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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-12994

GRAPHIC

THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)		   52-1802283
(I.R.S. Employer
Identification No.)

1300 Wilson Boulevard, Suite 400, Arlington, Virginia 22209
(Address of principal executive offices—zip code)

(703) 526-5000
(Registrant's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý  No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

44,321,586 shares of Common Stock
$0.01 par value, as of August 11, 2003

THE MILLS CORPORATION
FORM 10-Q
INDEX

 
    
   Page
PART I.   FINANCIAL INFORMATION    
Item 1.   Consolidated Financial Statements and Notes    
    Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 (audited)   3
    Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2003 and 2002 (restated)   5
    Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2003 and 2002 (restated)   6
    Consolidated Statement of Stockholders' Equity (unaudited) for the Six Months Ended June 30, 2003   7
    Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2003 and 2002 (restated)   8
    Notes to Consolidated Financial Statements (unaudited)   9
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   27
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   47
Item 4.   Controls and Procedures   49

PART II.
 
OTHER INFORMATION
 
 
Item 1.   Legal Proceedings   50
Item 2.   Changes in Securities and Use of Proceeds   50
Item 3.   Defaults Upon Senior Securities   50
Item 4.   Submission of Matters to Vote of Security Holders   50
Item 5.   Other Information   51
Item 6.   Exhibits and Reports on Form 8-K   51

        Certain matters discussed in this Form 10-Q and the information incorporated by reference herein contain "forward-looking statements" for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and are not guarantees of future performance.

        Forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "would be," or "continue" or the negative thereof or other variations thereon or comparable terminology are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are:

        We undertake no duty or obligation to publicly announce any revisions to, or updates of, these forward-looking statements that may result from future events or circumstances.

2

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements and Notes


THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)

 
   June 30, 2003
(Unaudited)
   December 31, 2002
(Audited)
  
ASSETS
              
Income producing property:              
  Land and land improvements   $ 376,062   $ 246,273  
  Building and improvements     1,735,367     995,914  
  Furniture, fixtures and equipment     56,003     54,250  
  Less: Accumulated depreciation and amortization     (312,233 )   (290,461 )
   
 
 
    Net income producing property     1,855,199     1,005,976  

Land held for investment and/or sale
 
 
11,797
 
 
11,531
 
Construction in progress     267,424     103,278  
Real estate assets held for disposition, net     —     61,748  
Investment in unconsolidated joint ventures     721,774     682,723  
   
 
 
    Net real estate and development assets     2,856,194     1,865,256  

Cash and cash equivalents
 
 
22,910
 
 
79,195
 
Restricted cash     33,761     28,600  
Accounts receivable, net     43,052     40,550  
Notes receivable     34,476     23,650  
Deferred costs, net     101,522     93,749  
Other assets     11,868     24,421  
   
 
 
    TOTAL ASSETS   $ 3,103,783   $ 2,155,421  
   
 
 

3

THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)

 
   June 30, 2003
(Unaudited)
   December 31, 2002
(Audited)
  
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Mortgages, notes and loans payable   $ 2,047,200   $ 1,243,062  
Liabilities on real estate held for disposition     —     55,620  
Accounts payable and other liabilities     128,028     105,205  
   
 
 
      2,175,228     1,403,887  
   
 
 
Minority interests, including Series D preferred units     140,062     132,261  
Series A Cumulative Convertible Preferred Stock, par value $.01, authorized and outstanding 750 shares as of June 30, 2003 and December 31, 2002, respectively     75,000     75,000  
Series B Cumulative Redeemable Preferred Stock, par value $.01, 4,300 shares authorized, issued and outstanding as of June 30, 2003 and December 31, 2002, respectively     107,500     107,500  
Series C Cumulative Redeemable Preferred Stock, par value $.01, 3,500 shares authorized, issued and outstanding as of June 30, 2003, and 3,450 authorized and 3,400 issued and outstanding as of December 31, 2002     87,500     85,000  
Series E Cumulative Redeemable Preferred Stock, par value $.01, 6,440 shares authorized, issued and outstanding as of June 30, 2003     161,000     —  
Common stock, $.01 par value, authorized 100,000 shares, 44,307 and 43,196 shares issued and outstanding as of June 30, 2003 and December 31, 2002, respectively     443     432  
Additional paid-in capital     844,736     822,168  
Accumulated deficit     (454,114 )   (450,898 )
Accumulated other comprehensive loss     (21,770 )   (14,353 )
Deferred compensation     (11,802 )   (5,576 )
   
 
 
  Total stockholders' equity     713,493     544,273  
   
 
 
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 3,103,783   $ 2,155,421  
   
 
 

See Accompanying Notes to Consolidated Financial Statements.

4


THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, In Thousands, Except Per Share Data)

 
   Three Months Ended June 30,
  
 
   2003
   2002
  
 
    
   (Restated)

  
REVENUES:              
  Minimum rent   $ 46,323   $ 25,599  
  Percentage rent     196     27  
  Recoveries from tenants     22,998     12,715  
  Other property revenue     7,590     2,669  
  Management fee income from unconsolidated joint ventures     3,238     2,805  
  Other fee income from unconsolidated joint ventures     1,432     2,328  
   
 
 
    Total operating revenues     81,777     46,143  
   
 
 
EXPENSES:              
  Recoverable from tenants     19,443     10,920  
  Other operating     3,515     1,372  
  General and administrative     4,802     3,241  
  Depreciation and amortization     17,013     9,947  
   
 
 
    Total operating expenses     44,773     25,480  
   
 
 
      37,004     20,663  
OTHER INCOME AND EXPENSES:              
  Equity in earnings of unconsolidated joint ventures     5,697     3,196  
  Interest income     2,479     2,255  
  Interest expense     (16,720 )   (11,190 )
  Loss on extinguishment of debt     (550 )   —  
  Other income (expense)     (62 )   1,894  
  Foreign currency exchange gain, net     20,821     6,599  
   
 
 
INCOME BEFORE DISCONTINUED OPERATIONS AND MINORITY INTEREST     48,669     23,417  
  Discontinued operations     —     98  
   
 
 
INCOME BEFORE MINORITY INTEREST     48,669     23,515  
  Minority interest, including Series D Preferred Unit distributions     (11,493 )   (7,668 )
   
 
 
NET INCOME     37,176     15,847  
  Series B, Series C and Series E Preferred Stock dividends     (6,616 )   —  
   
 
 
INCOME AVAILABLE TO COMMON STOCKHOLDERS   $ 30,560   $ 15,847  
   
 
 
EARNINGS PER COMMON SHARE — BASIC:              
  Income before discontinued operations per common share   $ 0.70   $ 0.46  
  Discontinued operations per common share     —     —  
   
 
 
  Income per common share   $ 0.70   $ 0.46  
   
 
 
EARNINGS PER COMMON SHARE — DILUTED:              
  Income before discontinued operations per common share   $ 0.69   $ 0.45  
  Discontinued operations per common share     —     —  
   
 
 
  Income per common share   $ 0.69   $ 0.45  
   
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:              
  Basic     43,562     34,955  
   
 
 
  Diluted     44,441     35,823  
   
 
 
DIVIDENDS PER SHARE DECLARED   $ 0.5650   $ 0.5475  
   
 
 

See Accompanying Notes to Consolidated Financial Statements

5

THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, In Thousands, Except Per Share Data)

 
   Six Months Ended June 30,
  
 
   2003
   2002
  
 
    
   (Restated)

  
REVENUES:              
  Minimum rent   $ 88,564   $ 51,257  
  Percentage rent     243     216  
  Recoveries from tenants     44,552     25,107  
  Other property revenue     11,530     6,281  
  Management fee income from unconsolidated joint ventures     6,331     5,370  
  Other fee income from unconsolidated joint ventures     2,280     3,507  
   
 
 
    Total operating revenues     153,500     91,738  
   
 
 
EXPENSES:              
  Recoverable from tenants     38,250     21,600  
  Other operating     5,108     2,744  
  General and administrative     9,136     6,537  
  Depreciation and amortization     33,643     20,006  
   
 
 
    Total operating expenses     86,137     50,887  
   
 
 
      67,363     40,851  

OTHER INCOME AND EXPENSES:
 
 
 
 
 
 
 
  Equity in earnings of unconsolidated joint ventures     10,964     9,347  
  Interest income     4,909     3,490  
  Interest expense     (30,192 )   (23,294 )
  Loss on extinguishment of debt     (550 )   —  
  Other income (expense)     (235 )   1,924  
  Foreign currency exchange gain, net     23,080     6,599  
   
 
 
INCOME BEFORE DISCONTINUED OPERATIONS AND MINORITY INTEREST     75,339     38,917  
  Discontinued operations     128     198  
   
 
 
INCOME BEFORE MINORITY INTEREST     75,467     39,115  
  Minority interest, including Series D Preferred Unit distributions     (17,610 )   (13,371 )
   
 
 
NET INCOME     57,857     25,744  
  Series B, Series C and Series E Preferred Stock dividends     (10,994 )   —  
   
 
 
INCOME AVAILABLE TO COMMON STOCKHOLDERS   $ 46,863   $ 25,744  
   
 
 
EARNINGS PER COMMON SHARE — BASIC:              
  Income before discontinued operations per common share   $ 1.08   $ 0.80  
  Discontinued operations per common share     —     —  
   
 
 
  Income per common share   $ 1.08   $ 0.80  
   
 
 
EARNINGS PER COMMON SHARE — DILUTED:              
  Income before discontinued operations per common share   $ 1.07   $ 0.79  
  Discontinued operations per common share     —     —  
   
 
 
  Income per common share   $ 1.07   $ 0.79  
   
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:              
  Basic     43,171     31,877  
   
 
 
  Diluted     43,986     32,742  
   
 
 
DIVIDENDS PER SHARE DECLARED   $ 1.130   $ 1.095  
   
 
 

See Accompanying Notes to Consolidated Financial Statements

6


THE MILLS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(In Thousands)

 
    
   COMMON STOCK
    
    
   ACCUMULATED
OTHER
COMPREHENSIVE
LOSS
    
    
    
  
 
   PREFERRED
STOCK
   ADDITIONAL
PAID IN
CAPITAL
   ACCUMULATED
DEFICIT
   DEFERRED
COMPENSATION
    
   TOTAL
COMPREHENSIVE
INCOME
  
 
   SHARES
   AMOUNT
   TOTAL
  
Balances, December 31, 2002 (audited)   $ 192,500   43,196   $ 432   $ 822,168   $ (450,898 ) $ (14,353 ) $ (5,576 ) $ 544,273   $ —  
Restricted stock incentive program     —   339     3     7,011     —     —     (7,014 )   —     —  
Amortization of restricted stock incentive program     —   —     —           —     —     788     788     —  
Exercise of stock options     —   654     7     19,472     —     —     —     19,479     —  
Sale of Series C preferred stock     2,500   —     —     (150 )   —     —     —     2,350     —  
Sale of Series E preferred stock     161,000   —     —     (5,446 )   —     —     —     155,554     —  
Units exchanged for common stock     —   118     1     3,748     —     —     —     3,749     —  
Change in fair value of cash flow hedges     —   —     —     —     —     (7,417 )   —     (7,417 )   (7,417 )
Dividends declared, common stock     —   —     —     —     (50,079 )   —     —     (50,079 )   —  
Dividends declared, Series B, Series C and Series E preferred stock     —   —     —     —     (10,994 )   —     —     (10,994 )   —  
Adjustment to minority interest     —   —     —     (2,067 )   —     —     —     (2,067 )   —  
Net income     —   —     —     —     57,857     —     —     57,857     57,857  
   
 
 
 
 
 
 
 
 
 
Balances, June 30, 2003 (unaudited)   $ 356,000   44,307   $ 443   $ 844,736   $ (454,114 ) $ (21,770 ) $ (11,802 ) $ 713,493   $ 50,440  
   
 
 
 
 
 
 
 
 
 


See Accompanying Notes to Consolidated Financial Statements.

7


THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In Thousands)

 
   Six Months Ended June 30,
  
 
   2003
   2002
  
 
    
   (Restated)

  
CASH FLOWS FROM OPERATING ACTIVITIES:              
Income before minority interests   $ 75,467   $ 39,115  
Adjustments to reconcile income before minority interests to net cash provided by operating activities:              
  Net accretion of notes receivable     (578 )   (191 )
  Depreciation and amortization     33,643     20,006  
  Depreciation and amortization from discontinued operations     285     573  
  Amortization of finance costs     4,870     2,263  
  Provision for losses on accounts receivable     559     63  
  Equity in earnings of unconsolidated joint ventures     (10,964 )   (9,347 )
  Amortization of restricted stock incentive program     788     3,153  
  Loss on debt refinancing     550     —  
  Gain from foreign currency exchange, net     (23,080 )   (6,599 )
  Gain on land sales     —     (2,500 )
Other changes in assets and liabilities:              
  Accounts receivable     (12,491 )   3,958  
  Notes receivable     (3,810 )   (530 )
  Other assets     (88 )   (4,031 )
  Accounts payable and other liabilities     (8,463 )   (10,057 )
   
 
 
    Net cash provided by op