Back to GetFilings.com
UNITED STATES
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
For The Fiscal Year Ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File #33-79012
Inland Real Estate Corporation
(Exact name of registrant as specified in its charter)
Maryland 36-3953261
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2901 Butterfield Road, Oak Brook, Illinois 60523
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 630-218-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $.01 par value 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 period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 10-K or any amendment to this
Form 10-K. [X]
As of March 30, 1999, the aggregate market value of the Shares of Common Stock
held by non-affiliates of the registrant was approximately $594,611,347.
As of March 30, 1999, there were 54,075,577 Shares of Common Stock outstanding.
Documents Incorporated by Reference: The Prospectus of the Registrant dated
April 7, 1998 as amended, are incorporated by reference in Parts I, II and III
of this Annual Report on Form 10-K.
-1-
INLAND REAL ESTATE CORPORATION
(A Maryland corporation)
TABLE OF CONTENTS
Part I Page
------ ----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 5
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 12
Part II
-------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.............................. 12
Item 6. Selected Financial Data....................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 16
Item 7(a) Quantitative and Qualitative Disclosures About Market Risk.... 23
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 54
Part III
--------
Item 10. Directors and Executive Officers of the Registrant............ 54
Item 11. Executive Compensation........................................ 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 58
Item 13. Certain Relationships and Related Transactions................ 58
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 59
SIGNATURES............................................................. 62
-2-
PART I
Item 1. Business
The Company
Inland Real Estate Corporation (the "Company") was formed on May 12, 1994. On
October 14, 1994, the Company commenced an initial public offering, on a best
effort basis, ("Initial Offering") of 5,000,000 shares of common stock
("Shares") at $10.00 per share. As of July 24, 1996, the Company had received
subscriptions for a total of 5,000,000 Shares, thereby completing the Initial
Offering. On July 24, 1996, the Company commenced an offering of an additional
10,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Second
Offering"). As of July 10, 1997, the Company had received subscriptions for a
total of 10,000,000 Shares, thereby completing the Second Offering. On July 14,
1997, the Company commenced an offering of an additional 20,000,000 Shares at
$10.00 per Share, on a best efforts basis, (the "Third Offering"). As of March
19, 1998, the Company had received subscriptions for a total of 20,000,000
Shares, thereby completing the Third Offering. On April 7, 1998, the Company
commenced an offering of an additional 27,000,000 Shares at $11.00 per Share, on
a best efforts basis, (the "Fourth Offering"). In order to maximize the
Company's flexibility in evaluating strategic alternatives, the Board of
Directors decided to terminate the Fourth Offering on December 31, 1998. As of
December 31, 1998, the Company had received subscriptions for a total of
16,642,397 Shares in the Fourth Offering. In addition, as of December 31,
1998, the Company has distributed 2,212,934 Shares through the Company's
Distribution Reinvestment Program ("DRP). As of December 31, 1998, the Company
has repurchased 198,375 Shares through its Share Repurchase Program. As a
result, as of December 31, 1998, Gross Offering Proceeds total $539,331,413, net
of Shares repurchased through the Share Repurchase program. Inland Real Estate
Advisory Services, Inc. (the "Advisor"), an Affiliate of the Company, is the
advisor to the Company.
On September 28, 1998, the Company engaged Everen Securities, Inc. to advise the
Company on strategic alternatives designed to increase stockholder value. These
alternatives include, but are not limited to, evaluating whether: (1) the
Company should become internally advised and managed by acquiring the Advisor
and the Property Manager; (2) the Company should list its common stock on an
exchange or other trading system; and (3) the Company should seek to merge with
a third party that is already listed on an exchange or other trading system.
Everen Securities, Inc. is expected to complete its advisor engagement by the
third quarter 1999.
The Company had no employees during 1998, 1997 and 1996.
-3-
Description of Business
The Company is in the business of acquiring Neighborhood Retail Centers, with
gross leasable area ranging from approximately 5,000 to 150,000 square feet, and
Community Centers, with gross leasable area ranging from 150,000 to 300,000
square feet, located primarily within an approximate 400-mile radius of its
headquarters in Oak Brook, Illinois. The Company may also acquire single-user
retail properties located throughout the United States. The Company is also
permitted to construct or develop properties, or render services in connection
with such development or construction, subject to the Company's compliance with
the rules governing real estate investment trusts under the Internal Revenue
Code of 1986, ("Code"), as amended.
The Company anticipates that aggregate borrowings secured by all of the
Company's properties will not exceed 50% of their combined fair market values,
however, the maximum amount of borrowings in the absence of the consent of a
majority of the Stockholders, may not exceed 300% of Net Assets. The Company
has incurred mortgage indebtedness subsequent to acquisition on properties
initially acquired on an all cash basis. The proceeds from such loans were used
to acquire additional properties. The Company may also incur indebtedness to
finance improvements to the properties it acquires. In certain instances, where
the terms were more favorable than those that could be obtained by the Company
or prepayment of the debt was not allowed, the Company has acquired properties
subject to existing debt.
The Company's real property investments are subject to competition from similar
types of properties in the vicinity in which each is located. Approximate
occupancy levels for the properties are in the table set forth in Item 2 below
to which reference is hereby made. The Company's real property investments are
all currently located within 400 miles of the Company's headquarters in
Illinois. The Company does not segregate revenues or assets by geographic
region, and such a presentation would not be material to an understanding of the
Company's business taken as a whole.
Certain risks exist due to a concentration of any single tenant within the
portfolio. Currently the largest single tenant is Dominick's Finer Foods, which
has eight leases totaling 543,977 square feet, or approximately 8.46% of the
total gross leasable area owned by the Company. Annualized base rental income
of these eight leases is projected to be $6,554,003 for the year ended December
31, 1999, or approximately 10.52% of the total annualized base rental income
based on the current portfolio.
Qualification as a Real Estate Investment Trust
The Company qualified as a real estate investment trust ("REIT") under the Code
for federal income tax purposes commencing with the tax year ending December 31,
1995. Since the Company qualified for taxation as a REIT, the Company generally
will not be subject to federal income tax to the extent it distributes its REIT
taxable income to its stockholders. If the Company fails to qualify as a REIT
in any taxable year, the Company will be subject to federal income tax on its
taxable income at regular corporate tax 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 federal income and excise taxes on its
undistributed income.
-4-
Item 2. Properties
As of December 31, 1998, the Company has acquired fee ownership of eighty-five
properties, including fifteen single-user retail properties, fifty-seven
Neighborhood Retail Centers and thirteen Community Centers. The Company owns
property in Illinois, Wisconsin, Indiana, Minnesota and Ohio. Tenants of the
properties are responsible for the payment of some or all of the real estate
taxes, insurance and common area maintenance.
Gross Mortgages
Leasable Year Payable Current
Area Date Built/ at No. of Anchor
Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants*
- - ---------------------------- -------- ------ --------- ----------- -------- ----------
Single-User Retail Property
- - ---------------------------
Walgreens, Decatur, IL 13,500 01/95 1988 $ 714,443 1 Walgreens Pharmacy
Zany Brainy, Wheaton, IL 12,499 07/96 1995 1,245,000 1 Zany Brainy
Ameritech, Joliet, IL 4,505 05/97 1995 522,375 1 Ameritech
Dominicks-Schaumburg
Schaumburg, IL 71,400 05/97 1996 5,345,500 1 Dominick's Finer Foods
Dominicks-Highland Park
Highland Park, IL 71,442 06/97 1996 6,400,000 1 Dominick's Finer Foods
Dominicks-Glendale Heights
Glendale Heights, IL 68,923 09/97 1997 4,100,000 1 Dominick's Finer Foods
Party City Store
Oak Brook Terrace, IL 10,000 11/97 1985 987,500 1 Party City
Eagle Country Market,
Roselle, IL 42,283 11/97 1990 1,450,000 1 Eagle Foods
Dominicks-West Chicago
West Chicago, IL 78,158 01/98 1990 3,150,000 1 Dominick's Finer Foods
Walgreens-Woodstock 15,856 06/98 1973 569,610 1 Walgreen's Pharmacy
Woodstock, IL
Bakers Shoes
Chicago, IL 20,000 09/98 1891 - 1 Bakers Shoes
Staples
Freeport, IL 24,049 12/98 1998 - 1 Staples
Carmax-Schaumburg
Schaumburg, IL 93,333 12/98 1998 - 1 Carmax
Carmax-Tinley Park
Tinley Park, IL 94,518 12/98 1998 - 1 Carmax
Hollywood Video-Hammond
Hammond, IN 7,488 12/98 1998 - 1 Hollywood Video
-5-
Gross Mortgages
Leasable Year Payable Current
Area Date Built/ at No. of Anchor
Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants*
- - ---------------------------- -------- ------ --------- ----------- -------- ----------
Neighborhood Retail Centers
- - ---------------------------
Eagle Crest Shopping Center
Naperville, IL 67,650 03/95 1991 2,350,000 12 Eagle Foods
Montgomery-Goodyear 12,903 09/95 1991 630,000 2 Goodyear Tire & Rubber
Montgomery, IL Merlin Corp.
Hartford/Naperville Plaza 43,862 09/95 1995 2,310,000 8 Blockbuster Video
Naperville, IL Sears Hardware
Keller/Williams Realty
Nantucket Square
Shopping Center 56,981 09/95 1980 2,200,000 20 Hallmark
Schaumburg, IL Trak Auto
The Dental Store Ltd.
Antioch Plaza, Antioch, IL 19,810 12/95 1995 875,000 5 Blockbuster Video
Radio Shack
Mundelein Plaza,
Mundelein, IL 68,056 03/96 1990 2,810,000 8 Sears
Regency Point, Lockport, IL 49,826 04/96 1993 4,312,036 18 Walgreens Pharmacy
5,050 04/96 1995 Ace Hardware
Prospect Heights, 28,080 06/96 1985 1,095,000 5 Walgreens Pharmacy
Prospect Hts., IL Blockbuster Video
Montgomery-Sears,
Montgomery, IL 34,600 06/96 1990 1,645,000 6 Sears Paint & Hardware
Blockbuster Video
Salem Square,
Countryside, IL 112,310 08/96 1973/ $3,130,000 5 TJ Maxx
1985 Marshalls
Hawthorn Village,
Vernon Hills,IL 98,686 08/96 1979 4,280,000 22 Dominick's Finer Foods
Walgreens Pharmacy
Six Corners, Chicago, IL 80,650 10/96 1966 3,100,000 7 Chicago Health Club
Illinois Masonic
Medical Center
Spring Hill Fashion Corner
West Dundee, IL 125,198 11/96 1985 4,690,000 20 TJ Maxx
Michaels Crafts
Crestwood Plaza,
Crestwood, IL 20,044 12/96 1992 904,380 2 Entenmann's
Pet Supplies Plus
Park St. Claire,
Schaumburg, IL 11,859 12/96 1994 762,500 2 Ameritech
Hallmark Showcase
Summit of Park Ridge
Park Ridge, IL 33,252 12/96 1986 1,600,000 14 LePeep Rest.
Giappos Pizza
Grand and Hunt Club,
Gurnee, IL 21,222 12/96 1996 1,796,000 2 Jewelry 3
Super Crown Books
Quarry Outlot, Hodgkins, IL 9,650 12/96 1996 900,000 3 Dunkin Donuts/
Baskin Robbins
The Casual Male
Jewelry 3
Aurora Commons, Aurora,IL 127,292 01/97 1988 9,205,252 24 Jewel/Osco
-6-
Gross Mortgages
Leasable Year Payable Current
Area Date Built/ at No. of Anchor
Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants*
- - ---------------------------- -------- ------ --------- ----------- -------- ----------
Neighborhood Retail Centers (cont.)
- - -----------------------------------
Lincoln Park Place,
Chicago, IL 10,678 01/97 1990 1,050,000 1 Lechters Housewares
Niles Shopping Center,
Niles, IL 26,117 04/97 1982 1,617,500 7 Jennifer Convertibles
Acel Cellular
Wolf Camera & Video
Mallard Crossing,
Elk Grove Village, IL 82,949 05/97 1993 4,050,000 11 Eagle Foods
Cobblers Crossing, Elgin, IL 102,643 05/97 1993 5,476,500 13 Jewel Food Store
Calumet Square,
Calumet City, IL 39,936 06/97 1967/ 1,032,920 3 Aronson Furniture
1994 Super Trak Warehouse
Sequoia Shopping Center
Milwaukee, WI 35,407 06/97 1988 1,505,000 13 Kinko's
U.S. Post Office
Play It Again Sports
Wong's Palace
Riversquare Shopping Center
Naperville, IL 58,158 06/97 1988 3,050,000 20 Salon Suites Limited
Harbour Contractors, Inc.
Shorecrest Plaza, Racine, WI 91,176 07/97 1977 2,978,000 13 Piggly Wiggly Grocery
Wisconsin Health & Fitness
Dominicks-Countryside
Countryside, IL 62,344 12/97 1975 1,150,000 1 Dominick's Finer Foods
Terramere Plaza,
Arlington Heights, IL 40,965 12/97 1980 2,202,500 20 None
Wilson Plaza, Batavia, IL 11,160 12/97 1986 650,000 7 White Hen Pantry
Dimples Donuts
Riverside Liquors
Iroquois Center,
Naperville, IL 140,981 12/97 1983 5,950,000 25 Total Beverage
Sears
Fashion Square, Skokie, IL 83,959 12/97 1984 6,200,000 19 Cost Plus
Designer Shoe Outlet
Shops at Coopers Grove
Country Club Hills, IL 72,518 01/98 1991 2,900,000 10 Eagle Foods
Maple Plaza
Downers Grove, IL 31,298 01/98 1988 1,582,500 12 J.C. Licht Co.
Goodyear Tire & Rubber
Orland Park Retail
Orland Park, IL 8,500 02/98 1997 625,000 3 Video Update
All Cleaners
Gianni's Pizza
Wisner/Milwaukee Plaza
Chicago, IL 14,677 02/98 1994 974,725 4 Blockbuster Video
Giordano's Restaurant
Spincycle Coin Laundry
Homewood Plaza
Homewood, IL 19,000 02/98 1993 1,013,201 3 Blockbuster Video
Trak Auto
-7-
Gross Mortgages
Leasable Year Payable Current
Area Date Built/ at No. of Anchor
Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants*
- - ---------------------------- -------- ------ --------- ----------- -------- ----------
Neighborhood Retail Centers (cont.)
- - -----------------------------------
Elmhurst City Center
Elmhurst, IL 39,117 02/98 1994 2,513,765 12 Walgreen's Pharmacy
Famous Footwear
Ruby's
Shoppes of Mill Creek
Palos Park, IL 102,443 03/98 1989 9,500,000 23 Jewel Food Store
Prairie Square
Sun Prairie, WI 35,755 03/98 1995 1,550,000 13 Famous Footwear
Blockbuster Video
Oak Forest Commons
Oak Forest, IL 108,360 03/98 1998 6,617,871 13 Dominick's Finer Foods
Downers Grove Market
Downers Grove, IL 104,445 03/98 1998 10,600,000 14 Dominick's Finer Foods
St. James Crossing
Westmont, IL 49,992 03/98 1990 3,847,599 21 Nevada Bob's
Luciano's
High Point Center
Madison, WI 86,204 04/98 1984 5,360,988 28 Pier 1 Imports
Western & Howard
Chicago, IL 12,784 04/98 1985 992,681 3 Pearle Vision
Payless Shoe Source
Super Gap
Wauconda Shopping Center
Wauconda, IL 31,157 05/98 1988 1,333,834 4 Sears Hardware
Spasso, Ltd.
Berwyn Plaza
Berwyn, IL 18,138 05/98 1983 708,638 5 Walgreens
Radio Shack
Woodland Heights
Streamwood, IL 120,436 06/98 1956 3,940,009 10 Jewel Food Store
U.S. Post Office
Schaumburg Shopping Center
Schaumburg, IL 61,485 06/98 1994 3,908,081 6 Sears Hardware
Trak Auto
Ulta 3
Winnetka Shopping Center
New Hope, MN 42,415 07/98 1990 2,233,744 16 Walgreen's
Big Wheel Auto Store
Eastgate Shopping Center
Lombard, IL 132,519 07/98 1959 - 40 Ace Hardware
Secretary of State
Orland Greens Shopping Center
Orland Park, IL 45,031 09/98 1984 - 14 Walgreen's
MacFrugals
Two Rivers Plaza
Bolingbrook, IL 57,900 10/98 1994 - 11 Kay-Bee Toy Store
Sizes Unlimited
Marshalls
Edinburgh Festival
Brooklyn Park, MN 91,613 10/98 1997 4,625,000 12 Knowlan's Super Markets
Riverplace Center
Noblesville, IN 74,414 11/98 1992 - 12 Fashion Bug
Kroger
Rose Plaza
Elmwood Park, IL 18,264 11/98 1997 - 1 Binny's
Marketplace at Six Corners
Chicago, IL 117,000 11/98 1997 11,200,000 6 Jewel Food Store
Marshalls
-8-
Gross Mortgages
Leasable Year Payable Current
Area Date Built/ at No. of Anchor
Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants*
- - ---------------------------- -------- ------ --------- ----------- -------- ----------
Community Centers
- - -----------------
Lansing Square,
Lansing, IL 233,508 12/96 1991 8,150,000 16 Sam's Club
Baby Superstore
Office Max
Maple Park Place,
Bolingbrook, IL 215,662 01/97 1992 7,650,000 19 K-Mart Corporation
Eagle Foods
Rivertree Court,
Vernon Hills, IL 299,055 07/97 1988 17,547,999 42 Best Buy
Plitt Theaters
Naper West,
Naperville, IL 165,311 12/97 1985 7,695,199 25 Douglas TV
TJ Maxx
Woodfield Plaza
Schaumburg, IL 177,163 01/98 1992 9,600,000 10 Kohl's
Linens 'N Things
Barnes & Noble
Lake Park Plaza
Michigan City, IN 229,639 02/98 1990 6,489,618 15 Walmart
Chestnut Court
Darien, IL 170,027 03/98 1987 8,618,623 22 Just Ducky
Stein Mart
Bergen Plaza
Oakdale, MN 270,283 04/98 1978 9,141,896 39 Rainbow Foods
K-Mart
Fairview Heights Plaza
Fairview Heights, IL 167,491 08/98 1991 - 8 1/2 Price Store
Michaels
The Sports Authority
Sears Homelife
Woodfield Commons-East/West
Schaumburg, IL 207,106 10/98 1973 13,500,000 16 Toys R Us
1975 Tower Records
1997 Comp USA
Cost Plus
Party City
Joliet Commons
Joliet, IL 159,184 10/98 1995 14,569,482 11 Barnes and Noble
Old Navy
M.C. Sports
Springboro Plaza
Springboro, OH 154,034 11/98 1992 - 4 K-Mart
Kroger
Park Center Plaza
Tinley Park, IL 193,179 12/98 1988 - 24 Cub Foods
* Anchor tenants include tenants leasing more than 10% of the gross leasable area of a property.
-9-
The following table lists the approximate physical occupancy levels for the
Company's investment properties as of the end of each year during 1998, 1997 and
1996. N/A indicates the property was not owned by the Company at the end of the
year.
As of December 31,
---------------------
Properties 1998 1997 1996
---------- -------- -------- --------
Walgreens, Decatur, IL ......................... 100% 100% 100%
Eagle Crest, Naperville, IL..................... 100% 97% 100%
Montgomery-Goodyear, Montgomery, IL............. 77% 77% 100%
Hartford/Naperville Plaza, Naperville, IL....... 100% 100% 100%
Nantucket Square, Schaumburg, IL................ 100% 96% 85%
Antioch Plaza, Antioch, IL...................... 68% 68% 57%
Mundelein Plaza, Mundelein, IL.................. 100% 100% 100%
Regency Point, Lockport, IL..................... 97% 97% 97%
Prospect Heights, Prospect Heights, IL.......... 92% 83% 100%
Montgomery-Sears, Montgomery, IL................ 100% 95% 85%
Zany Brainy, Wheaton, IL........................ 100% 100% 100%
Salem Square, Countryside, IL................... 97% 97% 97%
Hawthorn Village, Vernon Hills, IL.............. 100% 99% 98%
Six Corners, Chicago, IL........................ 82%* 90% 92%
Spring Hill Fashion Ctr., West Dundee, IL....... 95% 100% 95%
Crestwood Plaza, Crestwood, IL.................. 100% 100% 100%
Park St. Claire, Schaumburg, IL................. 100% 100% 100%
Lansing Square, Lansing, IL..................... 98% 90% 89%
Summit of Park Ridge, Park Ridge, IL............ 87% 83% 81%
Grand and Hunt Club, Gurnee, IL................. 100% 100% 100%
Quarry Outlot, Hodgkins, IL..................... 100% 100% 100%
Maple Park Place, Bolingbrook, IL............... 99% 98% N/A
Aurora Commons, Aurora, IL...................... 95% 98% N/A
Lincoln Park Place, Chicago, IL................. 60% 60% N/A
Ameritech, Joliet, IL........................... 100% 100% N/A
Dominicks-Schaumburg, Schaumburg, IL............ 100% 100% N/A
Dominicks-Highland Park, Highland Park, IL...... 100% 100% N/A
Niles Shopping Center, Niles, IL................ 100% 60% N/A
Mallard Crossing, Elk Grove Village, IL......... 97% 95% N/A
Cobblers Crossing, Elgin, IL.................... 91% 89% N/A
Calumet Square, Calumet City, IL................ 100% 100% N/A
Sequoia Shopping Center, Milwaukee, WI.......... 100% 93% N/A
Riversquare Shopping Ctr., Naperville, IL....... 97% 95% N/A
Rivertree Court, Vernon Hills, IL............... 99%* 99% N/A
Shorecrest Plaza, Racine, WI.................... 87% 96% N/A
Dominicks-Glendale Hts., Glendale Hts., IL...... 100% 100% N/A
Party City Store, Oak Brook Terrace, IL......... 100% 100% N/A
Eagle Country Market, Roselle, IL............... 100% 100% N/A
Dominicks-Countryside, Countryside, IL.......... 100% 100% N/A
Terramere Plaza, Arlington Heights, IL.......... 95% 80% N/A
Wilson Plaza, Batavia, IL....................... 100% 100% N/A
Iroquois Center, Naperville, IL................. 73%* 81% N/A
Fashion Square, Skokie, IL...................... 100% 88% N/A
Naper West, Naperville, IL...................... 83%* 86% N/A
Dominicks-West Chicago, West Chicago, IL........ 100% N/A N/A
Shops at Coopers Grove, Country Club Hills, IL.. 100% N/A N/A
Maple Plaza, Downers Grove, IL.................. 100% N/A N/A
Orland Park Retail, Orland Park, IL............. 100% N/A N/A
Wisner/Milwaukee Plaza, Chicago, IL............. 100% N/A N/A
-10-
As of December 31,
---------------------
Properties 1998 1997 1996
---------- -------- -------- --------
Homewood Plaza, Homewood, IL.................... 100% N/A N/A
Elmhurst City Center, Elmhurst, IL.............. 100% N/A N/A
Shoppes of Mill Creek, Palos Park, IL........... 98%* N/A N/A
Oak Forest Commons, Oak Forest, IL.............. 100% N/A N/A
Prairie Square, Sun Prairie, WI................. 90%* N/A N/A
Downers Grove Plaza, Downers Grove, IL.......... 100% N/A N/A
St. James Crossing, Westmont, IL................ 91%* N/A N/A
Woodfield Plaza, Schaumburg, IL................. 97%* N/A N/A
Lake Park Plaza, Michigan City, IN.............. 74%* N/A N/A
Chestnut Court, Darien, IL...................... 98%* N/A N/A
Western & Howard, Chicago, IL................... 100% N/A N/A
High Point Center, Madison, WI.................. 90%* N/A N/A
Wauconda Shopping Center, Wauconda, IL.......... 100% N/A N/A
Berwyn Plaza, Berwyn, IL........................ 100% N/A N/A
Woodland Heights, Streamwood, IL................ 81%* N/A N/A
Schaumburg Shopping Center, Schaumburg, IL...... 93%* N/A N/A
Bergen Plaza, Oakdale, MN....................... 98%* N/A N/A
Walgreens-Woodstock, Woodstock, IL.............. 100% N/A N/A
Winnetka Commons, New Hope, MN.................. 100% N/A N/A
Eastgate Shopping Center, Lombard, IL........... 91%* N/A N/A
Fairview Heights Plaza, Fairview Heights, IL.... 78%* N/A N/A
Orland Greens, Orland Park, IL.................. 100% N/A N/A
Bakers Shoes, Chicago, IL....................... 100% N/A N/A
Staples, Freeport, IL........................... 100% N/A N/A
Two Rivers Plaza, Bolingbrook, IL............... 100% N/A N/A
Edinburgh Festival, Brooklyn Park, MN........... 97%* N/A N/A
Woodfield Commons-East/West, Schaumburg, IL..... 89%* N/A N/A
Riverplace Center, Noblesville, IN.............. 100% N/A N/A
Rose Plaza, Elmwood Park, IL.................... 100% N/A N/A
Marketplace at Six Corners, Chicago, IL......... 100% N/A N/A
Joliet Commons, Joliet, IL...................... 97% N/A N/A
Springboro Plaza, Springboro, OH................ 100% N/A N/A
Carmax-Schaumburg, Schaumburg, IL............... 100% N/A N/A
Carmax-Tinley Park, Tinley Park, IL............. 100% N/A N/A
Hollywood Video-Hammond, Hammond, IN............ 100% N/A N/A
Park Center Plaza, Tinley Park, IL.............. 71%* N/A N/A
* As part of the purchase of these properties the Company receives rent under
master lease agreements on the space which was vacant at the time of the
purchase, resulting in 100% economic occupancy at December 31, 1998 for each
of these centers, except Six corners, Iroquois Center, Naper West, Prairie
Square, Lake Park Plaza and Woodland Heights where the master lease
agreement and collection of rent on spaces vacated results in economic
occupancy of 86%, 90%, 96%, 97%, 98% and 95%, respectively.
The master lease agreements are for periods ranging from one to two years
from the purchase date or until the spaces are leased.
-11-
Item 3. Legal Proceedings
The Company is not subject to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
As of December 31, 1998, there were 19,286 stockholders of the Company. There is
no public market for the shares.
Distributions
The Company declared distributions to Stockholders totaling $.88 per weighted
average share outstanding during the year ended December 31, 1998. Of this
amount, $.67 qualifies as distributions taxable as ordinary income for 1998 and
the remainder constitutes a return of capital for tax purposes.
Sales of Unregistered Securities
On October 24, 1996, Roland Burris, a Director of the Company, exercised
options to purchase 1,000 shares at a price equal to $9.05 per share. Both the
option and the shares were issued pursuant to the exemption from registration
set forth in Section 4(2) of the Securities Act of 1993, as amended.
-12-
Item 6. Selected Financial Data
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
For the years ended December 31, 1998, 1997, 1996 and 1995
(not covered by the Independent Auditors' Report)
1998 1997 1996 1995
---- ---- ---- ----
Total assets......... $ 787,608,547 333,590,131 104,508,686 18,750,877
Mortgages payable.... $ 288,982,470 106,589,710 30,838,233 750,727
Total income......... $ 73,302,278 29,421,585 6,327,734 1,180,422
Net income........... $ 24,085,871 8,647,221 2,452,221 496,514
Net income per
share, basic and
diluted (b)........ $ .60 .57 .55 .53
Distributions
declared........... $ 35,443,213 13,127,597 3,704,943 736,627
Distributions per
share (b).......... $ .88 .86 .82 .78
Funds from Operations
(b)(c)............. $ 35,474,823 13,203,666 3,391,365 666,408
Funds available for
distribution (c)... $ 35,698,975 13,141,242 3,680,824 787,011
Cash flows provided
by operating
activities......... $ 42,774,744 15,923,839 5,529,709 978,350
Cash flows used
by investing
activities......... $(344,384,056) (146,994,619) (68,976,841) (6,577,843)
Cash flows provided
by financing
activities........ $ 373,520,427 173,724,632 71,199,936 6,327,490
Weighted average
number of common
shares outstanding. 40,359,796 15,225,983 4,494,620 943,156
(a) The above selected financial data should be read in conjunction with the
financial statements and related notes appearing elsewhere in this Annual
Report.
-13-
(b) The net income and distributions per share are based upon the weighted
average number of common shares outstanding. The $.88 per share
distributions for the year ended December 31, 1998, represented 99.6% of
the Company's Funds From Operations ("FFO") and 99.0% of funds available
for distribution for that period. See Footnote (c) below for information
regarding the Company's calculation of FFO. Distributions by the Company
to the extent of its current and accumulated earnings and profits for
federal income tax purposes are taxable to stockholders as ordinary
income. Distributions in excess of these earnings and profits generally
are treated as a non-taxable reduction of the stockholder's basis in the
shares to the extent thereof, and thereafter as taxable gain (a return of
capital). These Distributions in excess of earnings and profits will have
the effect of deferring taxation of the amount of the Distribution until
the sale of the stockholder's shares. For the year ended December 31,
1998, $8,428,070 (or 23.78% of the $35,443,213 Distribution declared for
1998) represented a return of capital. The balance of the Distribution
constitutes ordinary income. In order to maintain its qualification as a
REIT, the Company must make annual Distributions to stockholders of at
least 95% of its REIT taxable income, or approximately $25,265,000 for
1998. REIT taxable income does not include net capital gains. Under
certain circumstances, the Company may be required to make Distributions
in excess of cash available for distribution in order to meet the REIT
distribution requirements. Distributions are determined by the Company's
Board of Directors and are dependent on a number of factors, including the
amount of funds available for distribution, the Company's financial
condition, any decision by the Board of Directors to reinvest funds rather
than to distribute the funds, the Company's capital expenditures, the
annual distribution required to maintain REIT status under the Code and
other factors the Board of Directors may deem relevant.
(c) One of the Company's objectives is to provide cash distributions to its
Stockholders from cash generated by the Company's operations. Cash
generated from operations is not equivalent to the Company's net operating
income as determined under GAAP. Due to certain unique operating
characteristics of real estate companies, the National Association of Real
Estate Investment Trusts ("NAREIT"), an industry trade group, has
promulgated a standard known as "Funds from Operations" or "FFO" for
short, which it believes more accurately reflects the operating
performance of a REIT such as the Company. As defined by NAREIT, FFO
means net income computed in accordance with GAAP, less extraordinary,
unusual and non-recurring items, excluding gains (or losses) from debt
restructuring and sales of property plus depreciation on real property and
amortization and after adjustments for unconsolidated partnership and
joint ventures in which the REIT holds an interest. The Company has
adopted the NAREIT definition for computing FFO because management
believes that, subject to the following limitations, FFO provides a basis
for comparing the performance and operations of the Company to those of
other REITs. The calculation of FFO may vary from entity to entity since
capitalization and expense policies tend to vary from entity to entity.
Items which are capitalized do not impact FFO, whereas items that are
expensed reduce FFO.
-14-
Consequently, the presentation of FFO by the Company may not be comparable
to other similarly titled measures presented by other REITs. FFO is not
intended to be an alternative to "Net Income" as an indicator of the
Company's performance nor to "Cash Flows from Operating Activities" as
determined by GAAP as a measure of the Company's capacity to pay
distributions. FFO and funds available for distribution are calculated as
follows:
Year ended December 31,
1998 1997
---- ----
Net income........................... $ 24,085,871 8,647,221
Depreciation, net of minority interest 11,388,952 4,556,445
------------- ------------
Funds from operations(1)........... 35,474,823 13,203,666
Principal amortization of debt....... (74,454) (67,300)
Straight line rental income (2)...... (2,120,951) (654,978)
Acquisition cost expenses (3)........ 437,783 249,493
Rental income received under
master lease agreements (4)........ 1,981,774 410,361
------------- ------------
Funds available for distribution... $ 35,698,975 13,141,242
============= ============
(1) FFO does not represent cash generated from operating activities
calculated in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs. FFO should not be considered
as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure
of liquidity.
(2) Certain tenant leases contain provisions providing for stepped rent
increases. GAAP requires the Company to record rental income for the
period of occupancy using the effective monthly rent, which is the
average monthly rent for the entire period of occupancy during the
term of the lease.
(3) Acquisition cost expenses include costs and expenses relating to the
acquisition of properties. These costs were estimated to be up to
.5% of the Gross Offering Proceeds and were paid from the Proceeds of
the Offering, thereby increasing funds available for distribution.
(4) As part of several purchases, the Company will receive rent under
master lease agreements on some of the spaces currently vacant for
periods ranging from one to two years or until the spaces are leased.
GAAP requires that as these payments are received, they be recorded
as a reduction in the purchase price of the properties rather than as
rental income.
-15-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this annual report that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Discussions containing forward-
looking statements may be found throughout this report and particularly in the
sections headed "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Without limiting the foregoing,
words such as "anticipates," "expects," "intends," "plans" and similar
expressions are intended to identify forward-looking statements. These
statements are subject to a number of risks and uncertainties. Actual results
could differ materially from those expressed or implied in the forward-looking
statements. For a discussion of the factors that may impact our ability to
achieve these results, see the section headed "Risk Factors" contained in our
registration statement dated April 7, 1998, as amended.
Liquidity and Capital Resources
Cash and cash equivalents consists of cash and short-term investments. Cash and
cash equivalents, at December 31, 1998 and December 31, 1997, were $123,056,702
and $51,145,587, respectively. The increase in cash and cash equivalents since
December 31, 1997 resulted primarily from the sale of Shares and loan proceeds
from financing secured by the Company's properties. Partially offsetting the
increase in cash and cash equivalents was the use of cash resources to purchase
additional properties since December 31, 1997 and the payment of Offering Costs
associated with the sale of Shares. The Company intends to use cash and cash
equivalents to purchase additional properties, to pay distributions and for
working capital requirements.
As of December 31, 1998, the Company had acquired eighty-five properties. The
properties owned by the Company are currently generating sufficient cash flow to
cover operating expenses of the Company plus pay a monthly distribution on
weighted average shares. Beginning June 1, 1998, the Company increased the
distribution paid to stockholders from $.87 per annum to $.88 per annum on
weighted average shares. Distributions declared for the year ended December 31,
1998 were $35,443,213, of which $8,428,070 represents a return of capital for
federal income tax purposes.
The Company monitors the various qualification tests it must meet to maintain
its status as a real estate investment trust. Large ownership of the Company's
stock is tested upon purchase to determine that no more than 50% in value of the
outstanding stock is owned directly, or indirectly, by five or fewer persons or
entities at any time. The Company also determines, on a quarterly basis, that
the Gross Income, Asset and Distribution Tests imposed by the REIT requirements
are met. On an ongoing basis, as due diligence is performed by the Advisor on
potential real estate purchases or temporary investment of uninvested capital,
the Company determines that the income from the new asset will qualify for REIT
purposes. Beginning with the tax year ended December 31, 1995, the Company has
qualified as a REIT.
-16-
Cash Flows From Operating Activities
Net cash provided by operating activities increased from $5,529,709 for the year
ended December 31, 1996 to $15,923,839 for the year ended December 31, 1997 to
$42,774,744 for the year ended December 31, 1998. These increases are due
primarily to increases in net income, depreciation and accrued real estate taxes
all resulting from an increase in the number of properties owned by the Company.
As of December 31, 1998 the Company had acquired eighty-five properties, as
compared to forty-four properties as of December 31, 1997, and twenty-one
properties as of December 31, 1996.
Cash Flows From Investing Activities
The Company used approximately $344 million in cash for investing activities
during the year ended December 31, 1998 compared to approximately $147 million
and $69 million for the years ended December 31, 1997 and 1996, respectively.
Substantially all of the cash was used to purchase properties during each year.
Cash Flows From Financing Activities
For the year ended December 31, 1998, the Company generated $373,520,427 of cash
flows from financing activities as compared to $173,724,632 of cash flows
generated from financing activities for the year ended December 31, 1997 and
$71,199,936 for the year ended December 31, 1996. These increases are due
primarily to the increase in proceeds raised of $290,099,616 from the sale of
shares, net of shares repurchased for the year ended December 31, 1998, as
compared to $168,138,616 from the sale of shares, net of shares repurchased for
the year ended December 31, 1997 and $61,116,826 from the sale of shares, net of
shares repurchased for the year ended December 31, 1996. These increases are
also due to the Company obtaining $166,352,000 in financing secured by thirty-
seven of the Company's properties for the year ended December 31, 1998, as
compared to $43,926,176 in financing secured by fifteen of the Company's
properties for the year ended December 31, 1997, and $25,670,000 in financing
secured by twelve of the Company's properties for the year ended December 31,
1996. The weighted annual average interest rate on the mortgages payable
outstanding at December 31, 1998 was approximately 7.00%. See Note (7) of the
Notes to Consolidated Financial Statements (Item 8 of the Annual Report) for a
description of the terms of the mortgages payable. These increases are partially
offset by an increase in the cash used to pay costs associated with selling
shares for the year ended December 31, 1998 as compared to the years ended
December 31, 1997 and 1996. For the year ended December 31, 1998, the Company
paid offering costs totaling $28,881,991, as compared to $17,563,326 paid for
the year ended December 31, 1997 and $7,305,153 paid for the year ended December
31, 1996. These increases are also partially offset by an increase in the amount
of distributions paid for the year ended December 31, 1998 of $33,297,236 as
compared to the distributions paid for the year ended December 31, 1997 of
$11,899,431 and distributions paid for the year ended December 31 ,1996 of
$3,285,528.
-17-
The Advisor has guaranteed payment of all public offering expenses (excluding
selling commissions, the marketing contribution and the due diligence expense
allowance fee) in excess of 5.5% of the Gross Offering Proceeds of the Offering
(the "Gross Offering Proceeds") or all organization and offering expenses
(including such selling expenses) which together exceed 15% of the Gross
Offering Proceeds. As of December 31, 1998, organizational and offering costs
totaling $57,572,899 did not exceed these limitations.
Results of Operations
At December 31, 1998, the Company owned fifteen single-user retail properties,
fifty-seven Neighborhood Retail Centers and thirteen Community Centers.
Total income for the years ended December 31, 1998, 1997 and 1996 was
$73,302,278, $29,421,585 and $6,327,734 respectively. These increases are due
primarily to increases in rental income resulting from an increase in the number
of properties owned by the Company and a full twelve months of operations on
properties acquired during 1997 and 1996. As of December 31, 1998, the Company
had acquired eighty-five properties, as compared to forty-four properties as of
December 31, 1997 and twenty-one properties as of December 31, 1996. The
purchase of additional properties also resulted in increases in property
operating expenses including depreciation expense.
The increase in mortgage interest to Affiliates and non-affiliates for the year
ended December 31, 1997, as compared to the year ended December 31, 1996, is due
to an increase in mortgages payable from approximately $30,800,000 to
approximately $106,600,000.
Similarly, the increase in mortgage interest to non-affiliates for the year
ended December 31, 1998, as compared to the year ended December 31, 1997, is due
to an increase in mortgages payable from approximately $106,600,000 to
approximately $289,000,000.
Interest income is the result of cash and cash equivalents being invested in
short-term investments until a property is purchased.
The increases in professional services to Affiliates and non-affiliates and
general and administrative expenses to Affiliates and non-affiliates for the
year ended December 31, 1998, as compared to the year ended December 31, 1997
and 1996, is due to an increase in the number of properties owned by the Company
and an increase in the number of stockholders.
-18-
The increase in general and administrative expenses to Affiliates and non-
affiliates for the year ended December 31, 1998, as compared to the years ended
December 31, 1997 and 1996 is due primarily to an increase in the number of
stockholders.
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. The Company paid an Advisor
Asset Management Fee which represented .20%, .45% and .56% of the 1% of the
Average Invested Assets for the years ended December 31, 1998, 1997 and 1996,
respectively.
The increase in acquisition cost expenses to Affiliates and non-affiliates is
due to the increased number of properties considered for acquisition by the
Company and not purchased.
The consolidated financial statements include the accounts of the Company and
the limited liability company ("LLC") which owns the Joliet Commons Shopping
Center. The Company entered into an LLC with an unaffiliated third party (the
"Seller") for the purchase of Joliet Commons. The transaction was structured
such that the Company contributed approximately $52,000 for a 1% interest in an
LLC and the Seller contributed a property with a value of approximately
$19,733,000 and debt of approximately $14,569,000 to the LLC for a 99% interest.
The Company is the managing member of the LLC. Due to the Company's ability as
managing member to directly control the LLC, it is consolidated for financial
reporting purposes. The Seller's interest is reflected as a minority interest
in the accompanying consolidated financial statements.
-19-
Year 2000 Issues
General
Many computer operating systems and software applications were designed such
that the year 1999 is the maximum date that can be processed accurately. In
conducting business, the Company relies on computers and operating systems
provided by equipment manufacturers, and also on application software developed
internally and, to a limited extent, by outside software vendors. The Company
has assessed its vulnerability to the so-called "Year-2000 Issue" with respect
to its equipment and computer systems.
State of Readiness
The Company has identified the following three areas for "Year-2000" compliance
efforts:
Business Computer Systems: The majority of the Advisor's information technology
systems were developed internally and include accounting, lease management,
investment portfolio tracking, and tax return preparation. The Company has
rights to the source code for these applications and employs programmers who are
knowledgeable regarding these systems. The process of testing these internal
systems to determine year 2000 compliance is nearly complete. The Company does
not anticipate any material costs relating to its business computer systems
regarding year 2000 compliance since the Company's critical hardware and
software systems use four digits to represent the applicable year. The Company
does use various computers, so-called "PC's", that may run software that may not
use four digits to represent the applicable year. The Company is in the process
of testing the PC hardware and software to determine year 2000 compliance, but
it must be noted that such PC's are incidental to the Company's critical
systems. The Company is considering independent testing of its critical
systems.
Tenants and Suppliers: The Company is in the process of surveying tenants,
suppliers and other parties with whom the Company does a significant amount of
business to identify the Company's potential exposure in the event such parties
are not year 2000 compliant in a timely manner. At this time, the Company is
not aware of any of these parties anticipating a material Year 2000 compliance
issue. However, since this area involves some parties over which the Company
has no control, such as public utility companies, it is difficult, at best, to
judge the status of the outside companies' year 2000 compliance. The Company is
working closely with significant suppliers of goods and services in an effort to
minimize the impact of the failure of any supplier to become year 2000 compliant
by December 31, 1999. The Company's investigations and assessments of possible
year 2000 issues are in a preliminary stage, and currently the Company is not
aware of any material impact on its business, operations or financial condition
even if one or more parties is not Year 2000 compliant in a timely manner, due
to the number and nature of the Company's diverse tenant base. The Company will
continue to investigate and assess its tenants through the year ended December
31, 1999.
Non-Information Technology Systems: In the operation of its properties, the
Company has acquired equipment with embedded technology such as
microcontrollers, which operate heating, ventilation, and air conditioning
systems, fire alarms, security systems, telephones and other equipment utilizing
time-sensitive technology. The Company is in the process of evaluating its
potential exposure and costs if such non-information technology systems are not
year 2000 compliant and expects to be able to complete its assessment during the
second quarter of 1999.
-20-
Year 2000 Costs
The Company's Advisor and its Affiliates estimate that costs to achieve year
2000 compliance will not exceed $100,000. However, only approximately 10% of
these costs will be directly allocated to and paid by the Company. The balance
of the year 2000 compliance costs, approximately 97%, will be paid by the
Advisor and its Affiliates. Total year 2000 compliance costs incurred through
December 31, 1998 are estimated at approximately $5,000.
Year 2000 Risks
The most reasonable likely worst case scenario for the Company with respect to
the year 2000 non-compliance of its business computer systems would be the
inability to access information which could result in the failure to issue
financial reports. The most reasonable likely worst case scenario for the
Company with respect to the year 2000 non-compliance of its tenants is failure
to receive rental income which could result in the Company being unable to meet
cash requirements for monthly expenses and distributions. The most reasonable
likely worst case scenario for the Company with respect to the year 2000 non-
compliance of its suppliers is the failure to supply necessary utilities;
including, but not limited to heating, as a result of a malfunctioning of non-
information technology systems in some of the Company's properties.
Contingency Plan
The Company expects to be Year 2000 compliant in advance of the year 2000. The
Company will continue to monitor its progress and state of readiness, and is in
the process of formulating a contingency plan which the Company will be prepared
to adopt with respect to areas in which evidence arises that it may not become
Year 2000 compliant in sufficient time. As part of its contingency plan, the
Company may consider obtaining a line of credit to meet short term cash needs.
In the event of a failure of the Company's business computer systems, the
Company may also consider the need to delay distributions until its business
computer systems could again process distributions or its tenants could begin
payment of rents. As information is obtained that may indicate such parties may
not become Year 2000 compliant in sufficient time, the Company is prepared to
develop contingency plans, accordingly.
Subsequent Events
In January 1999, the Company received $13,887,649 of offering proceeds for
subscriptions received as of December 31, 1998, bringing total Gross Offering
Proceeds to approximately $553,219,062.
In January 1999, the Company paid a distribution of $3,809,911 to the
Stockholders.
On January 6, 1999, the Company purchased The Plymouth Collection Shopping
Center from an unaffiliated third party for approximately $6,626,000. The
property is located in Plymouth, Minnesota and contains approximately 40,815
square feet of leasable space. Its anchor tenants are Golf Galaxy, Vintage
Liquors and Paper Warehouse.
-21-
On January 20, 1999, the Company purchased the Circuit City Store from an
unaffiliated third party for approximately $2,900,000. The property is located
in Traverse City, Michigan and contains approximately 21,337 square feet of
leasable space. Its sole tenant is Circuit City.
On February 1, 1999, the Company purchased the Loehmann's Plaza property from an
unaffiliated third party for approximately $13,565,000. The property is located
in Brookfield, Wisconsin and contains approximately 107,952 square feet of
leasable space. Its anchor tenants are Loehmann's, Dickens Books and V.
Richards Market.
On February 8, 1999, the Company purchased the Baytowne Square, Baytowne Shoppes
and Wendy's Outlot property from an unaffiliated third party for approximately
$12,655,000. The property is located in Champaign, Illinois and contains
approximately 119,014 square feet of leasable space. Its anchor tenants are
Staples and PetSmart.
On February 8, 1999, the Company purchased the Woodland Commons Shopping Center
from an unaffiliated third party for approximately $20,036,511. The property is
located in Buffalo Grove, Illinois and contains approximately 170,033 square
feet of leasable space. As part of the purchase of this property, the Company
agreed to assume the existing mortgage with Principal Life Insurance Company for
$11,469,903.
On March 2, 1999, the Company received $1,117,665 as payment for approximately
5.173 acres of land dedicated to the City of St. Charles for the development of
public improvements relating to the Stuarts Crossing Shopping Center.
On March 9, 1999, the Company purchased a single-user shopping center known as
"Super Value - Indianapolis" from an unaffiliated third party for approximately
$5,734,000. The property is located in Indianapolis, Indiana and contains
approximately 67,541 square feet of leasable space. Its sole tenant is Cub
Foods.
On March 9, 1999, the Company purchased a single-user shopping center known as
"Super Value - Plymouth" from an unaffiliated third party for approximately
$5,465,000. The property is located in Plymouth, Minnesota and contains
approximately 67,510 square feet of leasable space. Its sole tenant is Cub
Foods.
On March 17, 1999, the Company purchased the Gateway Square Shopping Center from
an unaffiliated third party for approximately $6,940,000. The property is
located in Hinsdale, Illinois and contains approximately 40,150 square feet of
leasable space. Its anchor tenant is Calico Corners.
-22-
Impact of Accounting Principles
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities, was issued in 1998 and is effective for
fiscal years beginning after June 15, 1999.
In April 1998, the AICPA issued Statement of Position No. 98-5 "Reporting on the
Costs of Start-up Activities." This statement provides guidance on the financial
reporting of start-up activities and organization costs. It requires that costs
of start-up activities and organization costs be expensed when incurred.
Adoption of this statement is required for fiscal years beginning after December
15, 1998, and the Company plans to adopt the statement effective January 1,
1999. This statement will have no material impact.
Inflation
For the Company's Neighborhood Retail Centers and Community Centers, inflation
is likely to increase rental income from leases to new tenants and lease
renewals, subject to market conditions. The Company's rental income and
operating expenses for those properties owned or to be owned and operated under
triple-net leases are not likely to be directly affected by future inflation,
since rents are or will be fixed under the leases and property expenses are the
responsibility of the tenants. The capital appreciation of triple-net leased
properties is likely to be influenced by interest rate fluctuations. To the
extent that inflation determines interest rates, future inflation may have an
effect on the capital appreciation of triple-net leased properties.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of its
long-term debt used to maintain liquidity and fund capital expenditures and
expansion of the Company's real estate investment portfolio and operations. The
Company's interest rate risk management objectives is to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. To achieve its objectives the Company borrows primarily at
fixed rates and may enter into derivative financial instruments such as interest
rate swaps, caps and treasury locks in order to mitigate its interest rate risk
on a related financial instruments. The Company does not enter into derivative
or interest rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques.
The table below presents the principal amounts and weighted average interest
rates by year of expected maturity to evaluate the expected cash flows and
sensitivity to interest rate changes.
1999 2000 2001 2002 2003
----------- ----------- ----------- ---------- ----------
Fixed rate debt 9,823,528 366,692 8,954,934 172,303 31,484,369
Average interest rate
on maturing debt 8.00% - 9.00% - 7.32%
Variable rate debt 70,849 4,241,187 - - -
Average interest rate
on maturing debt - 7.03% - - -
The fair value of the Company's debt approximates its carrying amount.
-23-
The Company entered into rate lock agreements in connection with two separate
loans between the Company and Lehman Brothers Holdings, Inc. and Column
Financial, Inc., respectively. These Agreements allowed the Company to set the
interest rate on the loan at time of execution of such Agreements rather than at
the funding. These Agreements were designed to hedge against higher interest
rates at the time of the loan closings.
The Company paid Lehman Brothers Holdings, Inc. $636,000 of loan fees and
$503,295 of other costs and paid Column Financial, Inc. $37,125 of loan fees and
$267,884 of other costs in connection with these loans.
The Lehman Brothers Holdings, Inc. loan and the Column Financial, Inc. loan
closed in October and November 1998, respectively.
Approximately $10,512,036 or 4% of the Company's mortgages payable at December
31, 1998 have variable interest rates averaging 4.73%. An increase in the
variable interest rate on certain mortgages payable constitutes a market risk.
Item 8. Consolidated Financial Statements and Supplementary Data
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Index
-----
Page
Independent Auditors' Report............................................. 25
Financial Statements:
Consolidated Balance Sheets, December 31, 1998 and 1997................ 26
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996..................................... 28
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996..................................... 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996..................................... 30
Notes to Consolidated Financial Statements............................. 32
Real Estate and Accumulated Depreciation (Schedule III).................. 47
Schedules not filed:
All schedules other than those indicated in the index have been omitted as the
required information is inapplicable or the information is presented in the
financial statements or related notes.
-24-
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Inland Real Estate Corporation:
We have audited the consolidated financial statements of Inland Real Estate
Corporation (the Company) as listed in the accompanying index. In connection
with the audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Inland Real Estate
Corporation as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
KPMG LLP
Chicago, Illinois
January 29, 1999
except as to Note 13, which is as of March 17, 1999
-25-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
------
1998 1997
---- ----
Investment properties (Notes 1 and 5):
Land............................................ $193,093,898 75,801,319
Construction in progress (Note 9)............... 1,230,448 -
Building and improvements....................... 452,885,969 200,509,519
------------- -------------
647,210,315 276,310,838
Less accumulated depreciation................... 17,161,998 5,665,483
------------- -------------
Net investment properties....................... 630,048,317 270,645,355
------------- -------------
Cash and cash equivalents including amount
held by property manager (Note 1)............... 123,056,702 51,145,587
Restricted cash (Notes 1 and 9)................... 15,613,197 2,073,799
Accounts and rents receivable (net of allowance
for doubtful accounts of $200,000 and -0- at
December 31, 1998 and 1997, respectively)
(Note 6)........................................ 12,720,962 4,926,643
Deposits and other assets (Note 8)................ 2,854,836 3,924,431
Deferred organization costs (net of accumulated
amortization of $16,477 and $10,985
at December 31, 1998 and 1997, respectively)
(Note 1)........................................ 19,746 16,477
Loan fees (net of accumulated amortization
of $395,962 and $131,266 at December 31, 1998
and 1997, respectively,) (Note 1)............... 3,294,787 857,839
------------- -------------
Total assets.................................. $787,608,547 333,590,131
============= =============
See accompanying notes to consolidated financial statements.
-26-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Balance Sheets
(continued)
December 31, 1998 and 1997
Liabilities and Stockholders' Equity
------------------------------------
1998 1997
Liabilities: ---- ----
Accounts payable................................ $ 917,483 47,550
Accrued offering costs to Affiliates (Note 3)... 890,786 544,288
Accrued offering costs to non-affiliates........ 2,740 36,574
Accrued interest payable to Affiliates.......... 4,558 4,641
Accrued interest payable to non-affiliates...... 1,651,334 560,821
Accrued real estate taxes....................... 14,384,234 7,031,732
Distributions payable (Note 13)................. 3,844,649 1,777,113
Security deposits............................... 1,561,020 754,359
Mortgages payable (Note 7)...................... 288,982,470 106,589,710
Unearned income................................. 448,809 495,535
Other liabilities (Note 5)...................... 5,208,755 493,116
Due to Affiliates (Note 3)...................... 32,925 337,825
------------- -------------
Total liabilities............................. 317,929,763 118,673,264
------------- -------------
Minority interest (Note 2)........................ 5,214,298 -
------------- -------------
Stockholders' Equity (Notes 1 and 3):
Preferred stock, $.01 par value, 6,000,000
Shares authorized; none issued and outstanding
at December 31, 1998 and December 31, 1997.... - -
Common stock, $.01 par value, 100,000,000 Shares
authorized; 52,394,500 and 24,973,340 issued and
outstanding at December 31, 1998 and 1997,
respectively.................................. 523,945 249,733
Additional paid-in capital (net of offering
costs of $57,536,374 and $28,341,719 at
December 31, 1998 and 1997, respectively, of
which $51,108,966 and $24,172,634 was paid
to Affiliates, respectively).................. 481,271,094 220,640,345
Accumulated distributions in excess
of net income................................. (17,330,553) (5,973,211)
------------- -------------
Total stockholders' equity.................... 464,464,486 214,916,867
------------- -------------
Commitments and contingencies (Note 12)...........
Total liabilities and stockholders' equity........ $787,608,547 333,590,131
============= =============
See accompanying notes to consolidated financial statements.
-27-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Statements of Operations
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Income: ---- ---- ----
Rental income (Notes 1 and 6)..... $ 51,133,774 21,112,365 4,467,903
Additional rental income.......... 16,679,388 6,592,983 1,336,809
Interest income................... 5,185,534 1,615,520 438,188
Other income...................... 303,582 100,717 84,834
------------- ------------ ------------
73,302,278 29,421,585 6,327,734
------------- ------------ ------------
Expenses:
Professional services to
Affiliates...................... 83,203 29,304 16,476
Professional services to
non-affiliates.................. 357,142 96,681 46,790
General and administrative
expenses to Affiliates.......... 330,651 115,468 42,904
General and administrative
expenses to non-affiliates...... 811,952 241,501 77,389
Advisor asset management fee...... 965,108 843,000 238,108
Property operating expenses to
Affiliates...................... 2,779,053 1,120,429 229,307
Property operating expenses to
non-affiliates.................. 18,238,307 7,742,595 1,643,867
Mortgage interest to Affiliates... 55,154 86,455 64,165
Mortgage interest to
non-affiliates.................. 13,366,445 5,568,109 533,320
Depreciation...................... 11,496,515 4,556,445 939,144
Amortization...................... 166,635 124,884 17,367
Acquisition cost expenses to
Affiliates...................... 236,380 194,187 -
Acquisition cost expenses to
non-affiliates.................. 201,403 55,306 26,676
------------- ------------ ------------
49,087,948 20,774,364 3,875,513
------------- ------------ ------------
Income before minority
interest in earnings.......... $ 24,214,330 8,647,221 2,452,221
Minority interest in earnings..... (128,459) - -
------------- ------------ ------------
Net income...................... $ 24,085,871 - -
============= ============ ============
Basic net income per common share... $ .60 .57 .55
============= ============ ============
Diluted net income per common share. $ .60 .57 .55
============= ============ ============
See accompanying notes to consolidated financial statements.
-28-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997 and 1996
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
----------- ------------ -------------- ------------
Balance January 1, 1996... 19,996 16,835,183 (240,113) 16,615,066
Net income................ - - 2,452,221 2,452,221
Distributions declared
($.82 per weighted average
common stock shares
outstanding)............ - - (3,704,943) (3,704,943)
Proceeds from Offering
including DRP (net
of Offering costs of
$7,378,933)............. 61,038 53,707,177 - 53,768,215
Repurchases of Shares..... (34) (30,287) - (30,321)
----------- ------------ -------------- ------------
Balance December 31, 1996. 81,000 70,512,073 (1,492,835) 69,100,238
Net income................ - - 8,647,221 8,647,221
Distributions declared
($.86 per weighted average
common stock shares
outstanding)............ - - (13,127,597) (13,127,597)
Proceeds from Offering
including DRP (net
of Offering costs of
$17,841,611)............ 169,198 150,548,641 - 150,717,839
Repurchases of Shares..... (465) (420,369) - (420,834)
----------- ------------ -------------- ------------
Balance December 31, 1997. 249,733 220,640,345 (5,973,211) 214,916,867
Net income................ - - 24,085,871 24,085,871
Distributions declared
($.88 per weighted average
common stock shares
outstanding)............ - - (35,443,213) (35,443,213)
Proceeds from Offering
including DRP (net
of Offering costs of
$29,194,655 and
subscriptions receivable)
(Note 13)................ 275,668 261,946,748 - 262,222,416
Repurchases of Shares..... (1,456) (1,315,999) - (1,317,455)
----------- ------------ -------------- ------------
Balance December 31, 1998. $ 523,945 481,271,094 (17,330,553) 464,464,486
=========== ============ ============== =============
See accompanying notes to consolidated financial statements.
-29-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities: ---- ---- ----
Net income........................ $ 24,085,871 8,647,221 2,452,221
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation.................... 11,496,515 4,556,445 939,144
Amortization.................... 166,635 124,884 17,367
Minority interest in
earnings...................... (128,459) - -
Rental income under master
lease agreements.............. 1,981,774 410,361 437,678
Straight line rental income..... (2,120,951) (654,978) (119,225)
Allowance for doubtful accounts. 200,000 - -
Interest on unamortized
loan fees..................... 103,855 - -
Changes in assets and liabilities:
Accounts and rents receivable. (5,873,368) (2,356,909) (1,461,708)
Other assets.................. (848,935) (810,073) 62,295
Accounts payable.............. 98,201 (242,362) 283,038
Accrued interest payable...... 1,090,430 508,342 51,878
Accrued real estate taxes..... 7,352,502 4,260,843 2,396,709
Security deposits............. 806,661 506,590 193,286
Other liabilities............. 4,715,639 460,296 3,968
Due to Affiliates............. (304,900) 82,234 248,314
Unearned income............... (46,726) 430,945 24,744
Net cash provided by operating -------------- -------------- -------------
activities........................ 42,774,744 15,923,839 5,529,709
-------------- -------------- -------------
Cash flows from investing activities:
Restricted cash................... (13,539,398) (1,951,756) -
Additions to investment properties
net of related payables......... (2,514,122) (836,962) (136,819)
Purchase of investment properties. (329,018,618) (141,187,371) (68,717,979)
Deposit for tenant improvements... - - (122,043)
Construction in progress.......... (1,230,448) - -
Deposits on investment properties. 1,918,530 (3,018,530) -
Net cash used in investing -------------- -------------- -------------
activities........................ (344,384,056) (146,994,619) (68,976,841)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from offering............ 291,417,071 168,559,450 61,147,147
Repurchase of Shares.............. (1,317,455) (420,834) (30,321)
Payments of offering costs........ (28,881,991) (17,563,326) (7,305,153)
Loan proceeds..................... 166,352,000 43,926,176 25,670,000
Loan fees......................... (2,701,644) (638,819) (350,286)
See accompanying notes to consolidated financial statements.
-30-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Consolidated Statements of Cash Flows
(continued)
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Distributions paid................ $ (33,297,236) (11,899,431) (3,285,528)
Repayment of notes from Affiliate. - (8,000,000) (3,271,185)
Principal payments of debt........ (18,041,255) (238,584) (1,374,738)
Payment of deferred organization
costs........................... (9,063) - -
Net cash provided by financing -------------- -------------- -------------
activities........................ 373,520,427 173,724,632 71,199,936
-------------- -------------- -------------
Net increase in cash and
cash equivalents.................. 71,911,115 42,653,852 7,752,804
Cash and cash equivalents at
beginning of year................. 51,145,587 8,491,735 738,931
-------------- -------------- -------------
Cash and cash equivalents at
end of year....................... $ 123,056,702 51,145,587 8,491,735
============== ============== =============
Supplemental schedule of noncash investing and financing activities:
1998 1997 1996
---- ---- ----
Purchase of investment properties.. $(368,364,949) (181,251,256) (77,421,408)
Assumption of mortgage debt...... 34,082,015 32,063,885 5,803,429
Note payable to Affiliate........ - 8,000,000 2,900,000
Minority interest................ 5,264,316 - -
-------------- -------------- -------------
$(329,018,618) (141,187,371) (68,717,979)
============== ============== =============
Distributions payable.............. $ 3,844,649 1,777,113 548,947
============== ============== =============
Cash paid for interest............. $ 12,435,024 5,146,222 545,607
============== ============== =============
See accompanying notes to consolidated financial statements.
-31-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997, and 1996
(1) Organization and Basis of Accounting
Inland Real Estate Corporation (the "Company") was formed on May 12, 1994. The
Company may acquire existing Neighborhood Retail Centers and Community Centers
located primarily within an approximate 400-mile radius of its headquarters in
Oak Brook, Illinois. The Company may also acquire single-user retail
properties in locations throughout the United States, certain of which may be
sale and leaseback transactions, net leased to creditworthy tenants. The
Company is also permitted to construct or develop properties, or render
services in connection with such development or construction, subject to the
Company's compliance with the rules governing real estate investment trusts
under the Internal Revenue Code of 1986, ("Code"), as amended. Inland Real
Estate Advisory Services, Inc. (the "Advisor"), an Affiliate of the Company, is
the advisor to the Company.
On October 14, 1994, the Company commenced an initial public offering, on a
best efforts basis, ("Initial Offering") of 5,000,000 shares of common stock
("Shares") at $10 per Share. As of July 24, 1996, the Company had received
subscriptions for a total of 5,000,000 Shares, thereby completing the Initial
Offering. On July 24, 1996, the Company commenced an offering of an additional
10,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Second
Offering"). As of July 10, 1997, the Company had received subscriptions for a
total of 10,000,000 Shares, thereby completing the Second Offering. On July
14, 1997, the Company commenced an offering of an additional 20,000,000 Shares
at $10.00 per Share, on a best efforts basis, (the "Third Offering"). As of
March 19, 1998, the Company had received subscriptions for a total of
20,000,000 Shares, thereby completing the Third Offering. On April 7, 1998,
the Company commenced an offering of an additional 27,000,000 Shares at $11.00
per Share, on a best efforts basis, (the "Fourth Offering"). As of December
31, 1998, the Company had received subscriptions for a total of 16,642,397
Shares in the Fourth Offering. In addition, as of December 31, 1998, the
Company has distributed 2,212,934 Shares through the Company's Distribution
Reinvestment Program ("DRP"). As of December 31, 1998, the Company has
repurchased a total of 198,375 Shares through the Share Repurchase Program. As
a result, as of December 31, 1998, Gross Offering Proceeds total $539,331,413,
net of Shares repurchased through the Share Repurchase Program.
-32-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
On September 28, 1998, the Company engaged Everen Securities, Inc. to advise
the Company on strategic alternatives designed to increase the stockholder
value. These alternative include, but are not limited to, evaluating whether:
(1) the Company should become internally advised and managed by acquiring the
Advisor and the Property Manager; (2) the Company should list its common stock
on an exchange or other trading system; and (3) the Company should seek to
merge with a third party that is already listed on an exchange or other trading
system. Everen Securities, Inc. is expected to complete its advisor engagement
by the third quarter 1999.
The Company qualified as a real estate investment trust ("REIT") under the Code
for federal income tax purposes commencing with the tax year ending December
31, 1995. Since the Company qualified for taxation as a REIT, the Company
generally will not be subject to federal income tax to the extent it
distributes its REIT taxable income to its stockholders. If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to
federal income tax on its taxable income at regular corporate tax 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 federal income and
excise taxes on its undistributed income.
The preparation of consolidated financial statements in conformity with
Generally Accepted Accounting Principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents and are carried at cost, which
approximates fair value.
Restricted cash includes amounts held in escrow for various properties. These
escrows were established for principal payments of debt, payment of real estate
tax and insurance on certain mortgaged properties, master lease, tenant
improvements, leasing commissions and guarantees of previous owners
obligations.
-33-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
Deposits and other assets represent deposits made to third parties for
financing in progress and potential acquisitions.
Statement of Financial Accounting Standards No. 121 requires the Company to
record an impairment loss on its property to be held for investment whenever
its carrying value cannot be fully recovered through estimated undiscounted
future cash flows from operations and sale of properties. The amount of the
impairment loss to be recognized would be the difference between the property's
carrying value and the property's estimated fair value. As of December 31,
1998, the Company does not believe any such impairment of its properties
exists.
Depreciation expense is computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 30 years for
the building and building improvements and 15 years for the site improvements.
Loan fees are amortized on a straight line basis over the life of the related
loans.
Deferred organization costs are amortized over a 60-month period.
Offering costs are offset against the Stockholders' equity accounts. Offering
costs consist principally of printing, selling and registration costs.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on a straight-line basis
and the cash rent due under the provisions of the lease agreements is recorded
as deferred rent receivable and is included as a component of accounts and
rents receivable in the accompanying consolidated balance sheets. The Company
recognizes percentage rents as they are received.
The Company believes that the interest rates associated with the mortgages
payable approximate the market interest rates for these types of debt
instruments, and as such, the carrying amount of the mortgages payable and
notes payable to Affiliates approximate their fair value.
-34-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
Certain reclassifications were made to the 1997 financial statements to conform
with the 1998 presentation.
The carrying amount of cash and cash equivalents, restricted cash, accounts and
rents receivable, accounts payable and other liabilities, accrued offering
costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest
payable to Affiliates, accrued real estate taxes, and distributions payable
approximate fair value because of the relatively short maturity of these
instruments.
In 1997, the Company adopted FASB No. 123, "Accounting for Stock Based
Compensation". As allowed by FASB No. 123, the Company plans to continue to
use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock options. This accounting pronouncement
did not have a material effect on the financial position or results of
operations of the Company.
In 1998, the Company adopted FASB No. 128, Earnings per Share. This Statement
did not have a material effect on the Company's primary or diluted net income
per share.
In April 1998, the AICPA issued Statement of Position No. 98-5 "Reporting on
the Costs of Start-up Activities." This statement provides guidance on the
financial reporting of start-up activities and organization costs. It requires
that costs of start-up activities and organization costs be expensed when
incurred. Adoption of this statement is required for fiscal years beginning
after December 15, 1998, and the Company plans to adopt the statement effective
January 1, 1999, and report the impact as a cumulative effect of a change in
accounting principle. This statment will have no material impact.
The Company may enter into derivative financial instrument transactions in
order to mitigate its interest rate risk on a related financial instrument.
The Company has designated these derivative financial instruments as hedges and
applies deferral accounting, as the instrument to be hedged exposes the Company
to interest rate risk, and the derivative financial instrument reduces that
exposure. Gains and losses related to the derivative financial instrument are
deferred and amortized over the terms of the hedged instrument. If a
derivative terminates or is sold, the gain or loss is deferred and amortized
over the remaining life of the derivative. The Company has only entered into
derivative transactions that satisfy the aforementioned criteria.
-35-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
(2) Basis of Accounting
The consolidated financial statements include the accounts of the Company and
the limited liability company ("LLC") which owns the Joliet Commons Shopping
Center. The Company entered into an LLC with an unaffiliated third party (the
"Seller") for the purchase of Joliet Commons. The transaction was structured
such that the Company contributed approximately $52,000 for a 1% interest in an
LLC and the Seller contributed a property with a value of approximately
$19,733,000 and debt of approximately $14,569,000 to the LLC for a 99%
interest. Due to the Company's ability as managing member to directly control
the LLC, it is consolidated for financial reporting purposes.
(3) Transactions with Affiliates
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to each of the
Offerings. Such expenses include postage, data processing and marketing and
are reimbursed at cost. The collective costs to Affiliates incurred relating
to the Offerings were $1,489,541 and $1,047,694 as of December 31, 1998 and
1997, respectively, of which $0 and $24,374 were unpaid as of December 31, 1998
and 1997, respectively. In addition, an Affiliate of the Advisor serves as
Dealer Manager of each of the Offerings and is entitled to receive selling
commissions, a marketing contribution and a due diligence expense allowance fee
from the Company in connection with each of the Offerings. Such amounts
incurred were $49,619,425 and $23,124,939 as of December 31, 1998 and 1997,
respectively, of which $890,786 and $519,914 was unpaid as of December 31, 1998
and 1997, respectively. Approximately $42,235,726 and $19,581,000 of these
commissions had been passed through from the Affiliate to unaffiliated
soliciting broker/dealers as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, the Company had incurred $57,572,899 of organization
and offering costs to Affiliates and non-affiliates. Pursuant to the terms of
each of the Offerings, the Advisor is required to pay organizational and
offering expenses (excluding sales commissions, the marketing contribution and
the due diligence expense allowance fee) in excess of 5.5% of the gross
proceeds of the Offerings (the "Gross Offering Proceeds") or all organization
and offering expenses (including selling commissions) which together exceed 15%
of Gross Offering Proceeds. As of December 31, 1998, organizational and
offering costs expenses did not exceed the 5.5% and 15% limitations. The
Company anticipates that these costs will not exceed these limitations upon
payment of any remaining costs associated with the Fourth Offering.
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its Affiliates relating to the
administration of the Company. Such costs of $83,203, $86,171 and $262,233 are
included in professional services to Affiliates, general and administrative
expenses to Affiliates and acquisition costs expensed to Affiliates,
respectively for the year ended December 31, 1998.
-36-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to
the extent that the Advisor Asset Management Fee plus Other Operating Expenses
paid during the previous calendar year exceed 2% of the Company's Average
Invested Assets for the calendar year or 25% of the Company's Net Income for
that calendar year; and (ii) to the extent that Stockholders have not received
an annual Distribution equal to or greater than the 8% Current Return. The
Advisor Asset Management Fee plus other operating expenses paid during the
previous calendar year did not exceed 2% of the Company's Average Invested
Assets for the calendar year or 25% of the Company's Net Income for that
calendar year and Stockholder's received an annual Distribution greater than an
8% return. Accordingly, for the year ended December 31, 1998, the Company has
incurred $965,108 of Advisor Asset Management Fees, of which $32,925 remained
unpaid at December 31, 1998. The Advisor may receive an annual Advisor Asset
Management Fee of not more than 1% of the Average Invested Assets, paid
quarterly. The Company paid an Advisor Asset Management Fee which represented
.20%, .45% and 56% of the 1% of the Average Invested Assets for the years ended
December 31, 1998, 1997 and 1996, respectively.
An Affiliate of the Advisor is entitled to receive Property Management Fees for
management and leasing services. The Company incurred and paid Property
Management Fees of $2,779,053, $1,120,429 and $229,307 for the years ended
December 31, 1998, 1997 and 1996, respectively, all of which has been paid.
The Advisor and its Affiliates are entitled to reimbursement for salaries and
expense of employees of the Advisor and its Affiliates relating to selecting,
evaluating and acquiring of properties. Such amounts are included in building
and improvements for those costs relating to properties purchased. Such
amounts are included in acquisition cost expenses to Affiliates for costs
relating to properties not acquired.
(4) Stock Option Plan and Soliciting Dealer Warrant Plan
The Company adopted an amended and restated Independent Director Stock Option
Plan which granted each Independent Director an option to acquire 3,000 Shares
as of the date they become a Director and an additional 500 Shares on the date
of each annual stockholders' meeting commencing with the annual meeting in 1995
if the Independent Director is a member of the Board on such date. The options
for the initial 3,000 Shares granted shall be exercisable as follows: 1,000
Shares on the date of grant and 1,000 Shares on each of the first and second
anniversaries of the date of grant. The succeeding options are exercisable on
the second anniversary of the date of grant. As of December 31, 1998, options
for 1,000 Shares have been exercised for $9.05 per Share. For the years ended
December 31, 1998, 1997 and 1996, options to purchase 13,500, 12,500 and 7,500
shares of common stock at prices ranging from $9.05 to $10.45 per share were
outstanding during each of the respective periods.
-37-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
In addition to sales commissions, Soliciting Dealers may also receive one
Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer
during the offerings, subject to state and federal securities laws. The holder
of a Soliciting Dealer Warrant will be entitled to purchase one Share from the
Company at a price stated in the Offering during the period commencing with the
first date upon which the Soliciting Dealer Warrants are issued and ending upon
the exercise period. Notwithstanding the foregoing no Soliciting Dealer
Warrant will be exercisable until one year from the date of issuance. As of
December 31, 1998, 1,159,421 warrants had been issued. As of December 31,
1998, none of these warrants were exercised. These warrants are assumed to
have no value.
(5) Investment Properties
As part of several purchases, the Company receives rent under master lease
agreements on the spaces currently vacant for periods ranging from one to two
years or until the spaces are leased. GAAP requires that as these payments are
received, they be recorded as a reduction in the purchase price of the
properties rather than as rental income. The cumulative amount of such
payments was $2,962,829 and $981,055 as of December 31, 1998 and 1997,
respectively (Note 6).
Pro Forma Information (unaudited)
The Company acquired its investment properties at various times. The following
table sets forth certain summary unaudited pro forma operating data as if the
acquisitions had been consummated as of the beginning of the previous
respective period.
For the years ending
December 31,
1998 1997
---- ----
Rental income........................... $ 63,332,102 54,315,842
Additional rental income................ 21,603,337 19,312,169
Total revenues.......................... 90,422,448 75,343,248
Property operating expenses............. 27,096,436 25,327,075
Total depreciation...................... 14,643,015 13,021,126
Total expenses.......................... 59,789,811 52,607,842
Net income.............................. 30,632,637 22,735,406
The unaudited pro forma operating data are presented for comparative purposes
only and are not necessarily indicative of what the actual results of
operations would have been for each of the periods presented, nor does such
data purport to represent the results to be achieved in future periods.
-38-
INLAND REAL ESTATE CORPORATION
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
(6) Operating Leases
Master Lease Agreements
As part of the purchases of several of the properties, the Company will receive
rent under master lease agreements on spaces currently vacant for periods
ranging from one to two years or until the spaces are leased and tenants begin
paying rent. GAAP requires the Company to reduce the purchase price of the
properties as these payments are received, rather than record the payments as
rental income.
Minimum lease payments under operating leases to be received in the future,
excluding rental income under master lease agreements and assuming no expiring
leases are renewed are as follows:
Minimum Lease
Payments
-------------
1999...................................... $ 66,603,241
2000...................................... 61,500,117