Mills Corp. In Jeopardy Due to Debt, Accounting

Mills Corp., of Chevy Chase, owns 42 regional shopping malls in the United States and Europe.
Mills Corp., of Chevy Chase, owns 42 regional shopping malls in the United States and Europe. (Courtesy Of Mills Corp.)
By Terence O'Hara
Washington Post Staff Writer
Friday, August 11, 2006

Mall developer Mills Corp. yesterday said its auditors believe there is "substantial doubt" that the company can stay in business because of looming deadlines for repayment of $2 billion in debt.

In a Securities and Exchange Commission filing, the Chevy Chase company also disclosed that accounting mistakes will force it to shave $210 million off the $342.8 million in profit that it had reported from 2003 to September 2005.

While the SEC is conducting an investigation into Mills' accounting problems, there has been no indication that the company or its executives purposely violated accounting rules for personal gain or deception. In addition to the SEC, an independent group of directors has hired a law firm to find out why the company's accounting was off-base for so long and why that wasn't discovered sooner.

A company spokesman declined to comment on the SEC filing, in which the company said it would file restated numbers for 2003, 2004 and 2005 by September. Mills owns 42 regional shopping malls in the United States and Europe, including Arundel Mills in suburban Maryland and Potomac Mills in Prince William County.

In its filing, Mills yesterday offered new details on the looming debt and liquidity problems, on its massive Xanadu project at the Meadowlands in New Jersey, and on the board's efforts to find a buyer for Mills by the end of this year.

Mills borrowed almost $2 billion in May to give it enough cash to keep building several projects and refinance several existing malls. However, that debt came with a requirement that Mills find a buyer by the end of the year, a prospect that isn't assured, or Mills will go into default. Mills said this uncertainty is what will lead auditors Ernst & Young to issue a "going concern" letter when the company reports its overdue results this September. Such a letter essentially alerts investors that the company might not be able to survive.

Another worry is the rising costs and financing of Xanadu, the company's biggest U.S. project ever. The expected final construction budget has ballooned to $2 billion from $1.3 billion. Also, because space in the uncompleted mall -- which will have an indoor ski slope and a 30-story Ferris wheel in addition to shops and restaurants -- hasn't leased as well or as fast as Mills hoped, banks aren't willing to finance its construction. If Mills can't get a lender, it will have to finance the construction itself, a prospect that could substantially reduce the company's investment value.

Last, the company said it continues to discuss a deal with potential buyers that most analysts expect could be reached in the next few months. Ultimately, Mills shareholders probably won't get half the money they would have a year ago. Shares closed yesterday at $22.59 on the New York Stock Exchange, 61 percent lower than on the same day last summer.

In the meantime, the company is dealing with its accounting problems.

In January, Mills said it had misapplied accounting rules for compensation expenses and for how it accounted for a small subsidiary. Since then, however, the company has discovered a wide array of additional problems, which it detailed yesterday for the first time.

The company identified eight areas in which it didn't account for costs properly or didn't value assets properly. In particular, Mills included certain expenses of its mall developments as part of the value of the development, a process known as "capitalizing" a cost. Capitalizing costs removes them from the bottom line and treats them as investments rather than expenses.

Mills said it had capitalized a variety of costs it shouldn't have, such as interest on a project, some company overhead that had nothing to do with a development, and advertising and grand opening expenses.

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