995, as compared to the year ended December 31,
1994. The increase was mainly due to a 1994 write-down of Western Crossing to
net realizable value of $3.4 million offset by the decrease in the gain on land
sales of $0.7 million.
Extraordinary loss on debt extinguishment decreased approximately $4.9
million in 1995 due to the paydown of debt associated with the IPO in 1994
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's balance of cash and cash
equivalents was $6.3 million, not including its proportionate share of cash
held in partnerships which are not consolidated. In addition to its cash
reserves, the Company had $20.3 million available under its $40.0 million
Line of Credit (see below).
FINANCING ACTIVITIES. During 1996, the Company completed various financing
and refinancing activities which extended the weighted average remaining term of
the Company's total indebtedness from 3.5 years at
37
December 31, 1995 to 4.5 years at December 31, 1996, without increasing the
weighted average interest rate (7.05% at December 31, 1996).
Loans totaling $349.9 million were refinanced during 1996 with the proceeds
of new borrowings totaling $360.0 million. On January 31, 1996, the Company
obtained a $76.0 million permanent mortgage loan secured by nine of the
Community Centers to repay a $60.0 million loan maturing on March 31, 1996. The
permanent mortgage loan bears interest at a fixed rate of 7.16% and matures on
January 31, 2001. On December 17, 1996, the Company completed a $289.9 million
refinancing of the existing mortgage indebtedness on Gurnee Mills and Potomac
Mills. This refinancing was achieved through a $284 million all-investment grade
securitization with a weighted average fixed coupon of 7.02% and an anticipated
balloon repayment due in seven years. The shortfall in this refinancing was
funded through a draw on the Line of Credit.
During 1996, three credit facilities were completed with Credit Suisse
First Boston, summarized as follows (dollars in thousands):
AMOUNT
OUTSTANDING
NATURE OF FACILITY MATURITY INTEREST RATE TERMS TOTAL FACILITY AT 12/31/96
- ------------------ -------- ------------- ----- -------------- -----------
Line of Credit. . . . . . . . . . . . . . . . . . 10/31/98 LIBOR + 3.00% Interest Only $ 40,000 $ 19,683
Revolving Master Repurchase Agreement . . . . . . Varies LIBOR + 1.25% Interest Only 10,600 10,556
Secured Term Loan . . . . . . . . . . . . . . . . 7/31/98 LIBOR + 2.35% Interest Only 12,000 12,000
---------- ----------
$ 62,600 $ 42,239
---------- ----------
The amounts available under the Line of Credit are subject to certain
performance measurements and restrictive covenants. The Company was in
compliance with the applicable covenants at December 31, 1996 and anticipates
increasing the availability in 1997 under the facility.
In October 1996, the Company filed a universal shelf registration statement
on Form S-3 for up to $250 million of common stock, preferred stock and common
stock warrants which became effective October 28, 1996. The Company filed a
Prospectus and preliminary Prospectus Supplement dated February 21, 1997 to sell
4,500,000 shares of Common Stock under the shelf registration statement. In
December 1996, the Company filed a preliminary proxy statement seeking
shareholder approval for up to $150 million of preferred equity capital from Kan
Am. In connection therewith, the Company is currently negotiating an agreement,
subject to such shareholder approval, with Kan Am to provide the Company (or the
Operating Partnership) with approximately $50 million in preferred equity
capital on terms the Company believes would be attractive. There can be no
assurance that any such agreement will be entered into or that such shareholder
approval will be obtained.
The Company had consolidated debt of approximately $730.1 million at
December 31, 1996 of which $657.9 million is fixed-rate debt and $72.2
million is variable-rate debt. Scheduled principal repayments of consolidated
indebtedness over the next four years is $254.8 million ($165.0 million of
which relates to Franklin Mills which the Company expects to refinance in
1997 and the remainder of which the Company expects to refinance or repay
with cash generated from operations, external borrowings or equity issuances),
with $475.3 million due thereafter. The Company's pro rata share of
unconsolidated joint venture debt at December 31, 1996 was $42.4 million (net
of tax increment financing).
The Company's ratio of debt-to-total market capitalization was
approximately 47.9% at December 31, 1996. If the Company's pro-rata share of
indebtedness of all unconsolidated joint venture properties were included, the
ratio of debt-to-total market capitalization would be approximately 49.3%.
DEVELOPMENT, REMERCHANDISING AND EXPANSION. The Company is involved in the
following development, remerchandising and expansion efforts:
Five Mills projects are planned to be completed in the next three years.
Grapevine Mills and Arizona Mills are expected to open in the fourth quarter of
1997. Construction loans and loan commitments, aggregating approximately $285
million (expected to increase to $300 million), equity commitments from the
Company's joint venture partners
38
and the Company's remaining required equity contribution of approximately $15
million (as of December 31, 1996) are considered adequate to fund the remaining
development efforts for these projects. The Company expects to obtain its
required equity contributions from external borrowings, potential equity
issuances and/or cash flow from operating activities.
Mills City at Orange and Houston Mills are scheduled to open in the fourth
quarter of 1998 and in 1999, respectively. Both projects will be financed
principally with external borrowings, potential preferred and other equity
contributions from Kan Am and/or the potential equity issuances. The Company
anticipates its required future equity requirements for Mills City at Orange and
Houston Mills in the aggregate may total as much as $30 million.
The Company expects to commence construction in 1998 of Meadowlands
Mills, with a targeted opening date in 1999. The Company is currently
evaluating its financing options with respect to this project, including
possibly obtaining an additional partner to provide equity.
In addition to these new Mills, the Company is planning to spend
approximately $115 million on its existing portfolio during the next three years
to complete its expansion and remerchandising programs in each of the Company's
first four Mills. It is anticipated that these projects will be financed with
external borrowings, equity contributions from Kan Am and other potential equity
issuances.
CAPITAL RESOURCES. The Company anticipates that its operating expenses,
interest expense on outstanding indebtedness, recurring capital expenditures and
distributions to stockholders in accordance with REIT requirements will be
provided by cash generated from operations, potential ancillary land sales and
borrowings under its Line of Credit.
The Company believes that it will have the capital and access to additional
capital resources sufficient to expand and develop its business in accordance
with its operating, development and financing strategies.
DISTRIBUTIONS. The Company has paid and intends to continue to pay regular
quarterly distributions to its stockholders. Distributions are payable at the
discretion of the Board of Directors and depend on a number of factors,
including net cash provided by operating activities, its financial condition,
capital commitments, debt repayment schedules and such other factors as the
Board of Directors deems relevant.
CASH FLOWS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Net cash provided by operating activities increased $1.4 million, or 2.3%, to
$63.2 million for the year ended December 31, 1996 as compared to $61.8 million
for the year ended December 31, 1995. Net cash used in investing activities
increased $9.0 million, or 15.4%, to $67.5 million for the year ended December
31, 1996, as compared to $58.5 million for the year ended December 31, 1995,
primarily as a result of capital invested by the Company for real estate and
development assets. Net cash used in financing activities decreased
$4.8 million, or 54.6%, to $4.0 million for the year ended December 31, 1996, as
compared to $8.8 million for the year ended December 31, 1995, primarily as a
result of a decrease in net borrowings.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Net cash provided by operating activities increased $16.8 million, or 37.2% to
$61.8 million for the year ended December 31, 1995, as compared to $45.0 million
for the year ended December 31, 1994 primarily due to increased rental revenues.
Net cash used in investing activities decreased $91.8 million, or 61.1% to
$58.4 million for the year ended December 31, 1995 as compared to $150.2 million
for the year ended December 31, 1994, primarily as a result of decreased
expenditures for real estate and development assets. Net cash provided by
financing activities decreased $122.5 million, or 107.8% to $8.8 million for the
year ended December 31, 1995 as compared to $113.7 million for the year ended
December 31, 1994, primarily due to the IPO proceeds in 1994.
39
FUNDS FROM OPERATIONS
The Company generally considers Funds From Operations ("FFO") a widely used
and appropriate measure of performance for an equity REIT which provides a
relevant basis for comparison among REITs. FFO as defined by NAREIT means income
(loss) before minority interest (determined in accordance with GAAP), excluding
gains (losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. FFO is presented to assist investors in
analyzing the performance of the Company. The Company's method of calculating
FFO may be different from methods used by other REITs and, accordingly, may not
be comparable to such other REITs. FFO (i) does not represent cash flows from
operations as defined by GAAP, (ii) is not indicative of cash available to fund
all cash flow needs and liquidity, including its ability to make distributions
and (iii) should not be considered as an alternative to net income (determined
in accordance with GAAP) for purposes of evaluating the Company's operating
performance.
FFO for the year ended December 31, 1996, increased to $56.3 million
compared to $50.0 million for the comparable period in 1995. FFO amounts were
calculated in accordance with NAREIT's definition of FFO as follows:
YEAR ENDED
DECEMBER 31,
------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
Funds From Operations Calculation(1):
Income before extraordinary item and minority interest. . . . . . . . . . . . . . . . . . . . . . $21,386 $15,268
Adjustments:
Add: Depreciation and amortization of real estate assets. . . . . . . . . . . . . . . . . . . 33,501 34,414
Add: Write-off of development costs -- 348
Add: Adjustment for real estate depreciation and amortization of unconsolidated affiliates. . 561 --
Add: Loss on sale of furniture, fixtures and equipment. . . . . . . . . . . . . . . . . . . . 802 --
--------- ---------
Funds From Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,250 $50,030
--------- ---------
--------- ---------
- ----------------
(1) The definition of FFO does not permit the add-back of amortization of loan
costs, including amortization relating to buydown fees and interest rate caps.
The annual amortization related to these items is not a cash expense to the
Company, although it reduces FFO. Potomac Mills and Gurnee Mills were refinanced
in December 1996 under a fixed rate securitization. Accordingly, the related
caps were sold and the amortization on such caps will not recur in 1997. The
impact of these items on the Company's historical effective interest rate and
other relevant information is detailed below (Sawgrass Mills has no interest
rate hedging instruments) (dollars in thousands):
40
PRIOR TO REFINANCING
---------------------
FRANKLIN MILLS POTOMAC MILLS GURNEE MILLS
-------------- ------------- ------------
Loan amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$165,000 $136,000 $151,152
Deferred cost type. . . . . . . . . . . . . . . . . . . . . . . . . .Rate buydown (1) Rate cap (2) Rate cap (3)
Deferred amount . . . . . . . . . . . . . . . . . . . . . . . . . . .$17,500 $5,834 $4,632
Current rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.13% 6.56% 7.50%
Effective rate with amortization of cap or buydown. . . . . . . . . .9.43% 7.42% 8.52%
Amortization:
Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.6 yrs 5 yrs 3 yrs
End date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dec-98 Oct-99 Apr-97
Annual amortization . . . . . . . . . . . . . . . . . . . . . . . . .$3,800 $1,167 $1,544
30-day LIBOR at December 16, 1996: 5.75%
(1) On April 21, 1994 (IPO date), the Company paid $17.5 million to reduce the
interest rate on this mortgage to 7.125% from 9.625% and to extend the
maturity date.
(2) On October 19, 1994, the Company paid $5.8 million for an interest rate
cap. Through October 19, 1997, LIBOR is capped at 6.00%, provided LIBOR is
below 8.00%. If LIBOR is greater than 8.00%, the LIBOR cap increases to
8.00%. From October 20, 1997 through October 19, 1999, LIBOR is capped at
8.00%.
(3) On April 21, 1994 (IPO date), the Company paid $4.6 million for an interest
rate cap. Through April 1, 1997, LIBOR is capped at 5.25%, provided LIBOR
is below 7.25%. If LIBOR is 7.25% or above, the LIBOR cap increases to
6.25%.
ECONOMIC TRENDS
Because inflation has remained relatively low during the last three years,
it has had little impact on the operation of the Mills Entities and the Company
during that period. Even in periods of higher inflation, however, tenant leases
provide, in part, a mechanism to help protect the Company. As operating costs
increase, leases permit a pass-through of the common area maintenance and other
operating costs, including real estate taxes and insurance, to the tenants.
Furthermore, most of the leases contain base rent steps and percentage rent
clauses that provide additional rent after a certain minimum sales level is
achieved. These provisions provide some protection to the Company during highly
inflationary periods.
41
SUMMARY OF OUTSTANDING INDEBTEDNESS
As of December 31, 1996, the Company had outstanding indebtedness in an
aggregate amount of approximately $730.1 million (excluding its pro rata share
of unconsolidated joint venture debt) as set forth below:
SECURED PROPERTY: PRINCIPAL INTEREST MATURITY
- ----------------- BALANCE RATE TYPE ANNUAL INTEREST RATE DATE
------- --------- -------------------- ----
(DOLLARS IN THOUSANDS)
Potomac
Mills/Gurnee
Mills:
Tranche A. . . . . . . $212,000 Fixed 6.905% 12/17/26 (1)
Tranche B. . . . . . . 27,000 Fixed 7.021% 12/17/26 (1)
Tranche C. . . . . . . 15,000 Fixed 7.235% 12/17/26 (1)
Tranche D. . . . . . . 30,000 Fixed 7.701% 12/17/26 (1)
Franklin Mills and
Liberty Plaza:
Mortgage Loan. . . . . 165,000 Fixed 7.125% 12/01/98
Mortgage Loan. . . . . 859 Fixed 4.000% 4/01/09
Sawgrass Mills:
Tranche A. . . . . . . 115,000 Fixed 6.450% 1/18/01
Tranche B. . . . . . . 10,000 Variable with cap 85 bp over LIBOR (6) 1/18/01
Tranche C. . . . . . . 20,000 Variable with cap 230 bp over LIBOR(6) 1/18/01
Sawgrass Mills-
Phase II . . . . . . . . 12,000 Variable 235 bp over LIBOR 7/31/98
Western Hills. . . . . . 14,949 Fixed 7.675% 1/01/99
9 Community Centers. . . 74,218 Fixed 7.160% 1/31/01
Line of Credit . . . . . 19,683 Variable 300 bp over LIBOR 10/31/98
Revolving Master
Repurchase
Agreement . . . . . 10,556 Variable 125 bp over LIBOR
Other. . . . . . . . . . 3,848 Fixed 7.0% weighted average
--------
Total . . . . . . . $730,113
--------
--------
EARLIEST DATE
ANNUAL DEBT AT WHICH DEBT
SERVICE CAN BE REPAID
------- -------------
Potomac
Mills/Gurnee
Mills:
Tranche A. . . . . . . $14,547 (2)
Tranche B. . . . . . . 1,896 (2)
Tranche C. . . . . . . 1,085 (2)
Tranche D. . . . . . . 2,310 (2)
Franklin Mills and
Liberty Plaza:
Mortgage Loan. . . . . 11,756 (3)
Mortgage Loan. . . . . 34 (4)
Sawgrass Mills:
Tranche A. . . . . . . 7,418 (5)
Tranche B. . . . . . . 660 (7) (5)
Tranche C. . . . . . . 1,620 (7) (5)
Sawgrass Mills-
Phase II . . . . . . . . 972 (7) (8)
Western Hills. . . . . . 1,140 (9)
9 Community Centers. . . 5,314 (10)
Line of Credit . . . . . 1,722 (7) (11)
Revolving Master
Repurchase
Agreement . . . . . 739 (7) (11)
Other. . . . . . . . . . 269 (7) (12)
-------
Total . . . . . . . $51,482
-------
-------
42
(1) This indebtedness is a 30 year amortizing loan with a balloon payment on
or about December 18, 2003. The maturity date of the note is December 17,
2026. Principal repayments are based on the scheduled amortization,
assuming a 7% mortgage loan interest rate, over a 30 year period ending
on December 17, 2006, of the principal amount of the mortgage loan, with
the monthly amortization payments being applied sequentially, beginning
with Tranche A, to reduce the principal balances.
(2) Optional payments of principal are not permitted prior to December 17,
1999. After such date, prepayments, in whole or in part, are permitted
upon at least 15 days notice. In addition, the Company is required to pay
a prepayment penalty equal to the greater of (i) 1% of the remaining
principal balance or (ii) a yield preservation payment. Generally, yield
preservation payments are intended to compensate the lender for the total
amount of interest it would have earned on the indebtedness but for the
repayment, less the amount of interest that the lender could earn if it
invested the repayment amount in United States Treasury obligations or
other similar securities from the date of repayment through the maturity
date of the indebtedness.
(3) Prepayable, in whole but not in part, at any time upon 30 days prior
notice to the lender. If prepaid prior to September 1, 1998 (other than
as the result of a casualty loss or condemnation), the Company is
required to pay a prepayment penalty equal to the greater of (i) 1% of
the principal balance or (ii) a yield preservation payment.
(4) Prepayable, in whole or in part, at any time upon payment of a prepayment
penalty of .05% of the outstanding principal amount.
(5) Optional prepayments of principal on Tranche A of this indebtedness are
not permitted prior to June 20, 2000 other than in connection with
certain casualty or condemnation events occurring with respect to
Sawgrass Mills. On and after such date, Tranche A may be prepaid in full,
but not in part, without any prepayment penalty. Optional prepayments of
Tranches B and C of the indebtedness may be made, in whole or in part, at
any time without any prepayment penalty, but only if payments of interest
are current with respect to each outstanding Tranche and an event of
default is not then continuing.
(6) The loan agreement provides for a cap on LIBOR at 14% for the life of the
loan. LIBOR is capped at 14% for Tranches B and C.
(7) Calculated using 30-day LIBOR at 5.75%, which was the rate at
December 16, 1996.
(8) Prepayable, in whole or in part, at any time without prepayment penalty.
(9) Optional prepayments of principal are not permitted, in whole or in part,
prior to December 31, 1996. Thereafter, this indebtedness may be prepaid,
in whole or in part, upon 30 days notice to the lender and the payment of
a prepayment penalty. The penalty percentage due on prepayment at any
time during the first six months after December 1, 1996 is 3% of the
outstanding principal amount. Thereafter, the penalty decreases by 0.5%
per six month period to a minimum of 1.5%. During the last three months
of its term, the indebtedness may be prepaid without penalty.
(10) Prepayable, in whole or in part, at any time, upon 60 days prior notice
to the lender. Only in the case of a partial prepayment is the Company
required to pay a prepayment penalty which would equal the greater of
(i) 1% of the principal balance or (ii) a yield preservation payment.
(11) Prepayable, in whole or in part, at any time without prepayment penalty.
(12) Primarily corporate debt with maturities under one year. Prepayable, in
whole or in part, at any time without prepayment penalty.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the index to Financial Statements and Schedules in
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their positions and
offices are set forth in the following table:
NAME AGE POSITIONS AND OFFICES HELD
- ---- --- --------------------------
Laurence C. Siegel 44 Chairman of the Board, Chief Executive Officer and Director
Peter B. McMillan 49 President, Chief Operating Officer and Director
Dietrich von Boetticher 55 Vice Chairman and Director
John M. Ingram 61 Vice Chairman and Director
Charles R. Black, Jr. 49 Director
James C. Braithwaite 56 Director
The Hon. Joseph B. Gildenhorn 67 Director
Peter A. Gordon 54 Director
Herbert S. Miller 53 Director
Harry H. Nick 55 Director
Franz von Perfall 55 Director
Robert P. Pincus 50 Director
James F. Dausch 53 Executive Vice President - Development
Howard J. Samuels 42 Executive Vice President - Leasing
Kent S. Digby 44 Executive Vice President - Management and Marketing
Judith S. Berson 53 Executive Vice President - Leasing
Thomas E. Frost 44 Senior Vice President, General Counsel and Secretary
Thomas M. Hindert 43 Senior Vice President - Planning, Pre-development and Acquisition
Steven J. Jacobsen 41 Senior Vice President - Development
Kenneth R. Parent 36 Senior Vice President and Chief Financial Officer
James P. Whitcome 50 Senior Vice President - Capital Services
Barry H. Young 55 Senior Vice President - Specialty Leasing
Biographical summaries of the directors and executive officers of the
Company are included under the caption "Board of Directors" and "Executive
Officers," respectively, in the Company's proxy statement for the 1997
Annual Meeting of Shareholders and are incorporated herein by reference.
Information required by Item 405 of Regulation S-K is included under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's proxy statement for the 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
44
CERTAIN PROCEEDINGS
Four partnerships in which Herbert S. Miller was a general partner or owned
an interest in the general partner defaulted on mortgage obligations during the
three-year period ended December 31, 1992 and the partnerships lost the
properties they owned as a result. In two of these default situations the
lender filed a foreclosure action and the partnerships deeded the properties to
the lender in full satisfaction of the indebtedness. In one such default
situation where the lender filed a foreclosure action, the partnership filed a
petition for reorganization under Chapter 11 of the federal bankruptcy laws
after the partnership was unable to secure an extension of the loan term. The
bankruptcy proceeding was dismissed when the partnership reached an agreement
with the mortgage lender to deed the property to the mortgage lender in
satisfaction of the indebtedness. With respect to the other two partnership
defaults, the lender sought a foreclosure and a deficiency judgment against Mr.
Miller and the other general partners. Mr. Miller paid his portion of these
obligations in full in December 1993.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the information under the captions "Compensation of Directors"
and "Executive Compensation" in the Company's proxy statement for the 1997
Annual Meeting of Shareholders.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management of the Company is incorporated herein by reference to the
information under the caption "Voting Securities and Principal Holders Thereof"
in the Company's proxy statement for the 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN TRANSACTIONS
Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Relationships and Transactions" in the Company's proxy statement for the 1997
Annual Meeting of Shareholders.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS AND FORM 8-K
14(a)(1) AND (2) FINANCIAL STATEMENTS AND SCHEDULES
THE MILLS CORPORATION AND THE MILLS ENTITIES Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated and Combined Statements of
Operations F-3
Consolidated and Combined Statements of
Stockholders' Equity F-4
Consolidated and Combined Statements of
Cash Flows F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES
Schedule III - Schedule of Consolidated Real
Estate and Accumulated Depreciation F-20
Notes to Schedule III F-21
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are included in the consolidated financial
statements or are inapplicable and therefore have been
omitted.
14(a)(3) EXHIBITS
NUMBER EXHIBIT
------ -------
1.1 None
2.1 None
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
**3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating Partnership
(filed as part of Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L. Kramer, the
A.J. 1989 Trust, the Irrevocable Intervivos Trust for the
Benefit of the Kramer Children, the N Street Investment
Trust, Equity Resources Associates, Herbert S. Miller, The
Mills Corporation and The Mills Limited Partnership (filed
as Exhibit 10.19)
**4.3 Non-Affiliate Registration Rights and Lock-Up Agreement
**4.4 Affiliate Registration Rights and Lock-Up Agreement
47
NUMBER EXHIBIT
------ -------
*10.1 Form of Employee Non-Compete/Employment Agreements
*10.2 1994 Executive Equity Incentive Plan
**10.3 Limited Partnership Agreement of Operating Partnership
*10.4 Option Agreement (Sunrise Residual/Parcels 4 and 5)
*10.5 Form of Noncompetition Agreement between the Company, the
Operating Partnership and each of Kan Am and the Kan Am
Partnerships
*10.6 Form of Noncompetition Agreement with Kan Am Directors
*10.7 Trust and Servicing Agreement, dated as of December 1, 1993,
among Sawgrass Finance L.L.C., as depositor, The First
National Bank of Chicago, as servicer, and State Street Bank
and Trust Company, as Trustee
*10.8 Amended and Restated Mortgage, Security Agreement,
Assignment of Lessee and Rents and Fixture filing, dated as
of December 1, 1993, by Sunrise Mills Limited Partnership,
as mortgagor, in favor of Sawgrass Finance L.L.C., as
mortgagee
*10.9 Assignment of Leases and Rents, dated as of December 1,
1993, between Sunrise Mills Limited Partnership and Sawgrass
Finance L.L.C.
*10.10 Assignment of Note, Mortgage, and Assignment of Rents
dated as of December 21, 1993, by Sawgrass Finance L.L.C.
in favor of State Street Bank & Trust Co.
*10.11 Promissory Note, dated as of November 16, 1993, by Western
Hills Associates Limited Partnership in favor of Connecticut
General Life Insurance Company
*10.12 Assignment of Rents and Leases, dated as of November 16,
1993, by Western Hills Associates Limited Partnership in
favor of Connecticut General Life Insurance Company
*10.13 Open-End Mortgage, Security Agreement and Fixture
Filing, dated as of November 16, 1993, by Western Hills
Associates Limited Partnership in favor of Connecticut
General Life Insurance Company
*10.19 Agreement dated March 15, 1994 among Richard L. Kramer, the
A.J. 1989 Trust, the Irrevocable Intervivos Trust for the
Benefit of the Kramer Children, the N Street Investment
Trust, Equity Resources Associates, Herbert S. Miller, The
Mills Corporation and The Mills Limited Partnership
*10.20 Form of Promissory Note made payable by Franklin Mills
Associates Limited Partnership to and for the benefit of
the Operating Partnership
*10.21 Form of Mortgage, Security Agreement and Assignment
of Rents and Leases by Franklin Mills Associates Limited
Partnership to and for the benefit of the Operating
Partnership
*10.22 Form of Sale of Partnership Interests Agreement (Franklin
Mills) by and between the Operating Partnership and Herbert
S. Miller, Laurence C. Siegel, Harry H. Nick, Western
Franklin Mills Corp., Kan Am USA IX Limited Partnership and
Kan Am USA X Limited Partnership
*10.23 Form of Indemnification Agreement between the Company and
each of its Directors and Executive Officers
48
NUMBER EXHIBIT
------ -------
*****10.24 Construction Loan Agreement dated November 9, 1995, by and
between Ontario Mills Limited Partnership and Canadian
Imperial Bank of Commerce, Bayerische Hypotheken-Und
Wechsel-Bank Aktiengesellschaft and The Mitsubishi Bank of
Commerce
*****10.25 Construction Deed of Trust, Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing Statement
dated as of December 26, 1995 in favor of Canadian Imperial
Bank of Commerce, Bayerische Hypotheken-Und Wechsel-Bank
Aktiengesellschaft and The Mitsubishi Bank of Commerce
*****10.26 Loan Agreement dated as of January 31, 1996 by and among
Coopers Crossing Associates (MLP) Limited Partnership,
Crosswinds Center Associates of St. Petersburg (MLP) Limited
Partnership, Echo Hills Center Associates (MLP) Limited
Partnership, Fashion Center Associates of Illinois No. 1
(MLP) Limited Partnership, Fashion Place Associates (MLP)
Limited Partnership, Germantown Development Associates (MLP)
Limited Partnership, Gwinnett Market Fair Associates (MLP)
Limited Partnership, Montgomery Village Associates (MLP)
Limited Partnership, Montgomery Village Ground (MLP) Limited
Partnership, Mount Prospect Plaza (MLP) Limited Partnership
(collectively, "The Mills Corporation, et. al."), and PFL
Life Insurance Company
*****10.27 First Amended and Restated Promissory Note dated as of
January 31, 1996, made by and among The Mills Corporation,
et al., and PFL Life Insurance Company
*****10.28 Absolute Assignment of Mortgage and Loan Documents dated
January 31, 1996 by and between CS First Boston Mortgage
Capital Corp., as assignor, and PFL Life Insurance Company,
as assignee
10.29-10.47 Intentionally Omitted
******10.48 Note dated July 30, 1996 by Sawgrass Mills Phase II
Limited Partnership in favor of CS First Boston Mortgage
Capital Corporation.
******10.49 Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Filing dated as of July 30, 1996, between
Sawgrass Mills Phase II Limited Partnership, as Mortgagor,
and CS First Boston Mortgage Capital Corporation, as
Mortgagee.
****10.50 First Amendment to Trust and Servicing Agreement (Exhibit
10.7) dated as of June 1, 1995, among Sawgrass Finance
L.L.C., as depositor, The First National Bank of Chicago, as
servicer, and State Street Bank and Trust Company, as
trustee.
****10.51 Prepayment Premium Agreement dated as of June 1, 1995,
between The Mills Limited Partnership and State Street Bank
and Trust Company, as trustee.
49
NUMBER EXHIBIT
------ -------
10.52 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.
10.53 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.
10.54 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
10.55 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. (See Exhibit 10.53)
10.56 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.
10.57 Credit Agreement dated as of October 28, 1996, among The
Mills Corporation, The Mills Limited Partnership, Sawgrass
Mills Phase II Limited Partnership, Sunrise Mills (MLP)
Limited Partnership, and CS First Boston Mortgage Capital
Corp.
10.58 General Pledge and Security Agreement, dated as of October
28, 1996 made by The Mills Limited Partnership, in favor of
CS First Boston Mortgage Capital Corp.
10.59 Intercompany Pledge and Security Agreement dated as of
October 28, 1996, made by The Mills Limited Partnership,
The Mills Corporation, Sunrise Mills (MLP) Limited
Partnership and Sawgrass Mills Phase II Limited
Partnership in favor of CS First Boston Mortgage Capital
Corp.
10.60 Assignment of Partnership Interest dated as of the 28th day
of October, 1996 from The Mills Limited Partnership,
to CS First Boston Mortgage Capital Corp.
10.61 Revolving Note dated as of October 28, 1996 from The Mills
Limited Partnership to CS First Boston Mortgage Capital
Corp. in the maximum amount of $40,000,000.
11 Statement Re: Computation of Per Share Earnings.
21.1 List of Subsidiaries of the Registrant
23 Consent of Independent Auditors
* Incorporated by reference to the Registrant's Registration Statement
on Form S-11, Registration No. 33-71524, which was declared effective
by Securities and Exchange Commission on April 14, 1994.
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the first quarter ended March 31, 1994.
*** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
**** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the second quarter ended June 30, 1995.
***** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995
****** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the third quarter ended September 30, 1996.
14(b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K during the last
quarter of the year ended December 31, 1996.
The Company's Current Report on Form 8-K dated November 21,
1996, announced the Company's plans to refinance the
indebtedness on Potomac Mills and Gurnee Mills. The
Company's Current Report on Form 8-K dated December 17, 1996
announced the closing of the refinancing of the Potomac
Mills and Gurnee Mills indebtedness through a fixed rate
securitization.
50
14(c) EXHIBITS
The list of exhibits filed with this report is set forth in
response to item 14(a)(3). The required exhibit index has
been filed with the exhibits.
14(d) FINANCIAL STATEMENTS
Schedule III - Schedule of Consolidated Real Estate and
Accumulated Depreciation
Notes to Schedule III.
51
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Mills Corporation
We have audited the accompanying consolidated balance sheets of The Mills
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and for the period from April 22, 1994 to
December 31, 1994. We have also audited the combined statements of operations,
owners' deficit, and cash flows of the Mills Entities for the period from
January 1, 1994 to April 21, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial state-
ments and schedule are the responsibility of the management of The Mills
Corporation. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Mills Corpora-
tion as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1996 and 1995 and
for the period from April 22, 1994 to December 31, 1994, and the combined
results of operations and cash flows of The Mills Entities for the period from
January 1, 1994 to April 21, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Washington, D.C.
February 21, 1997
F-1
THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
ASSETS
Income producing property:
Land and land improvements $ 164,420 $ 165,994
Building and improvements 662,469 652,706
Furniture, fixtures and equipment 22,221 21,943
Less: accumulated depreciation and amortization (179,658) (152,713)
--------- ---------
Total income producing property 669,452 687,930
Land held for investment and/or sale 3,564 3,225
Construction in progress 28,259 36,282
Investment in unconsolidated joint ventures 66,688 14,115
--------- ---------
Total real estate and development assets 767,963 741,552
Cash and cash equivalents 6,327 14,550
Restricted cash 13,215 19,354
Accounts receivable 19,165 17,274
Notes receivable 7,167 7,357
Deferred costs, net 45,655 49,596
Other assets 3,132 3,374
--------- ---------
TOTAL ASSETS $ 862,624 $ 853,057
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deed of Trusts, notes, and loans payable $ 730,113 $ 676,435
Accounts payable and other liabilities 43,011 39,375
--------- ---------
Total liabilities 773,124 715,810
Minority interest 43,975 66,839
Stockholders' equity:
Common stock $.01 par value, authorized 100,000,000 shares,
issued and outstanding 16,907,164 and 16,905,953 shares in
1996 and 1995, respectively 169 169
Additional paid-in capital 309,813 309,813
Accumulated deficit (264,457) (239,574)
--------- ---------
Total stockholders' equity 45,525 70,408
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 862,624 $ 853,057
--------- ---------
--------- ---------
See Accompanying Notes to Consolidated Financial Statements.
F-2
THE MILLS CORPORATION (THE COMPANY) AND
THE MILLS ENTITIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY AND THE COMBINED STATEMENTS OF OPERATIONS OF THE PREDECESSOR
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THE MILLS CORPORATION THE MILLS ENTITIES
----------------------------------------------- ------------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED FROM APRIL 22 FROM JANUARY 1
DECEMBER 31 DECEMBER 31 TO DECEMBER 31 TO APRIL 21
1996 1995 1994 1994
------------ ----------- -------------- --------------
REVENUES:
Minimum rent $ 94,678 $ 89,839 $ 62,174 $ 25,970
Percentage rents 4,216 4,460 2,575 1,366
Recoveries from tenants 45,761 44,267 28,283 12,611
Other revenues 7,616 6,537 3,966 976
Fee income 3,639 3,975 2,118 914
Interest income 2,850 2,431 1,556 402
-------- -------- -------- --------
158,760 151,509 100,672 42,239
EXPENSES:
Recoverable from tenants 41,308 39,299 26,002 11,578
Other operating 6,170 5,231 3,069 3,629
General and administrative 8,725 7,808 5,272 3,031
Interest expense 45,885 43,947 28,349 17,992
Depreciation and amortization 39,020 40,815 28,805 10,686
-------- -------- -------- --------
141,108 137,100 91,497 46,916
Other income (expense) 1,073 859 (1,881) 478
Equity in earnings of unconsolidated joint ventures 2,661 - - -
-------- -------- -------- --------
Income (loss) before extraordinary item
and minority interest 21,386 15,268 7,294 (4,199)
Extraordinary (loss) gain on debt extinguishment (5,301) (419) (5,414) 46
-------- -------- -------- --------
Income (loss) before minority interest 16,085 14,849 1,880 (4,153)
Minority interest (7,904) (7,231) (915) -
-------- -------- -------- --------
Net income (loss) $ 8,181 $ 7,618 $ 965 $ (4,153)
-------- -------- -------- --------
-------- -------- -------- --------
Income per share (Note 2)
before extraordinary items $ .64 $ .46 $ .22
-------- -------- --------
-------- -------- --------
Net income per share (Note 2) $ .48 $ .45 $ .06
-------- -------- --------
-------- -------- --------
Dividends declared per common share $ 1.89 $ 1.89 $ 1.31
-------- -------- --------
-------- -------- --------
Tax treatment of dividends (unaudited):
Ordinary income $ .66 $ .60 $ .54
-------- -------- --------
-------- -------- --------
Capital gains $ - $ .06 $ -
-------- -------- --------
-------- -------- --------
Return of capital $ 1.23 $ 1.23 $ .77
-------- -------- --------
-------- -------- --------
See Accompanying Notes to Consolidated Financial Statements.
F-3
THE MILLS CORPORATION (THE COMPANY) AND
THE MILLS ENTITIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY OF THE
COMPANY AND THE COMBINED STATEMENTS OF OWNERS' DEFICIT OF THE PREDECESSOR
(IN THOUSANDS)
COMMON
STOCK PAR ADDITIONAL ACCUMULATED
(SHARES) VALUE PAID-IN CAPITAL DEFICIT TOTAL
-------- ------ --------------- ------------ ----------
Balance, December 31, 1993 $ $ $ (74,540) $ (74,540)
Contributions 12,658 12,658
Distributions (22,891) (22,891)
Net loss (4,153) (4,153)
------- ---- -------- --------- ---------
Balance, April 21, 1994 (88,926) (88,926)
Net proceeds from initial public offering 16,906 169 309,813 309,982
Net effect of REIT formation adjustments 6,091 6,091
Minority interest ownership in
operating partnership (110,628) (110,628)
Dividends declared (22,189) (22,189)
Net income 965 965
------- ---- -------- --------- ---------
Balance, December 31, 1994 16,906 169 309,813 (214,687) 95,295
REIT formation settlement adjustments (553) (553)
Dividends declared (31,952) (31,952)
Net income 7,618 7,618
------- ---- -------- --------- ---------
Balance, December 31, 1995 16,906 169 309,813 (239,574) 70,408
Conversion of operating partnership units 1
Change in ownership - Note 1 (596) (596)
REIT formation settlement adjustments (516) (516)
Dividends declared (31,952) (31,952)
Net income 8,181 8,181
------- ---- -------- --------- ---------
Balance, December 31, 1996 16,907 $169 $309,813 $(264,457) $ 45,525
------- ---- -------- --------- ---------
------- ---- -------- --------- ---------
See Accompanying Notes to Consolidated Financial Statements.
F-4
THE MILLS CORPORATION (THE COMPANY) AND
THE MILLS ENTITIES (THE PREDECESSOR TO THE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS OF THE
COMPANY AND THE COMBINED STATEMENTS OF CASH FLOWS OF THE PREDECESSOR
(IN THOUSANDS)
THE MILLS CORPORATION THE MILLS ENTITIES
----------------------------------------------- ------------------
FOR THE PERIOD FOR THE PERIOD
YEAR ENDED YEAR ENDED FROM APRIL 22 FROM JANUARY 1
DECEMBER 31 DECEMBER 31 TO DECEMBER 31 TO APRIL 21
1996 1995 1994 1994
------------ ----------- -------------- --------------
OPERATING ACTIVITIES:
Income (loss) before minority interest $ 16,085 $ 14,849 $ 1,880 $ (4,153)
Adjustments to reconcile income (loss) before minority
interest to net cash provided by operating activities:
Net accretion of note receivable (700) (700) (555) (160)
Depreciation and amortization 42,816 44,618 31,494 10,686
Provision for losses on accounts receivable 441 848 485 455
Equity in earnings of unconsolidated joint ventures (2,661) - - (478)
Net gain on sales of property (1,048) (1,709) (2,428) -
Extraordinary loss (gain) on debt extinguishment 5,301 419 5,414 (46)
Loss on disposal of property held for sale - - 3,425 -
Other changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,458) (1,135) (4,684) 2,304
(Increase) decrease in notes receivable 890 1,361 229 745
(Increase) decrease in other assets 242 1,042 1,028 (2,279)
(Decrease) increase in accounts payable
and other liabilities 4,354 2,230 (2,193) 3,901
-------- -------- --------- --------
Net cash provided by operating activities 63,262 61,823 34,095 10,975
INVESTING ACTIVITIES:
Investment in real estate and development assets (56,768) (58,541) (128,410) (7,259)
Proceeds from sale of property 5,060 6,327 17,129 2,363
Deferred costs (15,760) (6,260) (35,332) 1,261
-------- -------- --------- --------
Net cash used in investing activities (67,468) (58,474) (146,613) (3,635)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 423,029 85,233 59,471 15,526
Repayments of mortgages, notes and loans payable (369,351) (26,193) (169,198) (20,940)
Payments to terminate interest rate swap agreements - - (2,061) -
Funding (to) from affiliates - 834 (48,857) 26,580
Restricted cash 6,139 (6,434) 4,967 (4,583)
Net proceeds from common stock offering - - 309,982 -
Contributions from partners - - 2,743 3,686
Dividends (31,952) (31,952) (14,201) -
Distributions (31,882) (30,344) (26,545) (22,891)
-------- -------- --------- --------
Net cash provided by (used in) financing activities (4,017) (8,856) 116,301 (2,622)
-------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents (8,223) (5,507) 3,783 4,718
Cash and cash equivalents at beginning of period 14,550 20,057 16,274 11,556
-------- -------- --------- --------
Cash and cash equivalents at end of period $ 6,327 $ 14,550 $ 20,057 $ 16,274
-------- -------- --------- --------
-------- -------- --------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 45,785 $ 43,748 $ 30,528 $ 16,027
-------- -------- --------- --------
-------- -------- --------- --------
See Accompany Notes to Consolidated Financial Statements.
F-5
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") was incorporated in Virginia on
January 2, 1991 and was reincorporated in Delaware in 1994. The Company
elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, commencing with its year ended
December 31, 1994. In connection with its re-incorporation, the Company
completed its initial public offering of 14,380,000 shares of its common
stock (the "Common Stock") on April 21, 1994 (the "Offering"). The net
proceeds of the Offering of approximately $310 million and other assets of
the Company were contributed to The Mills Limited Partnership (the "Operating
Partnership") in exchange for a 51.3% interest therein, including a 1%
interest as the sole general partner. Kan Am U.S., Inc. and certain of its
affiliates ("Kan Am"), owned directly or indirectly 41.1% of the partnership
interests ("Units") in the Operating Partnership. Also in connection with the
Offering, the Company was authorized to issue 20,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). The Board of
Directors of the Company may determine the preferences, rights and other
terms of Preferred Stock to be issued. As of December 31, 1996, there were
no shares of Preferred Stock outstanding. In January 1996, Kan Am was issued
274,777 additional Units in exchange for an approximately 6.25% interest in
Franklin Mills Associates Limited Partnership. This transaction resulted in
an increase in Kan Am's interest in the Operating Partnership to 41.6% and a
decrease in the Company's interest to 50.9%. The Operating Partnership was
formed prior to consummation of the Offering and is the successor to the
operations of the Mills Entities (the "Predecessor").
Simultaneously with the Offering, the individual property partnerships
comprising the Predecessor transferred their assets to the Operating
Partnership in exchange for Units and/or the assumption of their debt. Such
Units are exchangeable into Common Stock of the Company or cash (at the
option of the Company, as the general partner of the Operating Partnership)
equal to the fair market value of the number of shares of Common Stock into
which such Units are exchangeable. As of December 31, 1996, the Company has
reserved 16,331,306 shares of Common Stock for the exchange of such Units.
The Operating Partnership also acquired certain investors' interests in the
Mills Entities for cash and Units. Purchase accounting was applied to the
acquisition of all investor interests for which cash consideration was paid.
Contributed assets and liabilities related to interests of all Mills Entities
which received only Units and/or the assumption of debt by the Operating
Partnership have been accounted for as a reorganization of entities under
common control, and, accordingly, have been recorded at the Predecessor's
cost.
The net effect of the REIT formation adjustments and the REIT formation settle-
ment adjustments included in the accompanying statement of stockholders' equity
consists of distributions of assets or return of capital not intended for
inclusion in the REIT, conversion of debt due promoters to equity, contributions
of interest not previously included in the Mills Entities and the effects of
applying purchase accounting for acquisition of certain investors' interests in
the Mills Entities for cash and Units.
Disclosures made herein with respect to any period ended prior to April 22,
1994, are to be read as disclosures of Predecessor. All disclosures made in
reference to periods subsequent to April 21, 1994, are disclosures of the
Company.
The Company, which conducts all of its business through the Operating
Partnership, is engaged primarily in the ownership, development,
redevelopment, leasing, and management of super-regional, value and
entertainment-oriented outlet malls (the "Mills") and community shopping
centers (the "Community Centers"). As of December 31, 1996, the Operating
Partnership owns or holds an interest in the following operating properties:
F-6
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
PROPERTY NAME LOCATION
------------- --------
Franklin Mills Philadelphia, PA
Gurnee Mills Gurnee, IL (Chicago)
Potomac Mills Woodbridge, VA (Washington, DC)
Sawgrass Mills Sunrise, FL (Ft. Lauderdale)
Ontario Mills Ontario, CA (Los Angeles)
COMMUNITY CENTERS
-----------------
Butterfield Plaza Downers Grove, IL
Coopers Crossing Voorhees, NJ
Crosswinds Center St. Petersburg, FL
Fashion Place Columbia, SC
Germantown Commons Germantown, MD
Gwinnett Marketfair Duluth, GA
Liberty Plaza Philadelphia, PA
Montgomery Village Gaithersburg, MD
Mount Prospect Plaza Mount Prospect, IL
West Falls Church Outlet Center Falls Church, VA
Western Hills Plaza Cincinnati, OH
In addition to the operating properties, the Company is actively involved in the
development of a number of new Mills and sale of certain outparcels of land.
BASIS OF PRESENTATION
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 LLC ("Mills Management") and Management
Associates Limited Partnership ("MALP"). In addition, the Operating
Partnership owns 5% of the voting common stock and 99% of the preferred
stock of the Mills Services Corporation ("MSC"), an entity formed in
connection with the Offering to provide development, management, leasing
and financing services to the Company and other entities owned by affiliates
of the Company. As a result of the Operating Partnership's ownership of 99%
of the economic interests, MSC is consolidated with the Operating
Partnership. The Company's investments in the partnerships that own Ontario
Mills, Ontario Mills Residual, Grapevine Mills, Grapevine Mills Residual,
Arizona Mills, Columbus Mills and Mills City, which represent
non-controlling ownership interests, are accounted for using the equity
method of accounting (see Note 4).
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.
The financial statements for the period January 1, 1994 to April 21, 1994,
reflect the results of operations of the Predecessor. Such financial
statements have been presented on a combined basis because the properties
were under common ownership and control and because the entities were the
subject of the business combination described above. All significant
intercompany transactions and accounts have been eliminated.
F-7
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME PRODUCING PROPERTY
Income producing property is stated at cost. The Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" in 1995 whereby impairment losses will be recorded if events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by the assets are less than their carrying
amount. The adoption of SFAS No. 121 had no material effect on the financial
statements. Income producing property includes all costs related to acquisi-
tion, development, leasing and construction, including tenant improvements,
interest incurred during construction and certain direct and indirect costs of
the development department. Maintenance and repairs are charged to expense as
incurred. Depreciation expense is computed using the straight-line method over
the estimated useful lives of the assets, as follows:
Buildings and improvements 40 years
Land improvements 20 years
Furniture, fixtures and equipment 7 years
Total interest expense capitalized to real estate and development assets was
$7,171, $6,046 and $1,219 for the years ended December 31, 1996, 1995 and 1994,
respectively.
INCOME 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 are recognized on a straight-line basis over the terms
of the respective leases. Percentage rents are recognized on an accrual basis.
Recoveries from tenants for real estate taxes and other operating expenses are
recognized as revenue in the period the applicable costs are incurred.
Management, leasing and development fees relating to entities not controlled by
the Company are recognized as revenue as they are earned.
DEFERRED COSTS
Deferred costs consist of loan fees and related expenses which are amortized on
a straight-line basis that approximates the interest method over the terms of
the related notes and leasing charges, including tenant construction allowances
and direct salaries and other costs incurred by the Company to obtain a lease,
which are amortized over the terms of the related leases.
Total accumulated amortization of deferred costs was $57,608 and $70,740 at
December 31, 1996 and 1995, respectively.
In connection with the 1996 refinancing of debt described in Note 5,
unamortized deferred financing costs of $6,829 and a prepayment penalty of
$600 net of the proceeds from the sale of interest rate cap agreements of
$557 and the reversal of accruals for straight-line interest expense of
$1,571 were written off and are included as extraordinary items for 1996.
Deferred financing costs of $419 associated with a line of credit that was
paid in full during 1995 were written off and included as an extraordinary
item for 1995. In connection with the Offering, deferred financing costs
aggregating $3,118, associated with debt that was retired or paid down with
the proceeds of the Offering, as well as
F-8
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
prepayment penalties of $235 and payments of $2,061 to terminate interest rate
swap agreements, were written off and are included as an extraordinary item in
the accompanying statement of operations for the period from April 22, 1994 to
December 31, 1994.
CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
RESTRICTED CASH
Restricted cash primarily consists of funds invested in cash collateral ac-
counts. The purpose of the cash collateral accounts is to hold proceeds from
certain transactions and to fund maintenance reserves, interest, taxes and
payments on debt. The cash collateral accounts are controlled by the lenders.
INCOME TAXES
Federal income taxes are not provided for because the Company believes it
qualifies as a REIT under the provisions of the Internal Revenue Code ("IRC")
and will distribute in excess of its taxable income to its shareholders. As
a REIT, the Company is required to distribute at least 95% of its taxable
income to shareholders and to meet certain other requirements. The
differences between net income available to common shareholders for financial
reporting purposes and taxable income before dividend deductions relate
primarily to temporary differences, principally real estate depreciation.
MSC, the Company's consolidated (for GAAP purposes) IRC subchapter C corporate
subsidiary, is subject to federal income taxes at the prevailing tax rates.
However, MSC has no current provision for federal taxes due to its federal net
operating loss carry forwards of approximately $15 million and $9.2 million at
December 31, 1996 and 1995, respectively.
No provision for income taxes has been made in the financial statements of the
Predecessor because the entities included in the combined financial statements
were not subject to tax.
INTEREST RATE RISK MANAGEMENT
Prior to the refinancing of the Gurnee Mills and Potomac Mills debt in December
1996 (see Note 5), the Company used interest rate cap agreements to reduce the
potential impact of increases in interest rates relating to the floating rate
portion of certain of its borrowings. In addition, in connection with the
Offering, the Company purchased an interest rate buy-down from the lender on one
of its Mills properties. These costs are deferred and amortized on a straight-
line basis that approximates the interest method over the terms of the related
notes. Upon the refinancing of the Gurnee Mills and Potomac Mills debt, the
interest rate caps were sold and the excess of the net unamortized costs were
expensed and included in the extraordinary loss on debt extinguishment (see
"Deferred Costs"). Unamortized costs related to these agreements aggregated
approximately $7,219 and $17,434 at December 31, 1996 and 1995, respectively,
and are included in deferred costs.
NET INCOME PER SHARE
Net income per share for the years ended December 31, 1996 and December 31,
1995, and for the period April 22, 1994 to December 31, 1994, is based on the
weighted average number of common shares and common equivalent shares
outstanding during such period (17,009,000 at December 31, 1996, and 16,906,000
at December 31, 1995
F-9
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
and prior). Units in the Operating Partnership (16,331,000
and 16,058,000 outstanding at December 31, 1996 and 1995, respectively) may be
exchanged for shares of common stock of the Company on a one-for-one basis in
certain circumstances (See Note 1). This exchange right has not been consid-
ered in the computation of per share data as it does not have a dilutive effect.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with the
current year presentation.
3. NOTES RECEIVABLE
Notes receivable include $7,080 and $7,239 at December 31, 1996 and 1995,
respectively, relating to a reimbursement and annexation agreement with the
Village of Gurnee ("Village") to reimburse the owner of Gurnee Mills for the
cost of certain public improvements. The Village has executed a non-interest
bearing note for $15,000 to be paid from taxes collected from tenants of Gurnee
Mills during a ten-year period beginning one year after Gurnee Mills opened in
August 1991. In 1996, the note was amended to $17,500 to be paid over a
thirteen year period. The note was recorded in 1991 at its net present value,
based on the estimated taxes to be collected by the Village using a discount
rate of 10%. Interest income accreted was approximately $700, $700 and $715 for
the years ended December 31, 1996, 1995 and 1994, respectively. For the years
ended December 31, 1996, 1995 and 1994, collections from the Village totaled
$908, $880 and $808, respectively.
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Certain Mills and Mills under development are partially owned through joint
ventures ("Joint Ventures"). The Company is also a general partner of these
Joint Ventures. The Company's interest in each Joint Venture is as follows:
Ownership %
Joint Venture as of 12/31/96
------------- --------------
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 35.0%
Columbus Mills 75.0%
Mills City at Orange 50.0%
The Company does not control these Joint Ventures as major business decisions
require the approval of at least one other general partner. As a result, its
investments are accounted for under the equity method, where the investments are
recorded at cost and subsequently adjusted for net equity in income (loss) and
cash contributions and distributions. The Company eliminates intercompany
profits on sales of services that are capitalized by the Joint Ventures.
F-10
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
In connection with the Joint Venture agreements, the Company is committed to
providing certain levels of equity in addition to the amounts invested to date.
The Company has guaranteed repayment of $84.7 million of the Joint Venture debt
until certain debt service coverage tests are met. In addition, the Company is
contingently liable for property taxes and assessments levied against Ontario
Mills Limited Partnership by the City of Ontario Special Assessment District.
The aggregate amount of the special tax assessment is approximately $26,000 and
will be collected over a 25 year period to fund debt service on bonds issued by
the City to fund the infrastructure improvements.
Combined balance sheet and results of operations information is presented below
for all Joint Ventures at December 31, 1996 and for the year then ended:
December 31, 1996
-----------------
Assets:
Income producing assets $124,208
Construction in progress 108,854
Other 65,938
--------
$299,000
--------
--------
Liabilities and partners' equity:
Debt $ 99,021
Other liabilities 50,902
Operating Partnership's accumulated equity 41,959
Joint Venture partners' accumulated equity 107,118
--------
$299,000
--------
--------
Year Ended
December 31, 1996
-----------------
Revenues $ 3,720
Recoverable and other property expenses (1,085)
Interest expense (523)
Depreciation and amortization (1,268)
Other 5,489
--------
Net Income $ 6,333
--------
--------
Equity in earnings of unconsolidated joint ventures $ 2,661
--------
--------
The primary difference between the carrying value of the Company's investment
in unconsolidated joint ventures and the Operating Partnership's accumulated
equity noted above is due to capitalized interest on the investment balance,
capitalized development and leasing costs which are recovered by the
Operating Partnership through fees during construction and loans to the Joint
Ventures included in other liabilities above.
F-11
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
5. BORROWINGS
Deed of Trusts, notes, and loans payable, which are secured by the Company's
income producing properties, consist of the following at December 31, 1996
and 1995:
1996 1995
---- ----
Potomac Mills/Gurnee Mills securitized bonds - principal and interest
payments based on 30 year amortization with an anticipated balloon
repayment in December 2003 and required maturity in 2026; fixed
interest rates ranging from 6.905% to 7.701% $284,000 $ -
Gurnee Mills mortgage loan - interest only payments through
maturity in November 1997; variable interest rate at LIBOR
plus 1.75% increasing to LIBOR plus 2.25% in November 1996 -
paid in full with proceeds from Potomac Mills/Gurnee Mills
securitized bonds in December 1996 - 153,949
Potomac Mills securitized bonds - interest only payments through
maturity in October 1999; variable interest rates ranging from
LIBOR + .45% to LIBOR + 2.00% - paid in full with proceeds from
Potomac Mills/Gurnee Mills securitized bonds in December 1996 - 136,000
Sawgrass Mills securitized bonds - interest only payments through
maturity in January 2001; fixed interest rate of 6.45% on $115,000;
variable interest rates on remaining amounts from LIBOR + .85% to
LIBOR + 2.30% (LIBOR was 5.7% at December 31, 1996) 145,000 145,000
Sawgrass Mills Phase II mortgage loan - interest only payments through
maturity in July 1998; variable interest rate at LIBOR plus 2.35% 12,000 -
Franklin Mills mortgage loan - interest only payments through maturity
in December 1998; fixed interest rate at 7.125% 165,000 165,000
Western Hills mortgage loan - interest only payments through maturity
in January 1999; fixed interest rates at blended rate of 7.675% 14,949 14,949
Community Centers' mortgage loan - principal and interest payments
through maturity in January 2001; fixed interest rate of 7.16% 74,218 -
Community Centers' interim mortgage loan - interest only payments
through maturity in March 1996; variable interest rate at LIBOR plus
2.35% - paid in full with proceeds from Community Centers'
mortgage loan in January 1996 - 60,000
The Mills Limited Partnership $40.0 million revolving line of credit -
interest only payments through maturity in October 1998 (with a one
year extenstion option); variable interest rate at LIBOR plus 3.00% 19,683 -
The Mills Limited Partnership revolving master repurchase agreement -
interest only payments; balance due on demand; variable interest rate
at LIBOR plus 1.25% 10,556 -
Other notes and loans payable 4,707 1,537
-------- --------
$730,113 $676,435
-------- --------
-------- --------
F-12
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
Pursuant to an interest rate cap protection agreement, the LIBOR rate on the
Potomac Mills securitized bonds was capped through October 1997 at 6% if LIBOR
was less than 8% and was capped at 8% if LIBOR was greater than 8%; from October
1997 through October 1999, LIBOR is capped at 8%. This cap was sold in December
1996 in conjunction with the refinancing of Potomac Mills (see Note 2).
The additional interest due on the Gurnee Mills mortgage loan was being accrued
on a straight-line basis over the life of the loan. The Company also had an
interest rate cap agreement relating to this debt whereby the Company received a
spread payment from the swap counterparty to the extent that LIBOR exceeded
5.25%, provided LIBOR was below 7.25%. If LIBOR rose above 7.25%, then the
spread payment would be limited to the extent LIBOR exceeded 6.25%. This cap
was sold in December 1996 in conjunction with the refinancing of Gurnee Mills
(see Note 2).
The weighted average interest rate at December 31, 1996 and 1995, was 7.05%. Of
the Company's approximately $730.1 million of consolidated debt, $657.9 million
was fixed rate at December 31, 1996.
As of December 31, 1996, debt of the Joint Ventures aggregating $84.7 million
has been guaranteed by the Company.
In January 1992, in conjunction with improvements to one of the Mills, a Mills
Entity obtained from a bank a 10 year letter of credit in the amount of $30,249
which serves as a credit enhancement for bonds sold by a municipality to the
public. Proceeds from the bonds were used to reimburse the Mills Entity for the
costs of public works which amounted to approximately $21,000. This reimburse-
ment was recorded as a reduction of the costs previously capitalized to the
income producing property. The bonds are payable from ad valorem taxes levied
by the municipality against the assessed value of the real property owned
by the Partnership and real property owned
by outside parties. Funds can be drawn on the letter of credit for the purpose
of repaying principal and interest on the bonds.
The aggregate maturities of the Company's borrowings at December 31, 1996 is as
follows:
1997 $ 18,124
1998 204,881
1999 21,096
2000 10,697
2001 207,123
Thereafter 268,192
--------
$730,113
--------
--------
For the period from January 1, 1994 to April 21, 1994, debt obligations totaling
$329 were forgiven through negotiations with certain creditors. The gain on
extinguishment of debt, offset by prepayment penalties of $283 from early
payment of mortgage indebtedness, is classified as an extraordinary item in the
combined statements of operations.
6. LEASING ACTIVITIES
The Company has noncancellable leases with tenants with remaining terms ranging
from one to 25 years and requiring monthly payments of specified minimum rents.
A majority of the leases require reimbursement by the tenant of substantially
all operating expenses of the properties. In addition, many of the leases
provide for additional rental payments based on gross revenues of the tenant in
excess of specified amounts. Future minimum rental commitments to be received
under noncancellable leases for the Mills (excluding Ontario Mills) and the
Community Centers are as follows:
F-13
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
Year ending December 31
-----------------------
1997 $ 84,499
1998 77,214
1999 68,667
2000 59,529
2001 41,684
Thereafter 136,055
--------
$467,648
--------
--------
The Company has a noncancellable operating lease for its corporate headquarters
in Arlington, Virginia. The lease commenced April 1, 1996 for a term of ten
years. Minimum rental payments under this lease subsequent to December 31,
1996, are as follows:
Year ending December 31
-----------------------
1997 $ 1,100
1998 1,288
1999 1,320
2000 1,353
2001 1,480
Thereafter 6,301
-------
$12,842
-------
-------
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management,
using available market information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and develop estimat-
ed fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize on disposition of the
financial instruments. The use of different market assumptions and/or estima-
tion methodologies could have a material effect on the estimated fair value
amounts.
Cash equivalents, rents receivable, accounts payable and accrued expenses and
other liabilities are carried at amounts which reasonably approximate their fair
values.
Fixed rate debt with an aggregate carrying value of $657,874 has an estimated
aggregate fair value of $663,000 at December 31, 1996. Estimated fair value
of fixed rate debt is based on interest rates currently available to the
Company for issuance of debt with similar terms and remaining maturities. The
estimated fair value of the Company's variable rate debt is estimated to be
approximately equal to its carrying value of $ 72,239 at December 31, 1996.
Disclosure about fair value of financial instruments is based on pertinent
information available to management at December 31, 1996. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 1996, and current estimates of
fair value may differ significantly from the amounts presented herein.
F-14
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution benefit plan that covers all
employees who are age 21 or older and have at least one year of service.
Contributions made by employees electing to participate in the plan under salary
reduction agreements are recorded when paid into the plan, or alternatively,
accrued if unpaid. Employer contributions are accrued and paid into the plan
periodically. Employer contributions were $282, $297, and $272 in 1996, 1995
and 1994, respectively.
9. STOCK OPTION PLAN
In connection with the Offering, the Board of Directors approved the 1994
Executive Equity Incentive Plan (which plan, as amended in September 1996, is
referred to herein as the "Plan") for the purpose of attracting and retaining
directors, executive officers and other key personnel for the Company, the
Operating Partnership and their subsidiaries. Pursuant to the Plan,
2,500,000 shares of common stock have been reserved for issuance of stock
options at a price not less than 100% of fair market value at the date of
grant and restricted stock. The options expire 10 years from the date of
grant and will contain such other terms and conditions (including, without
limitation, conditions to vesting) as may be determined by the Company's
Executive Compensation Committee.
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1996 1995 1994
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Options Average Options Average Options Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding -
beginning of year 824 $22.28 1,079 $23.28 -0- $ -0-
Granted 858 17.73 155 18.58 1,149 23.29
Exercised -0- -0- -0- -0- -0- -0-
Forfeited (221) 22.54 (410) 23.50 (70) 23.50
----- ---- -----
Outstanding -
end of year 1,461 19.57 824 22.28 1,079 23.28
----- ---- -----
----- ---- -----
Exercisable at end
of year -0- -0- -0- -0- -0- -0-
Weighted-average fair
value of options granted
during the year $ .92 $ 1.02 N/A
The range of excercise prices of options outstanding at December 31,1996 was
$17.27 to $23.50. The weighted average remaining contractual life of options
outstanding at December 31, 1996 was 8.62 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. In 1996, the Company adopted pursuant to
the Plan, its 1996 Long-Term Incentive Plan which granted restricted stock
and certain options to the Company's executive officers and provided that
such options would vest in 20% increments over a five-year period. Generally,
other options granted under the Plan vest 50% and 100% on the third and
fourth anniversaries, respectively, of the date of grant.
F-15
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensations" which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest of 6.07% and 6.25%; expected life of the option of 4.16 years and
4.83 years; a dividend yield of 7.92%; and volatility factors of the
expected market price of the Company's common stock of .138.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly differ-
ent from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share informa-
tion):
1996 1995
---- ----
Pro forma income before minority interest $15,937 $14,818
Pro forma net income per common and
common equivalent share .48 .45
Because Statement of Financial Accounting Standards No. 123 is applicable
only to options granted subsequent to December 31, 1994, its pro forma effect
will not be fully reflected until later years.
10. LEGAL MATTERS
Mr. Richard Kramer ("Kramer") and certain of his affiliates, the AJ 1989 Trust
("A.J.") and Portals Development Associates Limited Partnership ("PDA"), filed
an action on April 27, 1994, in New York state courts against the Operating
Partnership, Herbert S. Miller ("Miller"), Kenwood Plaza Limited Partnership
("Kenwood") and Ernst & Young LLP for various alleged breaches of contract,
breaches of fiduciary duties, fraudulent acts, and other violations of law
relating primarily to the management and subsequent acquisition of the Proper-
ties acquired in the IPO in which Kramer and his affiliates owned an interest.
The complaint sought damages from the Operating Partnership in excess of $4.5
million, trebled under a RICO claim. That complaint also sought a declaratory
judgment that A.J. is entitled to retain $2.9 million sent to it by mistake upon
the closing of the IPO as on offset against its claimed damages, and a declara-
tory judgment, specific performance and damages against Miller relating to his
failure to sign certain guarantee affirmations and debt modifications in regard
to PDA.
On May 10, 1994, the defendants removed this case from the New York state courts
to the United States District Court for the Southern District of New York and
the plaintiffs agreed to dismiss the claims against Ernst & Young LLP. Thereaf-
ter, the court granted the defendant's motion to dismiss certain of the com-
plaint's claims and gave plaintiffs leave to replead. When the plaintiffs
served their amended complaint, they added the Company as a defendant. In late
February 1996, the plaintiffs moved to amend the amended complaint to delete the
RICO claim without prejudice and to remand other claims to the state court for
adjudication. Defendants crossmoved for summary judgment (a) on their counter-
claim seeking the return of the $2.9 million mistakenly transferred to A.J. and
(b) dismissing the remaining claims against the Company and the Operating
Partnership. In addition, the
F-16
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
defendants are asserting that the RICO claim should be dismissed only on a with-
prejudice basis. These motions are still pending. Pending the outcome of the
litigation, the Company is withholding partnership distributions that would
otherwise be payable to A.J. from Kenwood as an offset against the $2.9 million
mistakenly transferred to A.J. A.J. has filed an additional claim seeking
payment of those distributions. The Company, the Operating Partnership and
Mr. Miller intend to vigorously defend against whatever claims remain. At this
stage of the proceeding, the Company believes that it is unlikely that the
ultimate outcome of the pending proceeding would have a material adverse effect
on the Company's financial condition or results of operations.
On June 15, 1994, ICSC Partners Limited Partnership filed in the Court of Common
Pleas, Hamilton County, Ohio a derivative action on behalf of Kenwood Plaza
Limited Partnership ("Kenwood") against Mr. Miller, Western Development ("WDC")
and the Company seeking the return to Kenwood of $6.3 million paid by Kenwood to
Mr. Miller, WDC and the Company, plus $5 million in punitive damages. The
plaintiff subsequently filed an amended complaint which included a RICO claim
that, if proven, would entitle the plaintiff to recover treble damages and
attorney's fees in addition to compensatory and punitive damages. The defen-
dants filed counterclaims against the plaintiff seeking $5.0 million in compen-
satory damages and $10.0 million in punitive damages.
In 1995, the parties to the lawsuit reached a settlement that resulted in no
financial liability for the Company and no admission of liability by the
Company. The settlement was submitted to the court for approval and sent to the
non-party limited partners. A.J, a non-party limited partner, objected to the
settlement, and, on October 13, 1995, the court entered an order and judgment
overruling the objection and approving the settlement. A.J. appealed the order
to the Court of Appeals of Arlington County, Ohio, which affirmed the trial
court's approval of the settlement. A.J. has filed a motion asking the Supreme
Court of Ohio to accept jurisdiction in this case. This motion is pending. The
Company believes that it is unlikely that the ultimate outcome of the pending
proceeding would have a material adverse effect on the Company's financial
condition or results of operations.
On November 9, 1994, Gene E. Hess, a former officer of the Company whose
employment was terminated after the IPO, filed a complaint in the United States
District Court for the District of Columbia a complaint against the Company for
fraud, breach of employment contract, and breach of covenant of good faith and
fair dealing and against Mr. Miller for fraud and tortious interference with
contractual relations. In January, 1997, without admitting liability, the
defendants agreed to settle the lawsuit in exchange for the issuance of an
additional 13,650 shares of Common Stock of the Company.
The Company is involved in other litigation incident to the operations of its
income producing properties, the outcome of which is not expected to have a
material effect on the consolidated financial position or results of operations
of the Company.
11. TRANSACTIONS WITH AFFILIATES
MSC provides management, leasing, commissioned land sales, and related services
to entities owned by partners of the Operating Partnership. Such services were
provided by the Predecessor until April 21, 1994. Fees earned for the years
ended December 31, 1996, 1995, and 1994, were $1,166, $1,588 and $1,748,
respectively.
In addition, MSC provides development and leasing services for a Joint Venture.
Fees earned during 1996 and 1995, net of amounts eliminated, were $2,473 and
$2,546, respectively.
12. SUBSEQUENT EVENTS
On February 21, 1997, the Company filed a Prospectus and Preliminary Prospectus
Supplement to issue 4,500,000 shares of Common Stock pursuant to a universal
shelf registration statement on Form S-3 filed in October 1996.
F-17
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
13. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma Condensed Consolidated Statement of Operations
for 1994 is presented as if the consummation of the Offering and the other
Formation Transactions had occurred on January 1, 1994. This statement should
be read in conjunction with the financial statements and notes of the Company
and the Predecessor included in this Form 10-K. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
This unaudited pro forma Condensed Consolidated Statement of Operations does not
purport to represent what the actual results of operations of the Company would
have been assuming such transactions had been completed as set forth above, nor
do they purport to represent the results of operations for future periods.
1994
----
Rental revenues $137,921
Property operating costs (44,478)
Interest (38,660)
Other (42,575)
--------
Income before minority interests 12,208
Income allocated to minority interests 5,945
--------
Income before extraordinary items $ 6,263
--------
--------
Income before extraordinary items, per share $ .37
--------
--------
Pro forma adjustments to the statements of operations consist principally of
recognizing the effects of debt repayments and refinancing at lower rates, the
inclusion of third party investors' interests acquired, additional general and
administrative expenses of the Company and the exclusion of non recurring
charges.
14. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of results of operations for each of the fiscal
quarters during 1996:
THREE MONTHS ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Total rental revenues $36,921 $37,072 $37,438 $40,840
Income before extraordinary items
and minority interest 4,165 4,332 6,936 5,953
Income before minority interest 3,335 4,179 6,936 1,635
Net income 1,695 2,126 3,528 832
Income per share before extraordinary items 0.13 0.13 0.21 0.19
Net income per share 0.10 0.13 0.21 0.04
F-18
THE MILLS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE INDICATED)
The following is a summary of results of operations for each of the fiscal
quarters during 1995
THREE MONTHS ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Total rental revenues $34,963 $35,452 $35,451 $39,237
Income before extraordinary items
and minority interest 2,701 2,806 3,252 6,509
Income before minority interest 2,282 2,806 3,252 6,509
Net income 1,171 1,439 1,668 3,340
Income per share before extraordinary items 0.08 0.09 0.10 0.20
Net income per share 0.07 0.09 0.10 0.20
F-19
THE MILLS CORPORATION
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
DECEMBER 31, 1996
Cost
Capitalized
Subsequent to
Initial Cost to Company(3) Acquisition
---------------------------------------- -------------
Building, Building,
Equipment Equipment
and and Land
Description(1) Encumbrances(2) Land Improvements Improvements
-------------- --------------- ---- ------------ -------------
Mills
Potomac Mills . . . . . . . . . . . . $162,000 $ 8,486 $ $151,935
Sawgrass Mills. . . . . . . . . . . . 145,000 11,194 144,453
Sawgrass Mills Phase II . . . . . . . 12,000 2,556 21,476
Franklin Mills. . . . . . . . . . . . 165,858 15,333 153,682
Franklin Mills Residual . . . . . . . 4,779 (4,079)
Gurnee Mills. . . . . . . . . . . . . 122,000 20,449 159,589
Hunt Club . . . . . . . . . . . . . . 3,321 (3,048)
Community Centers
Montgomery Village. . . . . . . . . . 8,887 13,438
Germantown Commons. . . . . . . . . . 12,988 451 13,018
Mount Prospect Plaza. . . . . . . . . 10,644 4,560 3,740 10,868
Butterfield Plaza . . . . . . . . . . 7,715 1,604 9,452
Western Hills . . . . . . . . . . . . 14,949 2,299 3,785 14,625
Crosswinds. . . . . . . . . . . . . . 4,395 1,346 4,449 846
Gwinnett Marketfair . . . . . . . . . 11,328 6,827 2,789 7,238
Fashion Place . . . . . . . . . . . . 4,687 1,853 8,109
West Falls Church . . . . . . . . . . 4,297 839 6,602
Liberty Plaza . . . . . . . . . . . . 9,335 14,456 2,212
Coopers Crossing. . . . . . . . . . . 9,277 769 7,888 800
Construction in Process and
Development Pre-construction Costs . . 28,259
Corporate. . . . . . . . . . . . . . . . 34,088 2,769 4,673
Mainstreet Retail. . . . . . . . . . . . 484 424
-------- ------- ------- --------
Totals . . . . . . . . . . . . . . . . . $730,113 $96,001 $40,360 $744,572
-------- ------- ------- --------
-------- ------- ------- --------
Gross Amount at Which
Carried at Close of Period
---------------------------------------------
Building
Land Equipment
and and Accumulated Date Useful
Description(1) Improvements Improvements(7) Total(4)(5) Depreciation(6) Acquired Life(8)
-------------- ------------ --------------- ----------- --------------- -------- -------
Mills
Potomac Mills . . . . . . . . . . . . $ 41,197 $119,224 $160,421 $ 32,215 1983
Sawgrass Mills. . . . . . . . . . . . 14,018 141,629 155,647 27,612 1986
Sawgrass Mills Phase II . . . . . . . 3,588 20,444 24,032 686 1993
Franklin Mills. . . . . . . . . . . . 30,587 138,428 169,015 49,523 1986
Franklin Mills Residual . . . . . . . 700 700 1986
Gurnee Mills. . . . . . . . . . . . . 37,164 142,874 180,038 35,548 1988
Hunt Club . . . . . . . . . . . . . . 273 273 1988
Community Centers
Montgomery Village. . . . . . . . . . 5,511 7,927 13,438 2,680 1980
Germantown Commons. . . . . . . . . . 1,975 11,494 13,469 4,056 1980
Mount Prospect Plaza. . . . . . . . . 4,115 15,053 19,168 4,333 1985
Butterfield Plaza . . . . . . . . . . 2,405 8,651 11,056 2,882 1982
Western Hills . . . . . . . . . . . . 3,566 17,143 20,709 5,519 1981
Crosswinds. . . . . . . . . . . . . . 1,564 5,077 6,641 2,411 1981
Gwinnett Marketfair . . . . . . . . . 7,868 8,986 16,854 2,986 1986
Fashion Place . . . . . . . . . . . . 2,047 7,915 9,962 3,704 1985
West Falls Church . . . . . . . . . . 1,721 5,720 7,441 2,147 1987
Liberty Plaza . . . . . . . . . . . . 8,916 17,087 26,003 1,007 1994
Coopers Crossing. . . . . . . . . . . 769 8,688 9,457 603 1994
Construction in Process and
Development Pre-construction Costs . . 28,259 28,259 various
Corporate. . . . . . . . . . . . . . . . 7,442 7,442 1,532 various
Mainstreet Retail. . . . . . . . . . . . 908 908 214 1995
Totals . . . . . . . . . . . . . . . . .
-------- -------- -------- --------
$167,984 $712,949 $880,933 $179,658
-------- -------- -------- --------
-------- -------- -------- --------
F-20
THE MILLS CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 1996
(IN THOUSANDS)
(1) The Mills Corporation, through the Operating Partnership, owns super-
regional, value and entertainment-oriented malls ("Mills") and community
shopping centers ("Community Centers"). The geographic location of
the Mills and Community Centers are as follows:
PROPERTY NAME LOCATION
------------- --------
MILLS:
Franklin Mills. . . . . . . . . . . . . . . . . . . . . . Philadelphia, PA
Franklin Mills - Residual . . . . . . . . . . . . . . . . Philadelphia, PA
Gurnee Mills. . . . . . . . . . . . . . . . . . . . . . . . . . Gurnee, IL
Hunt Club . . . . . . . . . . . . . . . . . . . . . . . . . . . Gurnee, IL
Potomac Mills . . . . . . . . . . . . . . . . . . . . . . . Woodbridge, VA
Sawgrass Mills. . . . . . . . . . . . . . . . . . . . . . . . .Sunrise, FL
Sawgrass Mills - Phase II . . . . . . . . . . . . . . . . . . .Sunrise, FL
COMMUNITY CENTERS:
Butterfield Plaza . . . . . . . . . . . . . . . . . . . .Downers Grove, IL
Coopers Crossing. . . . . . . . . . . . . . . . . . . . . . . Voorhees, NJ
Crosswinds Center . . . . . . . . . . . . . . . . . . . St. Petersburg, FL
Fashion Place . . . . . . . . . . . . . . . . . . . . . . . . Columbia, SC
Germantown Commons. . . . . . . . . . . . . . . . . . . . . Germantown, MD
Gwinnett Marketfair . . . . . . . . . . . . . . . . . . . . . . Duluth, GA
Liberty Plaza . . . . . . . . . . . . . . . . . . . . . . Philadelphia, PA
Montgomery Village. . . . . . . . . . . . . . . . . . . . Gaithersburg, MD
Mount Prospect Plaza. . . . . . . . . . . . . . . . . . Mount Prospect, IL
West Falls Church Outlet Center . . . . . . . . . . . . . Falls Church, VA
Western Hills Plaza . . . . . . . . . . . . . . . . . . . . Cincinnati, OH
(2) See description of mortgage, notes and loans payable in Note 5 of the Notes
to Combined Financial Statements. The debt shown in regard to Hunt Club is
unsecured. Certain corporate debt does not encumber real estate and is
excluded.
(3) Initial cost of properties is cost at the end of the calendar year for the
year of acquisition.
(4) The aggregate cost of land, land held for sale, buildings, improvements,
equipment, and tenant improvement for federal income tax basis is $877,953
at December 31, 1996.
F-21
THE MILLS CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 1996
(IN THOUSANDS)
(5) Reconciliation of Real Estate and Development Assets, excluding Investment
in Partnerships
1996 1995 1994
---- ---- ----
Balance at January 1. . . . . $880,150 $855,049 $760,757
Acquisitions. . . . . . . . . 23,177 58,541 85,751
Retirements . . . . . . . . . (1,618) (3,778) (5,430)
Other . . . . . . . . . . . . (20,776) (29,662) 13,971
-------- -------- --------
Balance at December 31. . . . $880,933 $880,150 $855,049
-------- -------- --------
-------- -------- --------
(6) Reconciliation of Accumulated Depreciation
1996 1995 1994
---- ---- ----
Balance at January 1. . . . . $152,713 $126,072 $102,557
Additions charged to costs
and expenses. . . . . . . . 27,724 27,180 23,515
Removal of accumulated
depreciation. . . . . . . . (779) (539) -
-------- -------- --------
Balance at December 31. . . . $179,658 $152,713 $126,072
-------- -------- --------
-------- -------- --------
(7) In 1991, the city of Sunrise, Florida issued municipal bonds in the amount
of $24,730 and reimbursed a Partnership for costs of public works which
amounted to approximately $21,000. Costs previously capitalized to income
producing property were reduced upon reimbursement.
In 1991, a note receivable of $5,925 was recorded pursuant to reimbursement
and annexation agreements with the Village of Gurnee to reimburse the
Partnership that owns Gurnee Mills for the cost of certain public improve-
ments. The Village of Gurnee has executed a noninterest bearing note for
$15,000, amended to $17,500 in 1996, to be paid from taxes collected from
the tenants of the shopping mall during a ten-year period, amended to a
thirteen year period in 1996, beginning one year after the mall opens. The
note was recorded in 1991, based on the estimated taxes to be collected by
the Village of Gurnee from the tenants using a discount rate of 10%.
(8) Depreciation is computed based upon the following estimated lives:
Building and improvements. . . . . . . . . . . . . . . . 40 years
Land improvements. . . . . . . . . . . . . . . . . . . . 20 years
Equipment. . . . . . . . . . . . . . . . . . . . . . . . .7 years
Tenant improvements. . . Lesser of life of asset or life of lease
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 12, 1997.
THE MILLS CORPORATION,
a Delaware corporation
By: /s/ Laurence C. Siegel
_____________________________
Laurence C. Siegel
Chairman of the Board of
Directors, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
below on March 11, 1997:
Name Title
- ---- -----
/s/ Laurence C. Siegel
___________________________ Chairman of the Board, Chief Executive Officer
Laurence C. Siegel and Director (principal executive officer)
/s/ Peter B. McMillan
___________________________ President, Chief Operating Officer and Director
Peter B. McMillan
/s/ Kenneth R. Parent
___________________________ Senior Vice President and Chief Financial Officer
Kenneth R. Parent (principal financial officer and principal
accounting officer)
/s/ Dietrich von Boetticher
___________________________ Vice Chairman and Director
Dietrich von Boetticher
/s/ John M. Ingram
___________________________ Vice Chairman and Director
John M. Ingram
52
/s/ Charles R. Black, Jr.
___________________________ Director
Charles R. Black, Jr.
/s/ James C. Braithwaite
___________________________ Director
James C. Braithwaite
___________________________ Director
Harry H. Nick
/s/ Joseph B. Gildenhorn
___________________________ Director
Joseph B. Gildenhorn
___________________________ Director
Peter A. Gordon
___________________________ Director
Herbert S. Miller
/s/ Franz von Perfall
___________________________ Director
Franz von Perfall
___________________________ Director
Robert P. Pincus
53
THE MILLS CORPORATION
EXHIBIT INDEX
(Pursuant to item 601 of Regulation S-K)
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
1.1 None
2.1 None
*3.1 Amended and Restated Certificate of Incorporation
of the Company.
**3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating
Partnership (filed as part of Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L.
Kramer, the A.J. 1989 Trust, the Irrevocable
Intervivos Trust for the Benefit of the Kramer
Children, the N Street Investment Trust, Equity
Resources Associates, Herbert S. Miler, The Mills
Corporation and The Mills Limited Partnership
(filed as Exhibit 10.19)
**4.3 Non-Affiliate Registration Rights and Lock-Up
Agreement
**4.4 Affiliate Registration Rights and Lock-Up
Agreement
*10.1 Form of Employee Non-Compete/Employment Agreements
*10.2 1994 Executive Equity Incentive Plan
**10.3 Limited Partnership Agreement of Operating
Partnership
*10.4 Option Agreement (Sunrise Residuals/Parcels 4 and 5)
*10.5 Form of Noncompetition Agreement between the
Company, the Operating Partnership and each of Kan
Am and the Kan Am Partnerships
*10.6 Form of Noncompetition Agreement with Kan Am
Directors
*10.7 Trust and Servicing Agreement, dated as of
December 1, 1993, among Sawgrass Finance L.L.C.,
as depositor, The First National Bank of Chicago,
as servicer, and State Street Bank and Trust
Company, as Trustee
*10.8 Amended and Restated Mortgage, Security Agreement,
Assignment of Lessee and Rents and Fixture filing,
dated as of December 1, 1993, by Sunrise Mills
Limited Partnership, as mortgagor, in favor of
Sawgrass Finance L.L.C., as mortgagee
*10.9 Assignment of Leases and Rents, dated as of
December 1, 1993, between Sunrise Mills Limited
Partnership and Sawgrass Finance L.L.C.
*10.10 Assignment of Note, Mortgage, and Assignment of
Rents dated as of December 21, 1993, by Sawgrass
Finance L.L.C. in favor of State Street Bank &
Trust Co.
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
*10.11 Promissory Note, dated as of November 16, 1993, by
Western Hills Associates Limited Partnership in
favor of Connecticut General Life Insurance
Company
*10.12 Assignment of Rents and Leases, dated as of
November 16, 1993, by Western Hills Associates
Limited Partnership in favor of Connecticut
General Life Insurance Company
*10.13 Open-End Mortgage, Security Agreement and Fixture
Filing, dated as of November 16, 1993, by Western
Hills Associates Limited Partnership in favor of
Connecticut General Life Insurance Company
*10.19 Agreement dated March 15, 1994 among Richard L.
Kramer, the A.J. 1989 Trust, the Irrevocable
Intervivos Trust for the Benefit of the Kramer
Children, the N Street Investment Trust, Equity
Resources Associates, Herbert S. Miller, The Mills
Corporation and The Mills Limited Partnership
*10.20 Form of Promissory Note made payable by Franklin
Mills Associates Limited Partnership to and for
the benefit of the Operating Partnership
*10.21 Form of Mortgage, Security Agreement and
Assignment of Rents and Leases by Franklin Mills
Associates Limited Partnership to and for the
benefit of the Operating Partnership
*10.22 Form of Sale of Partnership Interests Agreement
(Franklin Mills) by and between the Operating
Partnership and Herbert S. Miller, Laurence C.
Siegel, Harry H. Nick, Western Franklin Mills
Corp., Kan Am USA IX Limited Partnership and Kan
Am USA X Limited Partnership
*10.23 Form of Indemnification Agreement between the
Company and each of its Directors and Executive
Officers
*****10.24 Construction Loan Agreement dated November 9,
1995, by and between Ontario Mills Limited
Partnership and Canadian Bank of Commerce,
Bayerische Hypotheken-Und Wechsel-Bank
Aktiengesellschaft and The Mitsubishi Bank of
Commerce
*****10.25 Construction Deed of Trust, Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement dated as of December 26, 1995
in favor of Canadian Imperial Bank of Commerce,
Bayerische Hypotheken-Und Wechsel-Bank
Aktiengesellschaft and The Mitsubishi Bank of
Commerce
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
*****10.26 Loan Agreement dated as of January 31, 1996 by and
among Coopers Crossing Associates (MLP) Limited
Partnership, Crosswinds Center Associates of St.
Petersburg (MLP) Limited Partnership, Echo Hills
Center Associates (MLP) Limited Partnership,
Fashion Center Associates of Illinois No. 1 (MLP)
Limited Partnership, Fashion Place Associates
(MLP) Limited Partnership, Germantown Development
Associates (MLP) Limited Partnership, Gwinnett
Market Fair Associates (MLP) Limited Partnership,
Montgomery Village Associates (MLP) Limited
Partnership, Montgomery Village Ground (MLP)
Limited Partnership, Mount Prospect Plaza (MLP)
Limited Partnership (collectively, "The Mills
Corporation, et. al."), and PFL Life Insurance
Company
*****10.27 First Amended and Restated Promissory Note dated
as of January 31, 1996, made by and among The
Mills Corporation, ET AL., and PFL Life Insurance
Company
*****10.28 Absolute Assignment of Mortgage and Loan Documents
dated January 31, 1996 by and between CS First
Boston Mortgage Capital Corporation as assignor
and PFL Life Insurance Company as assignee
10.29-10.47 Intentionally Omitted
******10.48 Note dated July 30, 1996 by Sawgrass Mills Phase II
Limited Partnership in favor of CS First Boston Mortgage
Capital Corporation.
******10.49 Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Filing dated as of July 30, 1996, between
Sawgrass Mills Phase II Limited Partnership, as Mortgagor,
and CS First Boston Mortgage Capital Corporation, as
Mortgagee.
****10.50 First Amendment to Trust and Servicing Agreement
(Exhibit 10.7) dated as of June 1, 1995, among
Sawgrass Finance L.L.C., as depositor, The First
National Bank of Chicago, as servicer, and State
Street Bank and Trust Company, as trustee.
****10.51 Prepayment Premium Agreement dated as of June 1,
1995, between The Mills Limited Partnership and
State Street Bank and Trust Company, as trustee.
SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------ ------- -------------
10.52 Second Amended and Restated Deed of Trust,
Security Agreement, Assignment of Rents and
Fixture Filing by Potomac Mills-Phase III (MLP)
Limited Partnership and Washington Outlet Mall
(MLP) Limited Partnership, collectively, as
Grantor to R. Eric Taylor, a resident of Fairfax
County, Virginia as Deed Trustee for the benefit
of CS First Boston Mortgage Capital Corp., as
Beneficiary dated as of December 17, 1996
10.53 Assignment of Leases and Rents and Security
Deposits dated as of December 17, 1996 by Potomac
Mills-Phase III (MLP) Limited Partnership and
Washington Outlet Mall (MLP) Limited Partnership
to CS First Boston Mortgage Capital Corp.
10.54 Mortgage, Security Agreement, Assignment of Rents
and Fixture Filing by Gurnee Mills (MLP) Limited
Partnership, as Mortgagor to CS First Boston
Mortgage Capital Corp., as Mortagee dated as of
December 17, 1996
10.55 Assignment of Leases and Rents and Security
Deposits dated as of December 17, 1996 by Gurnee
Mills (MLP) Limited Partnership to CS First Boston
Mortgage Capital Corp.
10.56 Trust and Servicing Agreement dated as of December
1, 1996 among Potomac Gurnee Finance Corp., as
Depositor, AMRESCO Management, Inc., as Servicer,
ABN AMRO Bank N.V., as Fiscal Agent and LaSalle
National Bank, as Trustee
10.57 Credit Agreement dated as of October 28, 1996, among
The Mills Corporation, The Mills Limited Partnership, Sawgrass
Mills Phase II Limited Partnership, Sunrise Mills (MLP)
Limited Partnership, and CS First Boston Mortgage Capital Corp.
10.58 General Pledge and Security Agreement, dated as of October
28, 1996 made by The Mills Limited Partnership, in favor of
CS First Boston Mortgage Capital Corp.
10.59 Intercompany Pledge and Security Agreement dated as of
October 28, 1996, made by The Mills Limited Partnership, The
Mills Corporation, Sunrise Mills (MLP) Limited Partnership
and Sawgrass Mills Phase II Limited Partnership in favor of
CS First Boston Mortgage Capital Corp.
10.60 Assignment of Partnership Interest dated as of the 28th day of
October, 1996 from The Mills Limited Partnership, to CS First
Boston Mortgage Capital Corp.
10.61 Revolving Note dated as of October 28, 1996 from The Mills
Limited Partnership, to CS First Boston Mortgage Capital Corp.
in the maximum amount of $40,000,000.
11 Statement Re: Computation of Per Share Earnings.
21.1 List of Subsidiaries of the Registrant
23 Consent of Independent Auditors
* Incorporated by reference to the Registrant's Registration Statement
on Form S-11, Registration No. 33-71524, which was declared effective
by Securities and Exchange Commission on April 14, 1994 (Commission
File No. 1-12994).
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the first quarter ended March 31, 1994 (Commission File No.
1-12994).
*** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
**** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the second quarter ended June 30, 1995.
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
****** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the third quarter ended September 30, 1996.