-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WifW+MIMPUaHxkGHsEu3SDWq3Idq0Pwk7LjgM0auV+XCRC7uxUyV96vCozYF1xSU Yu3XjFpYfEgagtm2NsjU1w== 0000923284-98-000008.txt : 19980210 0000923284-98-000008.hdr.sgml : 19980210 ACCESSION NUMBER: 0000923284-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980209 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INLAND REAL ESTATE CORP CENTRAL INDEX KEY: 0000923284 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 363953261 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28382 FILM NUMBER: 98525127 BUSINESS ADDRESS: STREET 1: 2901 BUTTERFIELD RD CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7082188000 MAIL ADDRESS: STREET 1: 2901 BUTTERFIELD RD CITY: OAK BROOK STATE: IL ZIP: 60521 FORMER COMPANY: FORMER CONFORMED NAME: INLAND MONTHLY INCOME FUND III INC DATE OF NAME CHANGE: 19940518 10-K 1 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, 1997 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 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 February 3, 1998, the aggregate market value of the Shares of Common Stock held by non-affiliates of the registrant was approximately $271,891,000. As of February 3, 1998, there were 27,259,012 Shares of Common Stock outstanding. Documents Incorporated by Reference: The Prospectus of the Registrant dated July 14, 1997, and Supplement No. 7 to the Prospectus of the Registrant dated January 14, 1998, filed pursuant to Rule 424 under the Securities Act of 1933 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.................................................... 8 Item 3. Legal Proceedings............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders........... 10 Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 11 Item 6. Selected Financial Data....................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 15 Item 8. Financial Statements and Supplementary Data................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 47 Part III -------- Item 10. Directors and Executive Officers of the Registrant............ 47 Item 11. Executive Compensation........................................ 50 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 51 Item 13. Certain Relationships and Related Transactions................ 51 Part IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................. 52 SIGNATURES............................................................. 53 -2- PART I Item 1. Business The Company Inland Real Estate Corporation, formerly known as Inland Monthly Income Fund III, Inc., (the "Company") was formed on May 12, 1994. On October 14, 1994, the Company commenced an initial public offering, on a best effort basis, ("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 has 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 December 31, 1997, the Company had received subscriptions for a total of 9,326,186 Shares from the Third Offering. In addition, the Company has distributed 699,954 Shares through the Company's Distribution Reinvestment Program ("DRP). As of December 31, 1997, the Company has repurchased 52,800 Shares through the Share Repurchase Program. As a result, Gross Offering Proceeds total $249,231,797, 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. The Company had no employees during 1997, 1996 and 1995. Description of Business The Company is in the business of acquiring Neighborhood Retail Centers located within an approximate 150-mile radius of its headquarters in Oak Brook, Illinois. The Company may also acquire single-user retail properties in locations throughout the United States. It is the Company's intention, whenever possible, to acquire properties free and clear of permanent mortgage indebtedness by paying the entire purchase price of each property in cash or shares of the Company's stock, although, the Company does, in certain instances, utilize borrowings to acquire properties. On properties purchased on an all cash basis, the Company has from time to time, incurred mortgage indebtedness on such properties, subsequent to acquisition. The proceeds from such loans are used to acquire additional properties. The Company may also incur indebtedness to finance improvements to the properties it acquires. 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. -3- As of December 31, 1997, the Company has acquired fee ownership of forty-four properties.
Gross Mortgages Leasable Payable Current Area Date Year at No. of Anchor Property (Sq. Ft.) Acq. Built Dec 31, 1997 Tenants Tenants* - ---------------------------- ---------- ------- -------- ------------ ---------- ---------- Single-User Retail Property - --------------------------- Walgreens, Decatur, IL 13,500 01/95 1988 $ 727,472 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 - 1 Dominick's Finer Foods Party City Store Oak Brook Terrace, IL 10,000 11/97 1985 - 1 Party City Eagle Country Market, Roselle, IL 42,283 11/97 1990 - 1 Eagle Foods 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 18 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 4,373,461 18 Walgreens Pharmacy 5,050 04/96 1995 Ace Hardware Prospect Heights, 28,080 06/96 1985 1,095,000 4 Walgreens Pharmacy Prospect Hts., IL Blockbuster Video -4- Gross Mortgages Leasable Payable Current Area Date Year at No. of Anchor Property (Sq. Ft.) Acq. Built Dec 31, 1997 Tenants Tenants* - ---------------------------- ---------- ------- -------- ------------ ---------- ---------- Neighborhood Retail Centers (cont.) - ----------------------------------- Montgomery-Sears, Montgomery, IL 34,600 06/96 1990 1,645,000 5 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 21 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 Lansing Square, Lansing, IL 233,508 12/96 1991 8,150,000 17 Sam's Club Baby Superstore Office Max Summit of Park Ridge Park Ridge, IL 33,252 12/96 1986 1,600,000 13 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 Maple Park Place, Bolingbrook, IL 215,662 01/97 1992 7,650,000 19 K-Mart Corporation Eagle Foods Aurora Commons, Aurora,IL 127,292 01/97 1988 9,392,602 24 Jewel/Osco Lincoln Park Place, Chicago, IL 10,678 01/97 1990 1,050,000 1 Lechters Housewares -5- Gross Mortgages Leasable Payable Current Area Date Year at No. of Anchor Property (Sq. Ft.) Acq. Built Dec 31, 1997 Tenants Tenants* - ---------------------------- ---------- ------- -------- ------------ ---------- ---------- Neighborhood Retail Centers (cont.) - ----------------------------------- Niles Shopping Center, Niles, IL 26,117 04/97 1982 1,617,500 5 Jennifer Convertibles Acel Cellular Wolf Camera & Video Mallard Crossing, Elk Grove Village, IL 82,949 05/97 1993 - 10 Eagle Foods Cobblers Crossing, Elgin, IL 102,643 05/97 1993 - 12 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 12 Kinko's U.S. Post Office Play It Again Sports Riversquare Shopping Center Naperville, IL 58,158 06/97 1988 - 18 Salon Suites Limited Harbour Contractors, Inc. Rivertree Court, Vernon Hills, IL 299,055 07/97 1988 15,700,000 41 Best Buy Plitt Theaters Shorecrest Plaza, Racine, WI 91,176 07/97 1977 - 14 Piggly Wiggly Grocery Wisconsin Health & Fitness Dominicks-Countryside Countryside, IL 62,344 12/97 1975 - 1 Dominick's Finer Foods Terramere Plaza, Arlington Heights, IL 40,965 12/97 1980 - 17 None Wilson Plaza, Batavia, IL 11,160 12/97 1986 - 7 White Hen Pantry Dimples Donuts Riverside Liquors Iroquois Center, Naperville, IL 140,981 12/97 1983 - 26 Total Beverage Sears Fashion Square, Skokie, IL 83,959 12/97 1984 6,800,000 13 Cost Plus Designer Shoe Outlet Naper West, Naperville, IL 165,311 12/97 1985 - 23 Douglas TV TJ Maxx * Anchor tenants include tenants leasing more than 10% of the gross leasable area of a property.
-6- The Company's real property investments are described on pages 75-98 of the Prospectus of the Company dated July 14, 1997 (the "Prospectus"), and in Supplement No. 7 to the Prospectus dated January 14, 1998 ("Supplement No. 7"), which is incorporated herein by reference. Reference is also made to Note (4) of the Notes to Financial Statements (Item 8 of this Annual Report) for additional descriptions of these investments of the Company. 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 set forth on a quarterly basis 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 150 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. The Company does not believe any risk exists due to a concentration of any single tenant at the centers. Currently the largest single tenant is Dominick's Finer Foods, which has five leases totaling 321,049 square feet, or approximately 9.5% of the total gross leasable area owned by the Company. Annualized base rental income of these five leases is projected to be $3,739,348 for the year ended December 31, 1998, or approximately 10.87% of the total annualized base rental income based on the current properties. The terms of transactions between the Company and Affiliates of the Company are set forth in Item 11 below and Note (2) to the Company's Financial Statements (Item 8 of this Annual Report) to which reference is hereby made for a description of such terms and transactions. The Company has reviewed its current computer systems and does not anticipate any future problems relating to the year 2000. Qualification as a Real Estate Investment Trust The Company qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, 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. -7- Item 2. Properties As of December 31, 1997, the properties owned by the Company included thirty-six Neighborhood Retail Centers and eight single-user retail properties. Each of the properties, with the exception of two are located in Illinois. The other two properties are located in Wisconsin. Tenants of the properties are responsible for the payment of some or all of the real estate taxes, insurance and common area maintenance. Reference is made to Item 1 above for a description of the properties. The following table lists the approximate physical occupancy levels for the Company's investment properties as of the end of each quarter during 1997 and 1996. N/A indicates the property was not owned by the Company at the end of the quarter. 1996 1997 ------------------------ ------------------------ at at at at at at at at Properties 03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31 ---------- ----- ----- ----- ----- ----- ----- ----- ----- Walgreens 100% 100% 100% 100% 100% 100% 100% 100% Decatur, Illinois Eagle Crest 100% 100% 100% 100% 97% 97% 97% 97% Naperville, Illinois Montgomery-Goodyear 100% 100% 100% 100% 77% 77% 77% 77% Montgomery, Illinois Hartford/Naperville Plaza 100% 100% 100% 100% 100% 100% 94% 100% Naperville, Illinois Nantucket Square 81% 81% 94% 85% 94% 94% 96% 96% Schaumburg, Illinois Antioch Plaza 49% 49% 49% 57% 59% 59% 68% 68%* Antioch, Illinois Mundelein Plaza 100% 100% 100% 100% 100% 96% 97% 100% Mundelein, IL Regency Point N/A 97% 97% 97% 100% 100% 97% 97% Lockport, IL Prospect Heights N/A 78% 100% 100% 83% 83% 83% 83%* Prospect Heights, IL Montgomery-Sears N/A 85% 85% 85% 85% 85% 85% 95%* Montgomery, IL Zany Brainy N/A N/A 100% 100% 100% 100% 100% 100% Wheaton, IL Salem Square N/A N/A 97% 97% 97% 97% 97% 97%* Countryside, IL Hawthorn Village N/A N/A 99% 98% 97% 98% 99% 99% Vernon Hills, IL Six Corners N/A N/A N/A 92% 94% 94% 94% 90%* Chicago, IL Spring Hill Fashion Ctr. N/A N/A N/A 95% 96% 96% 96% 100% West Dundee, IL Crestwood Plaza N/A N/A N/A 100% 100% 100% 100% 100% Crestwood, IL Park St. Claire N/A N/A N/A 100% 100% 100% 100% 100% Schaumburg, IL Lansing Square N/A N/A N/A 89% 90% 90% 90% 90% Lansing, IL -8- 1996 1997 ------------------------ ------------------------ at at at at at at at at Properties 03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31 ---------- ----- ----- ----- ----- ----- ----- ----- ----- Summit of Park Ridge N/A N/A N/A 81% 82% 81% 84% 83%* Park Ridge, IL Grand and Hunt Club N/A N/A N/A 100% 100% 100% 100% 100% Gurnee, IL Quarry Outlot N/A N/A N/A 100% 100% 100% 100% 100% Hodgkins, IL Maple Park Place N/A N/A N/A N/A 99% 97% 98% 98% Bolingbrook, IL Aurora Commons N/A N/A N/A N/A 99% 100% 100% 98%* Aurora, IL Lincoln Park Place N/A N/A N/A N/A 100% 100% 100% 60%* Chicago, IL Ameritech N/A N/A N/A N/A N/A 100% 100% 100% Joliet, IL Dominicks-Schaumburg N/A N/A N/A N/A N/A 100% 100% 100% Schaumburg, IL Dominicks-Highland Park N/A N/A N/A N/A N/A 100% 100% 100% Highland Park, IL Niles Shopping Center N/A N/A N/A N/A N/A 100% 87% 60%* Niles, IL Mallard Crossing N/A N/A N/A N/A N/A 95% 95% 95%* Elk Grove Village, IL Cobblers Crossing N/A N/A N/A N/A N/A 91% 89% 89%* Elgin, IL Calumet Square N/A N/A N/A N/A N/A 100% 100% 100% Calumet City, IL Sequoia Shopping Center N/A N/A N/A N/A N/A 96% 97% 93%* Milwaukee, WI Riversquare Shopping Ctr. N/A N/A N/A N/A N/A 100% 100% 95% Naperville, IL Rivertree Court N/A N/A N/A N/A N/A N/A 97% 99%* Vernon Hills, IL Shorecrest Plaza N/A N/A N/A N/A N/A N/A 96% 96%* Racine, WI Dominicks-Glendale Heights N/A N/A N/A N/A N/A N/A 100% 100% Glendale Heights, IL Party City Store Oak Brook Terrace, IL N/A N/A N/A N/A N/A N/A N/A 100% Eagle Country Market Roselle, IL N/A N/A N/A N/A N/A N/A N/A 100% Dominicks-Countryside Countryside, IL N/A N/A N/A N/A N/A N/A N/A 100% Terramere Plaza Arlington Heights, IL N/A N/A N/A N/A N/A N/A N/A 80% Wilson Plaza, Batavia, IL N/A N/A N/A N/A N/A N/A N/A 100% Iroquois Center Naperville, IL N/A N/A N/A N/A N/A N/A N/A 81% Fashion Square, Skokie, IL N/A N/A N/A N/A N/A N/A N/A 88% Naper West, Naperville, IL N/A N/A N/A N/A N/A N/A N/A 86% -9- * 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, 1997 for Montgomery-Sears, Mallard Crossing, Sequoia Shopping Center, Shorecrest Plaza and Rivertree Court, and 98% economic occupancy for Cobblers Crossing. The master lease agreements resulted in 100% economic occupancy through June 30, 1997 for Antioch Plaza and through August 1, 1997 for Salem Square, at which times these master leases expired. As part of the purchase of Summit of Park Ridge, a portion of the Seller's proceeds were escrowed for the monthly release of master lease payments. The master lease agreements along with credits for signed leases resulted in 90% economic occupancy for Summit of Park Ridge at December 31, 1997. As of November 1997, the Company began receiving master lease payments on spaces which were vacated at Lincoln Park Place and Niles Shopping Center. The master lease agreements result in 100% economic occupancy at December 31, 1997 for Lincoln Park Place and 73% economic occupancy for Niles Shopping Center. The Company continues to collect rental income on space vacated at Six Corners and Aurora Commons. This income results in 94% economic occupancy at December 31, 1997 for Six Corners and 100% economic occupancy for Aurora Commons. The master lease agreements are for periods ranging from one to two years or until the spaces are leased. The Company has received termination fees resulting in 100% economic occupancy for Prospect Heights through September 30, 1997. On behalf of the Company, the Advisor is currently exploring the purchase of additional Neighborhood Retail Centers and single-user retail properties from unaffiliated third parties. 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 1997. -10- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information As of December 31, 1997, there were 10,305 Stockholders of the Company. There is no public market for the Shares. The Company's Share Repurchase Program is available to the Stockholders. Reference is made to "Investment, Reinvestment and Share Repurchase Programs" on page 136 of the Prospectus, which is incorporated herein by reference. Distributions The Company declared distributions to Stockholders totaling $.86 per weighted average shares outstanding during 1997. Of this amount, $.64 qualifies as distributions taxable as ordinary income for 1997 and the remainder constitutes a return of capital for tax purposes. Sales of Unregistered Securities Options to purchase up to 12,500 Shares have been granted as of December 31, 1997 to the Independent Directors pursuant to the Independent Director Stock Option Plan. On October 24, 1996, 1,000 shares of common stock were sold to Roland Burris, a Director of the Company, for an aggregate of $9,050, pursuant to the exercise of options by Mr. Burris. Since the transaction did not involve any public offering or general solicitation and Mr. Burris had access to the Company's registration statement and knowledge and experience in financial and business matters to evaluate the transaction, the Company relied on the exemption from registration provided in Section 4(2) of the Securities Act in order to issue the shares to Mr. Burris. -11- Item 6. Selected Financial Data INLAND REAL ESTATE CORPORATION (a Maryland corporation) For the years ended December 31, 1997, 1996 and 1995 (not covered by the Independent Auditors' Report) 1997 1996 1995 ---- ---- ---- Total assets.................... $ 333,590,131 104,508,686 18,750,877 Mortgages payable............... $ 106,589,710 30,838,233 750,727 Total income.................... $ 29,421,585 6,327,734 1,180,422 Net income...................... $ 8,647,221 2,452,221 496,514 Net income per share (b)........ $ .57 .55 .53 Distributions declared.......... $ 13,127,597 3,704,943 736,627 Distributions per share (b)..... $ .86 .82 .78 Funds from Operations (b)(c).... $ 13,203,666 3,391,365 666,408 Funds available for distribution (c).............. $ 13,141,242 3,680,824 787,011 Cash flows provided by operating activities.................... $ 15,923,839 5,529,709 978,350 Cash flows used by investing activities.................... $ (146,994,619) (68,976,841) (6,577,843) Cash flows provided by financing activities.................... $ 173,724,632 71,199,936 6,327,490 Weighted average number of common shares outstanding............ 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. (b) The net income and distributions per share are based upon the weighted average number of common shares outstanding. The $.86 per share -12- INLAND REAL ESTATE CORPORATION (a Maryland corporation) For the years ended December 31, 1997, 1996 and 1995 (not covered by the Independent Auditors' Report) Distributions for the year ended December 31, 1997, represented 99.4% of the Company's Funds From Operations ("FFO") and 99.9% of funds available for distribution for that period. See Footnote (b) 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 will be taxable to Stockholders as ordinary dividend income. Distributions in excess of earnings and profits generally will be 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 will have the effect of deferring taxation of the amount of the Distribution until the sale of the Stockholder's Shares. For 1997, $3,388,364 (or 25.81% of the $13,127,597 Distribution paid for 1997 represented a return of capital. In order to maintain its qualification as a REIT, the Company must make annual distributions to Stockholders of at least 95% of its taxable income, or approximately $9,252,000 for 1997. 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) "FFO" means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property and amortization and other non-cash items. FFO and funds available for distribution are calculated as follows: Year ended December 31, 1997 1996 ---- ---- Net income........................... $ 8,647,221 2,452,221 Depreciation......................... 4,556,445 939,144 ------------ ------------ Funds from operations(1)........... 13,203,666 3,391,365 Normal amortizing principal payments of debt................... (67,300) (55,670) Deferred rent receivable (2)......... (654,978) (119,225) Acquisition cost expenses (3)........ 249,493 26,676 Rental income received under master lease agreements (4)........ 410,361 437,678 ------------ ------------ Funds available for distribution... $13,141,242 3,680,824 ============ ============ -13- INLAND REAL ESTATE CORPORATION (a Maryland corporation) For the years ended December 31, 1997, 1996 and 1995 (not covered by the Independent Auditors' Report) (1) FFO does not represent cash generated from operating activities calculated in accordance with generally accepted accounting principles 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 are estimated to be up to .5% of the Gross Offering Proceeds and are paid from the Proceeds of the Offering. (4) As part of several purchases, the Company will receive rent under master lease agreements on the spaces currently vacant for periods ranging from one year to eighteen months or until the spaces are leased. Generally accepted accounting principles require that as these payments are received, they be recorded as a reduction in the purchase price of the properties rather than as rental income. -14- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report on Form 10-K constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, limitations on the area in which the Company may acquire properties; risks associated with borrowings secured by the Company's properties; competition for tenants and customers; federal, state or local regulations; adverse changes in general economic or local conditions; competition for property acquisitions with third parties that have greater financial resources than the Company; inability of lessees to meet financial obligations; uninsured losses; risks of failing to qualify as a REIT; and potential conflicts of interest between the Company and its affiliates including the Advisor. Liquidity and Capital Resources As of July 24, 1996, the Company had received subscriptions for a total of 5,000,000 Shares, offered on a best efforts basis, at $10.00 per Share, thereby completing the Company's initial Offering. On July 24, 1996, the Company commenced an offering of an additional 10,000,000 shares, the Second Offering, at $10.00 per Share, on a best efforts basis. As of July 10, 1997, the Company had received subscriptions for a total of 10,000,000 Shares, thereby completing the Company's Second Offering. On July 14, 1997, the Company commenced an offering of an additional 20,000,000 Shares, the Third Offering, at $10.00 per Share, on a best efforts basis. As of December 31, 1997, the Company had received subscriptions for a total of 9,326,186 Shares from the Third Offering. In addition, as of December 31, 1997, the Company has distributed 699,954 Shares through the Company's Distribution Reinvestment Program. As of December 31, 1997, the Company has repurchased 52,800 Shares through the Company's Share Repurchase Program. As a result, Gross Offering Proceeds, total $249,231,797, net of Shares repurchased through the Share Repurchase Program. The Company's capital needs and resources are expected to undergo changes as a result of the completion of the Company's first follow-on public offering of Shares, the commencement of the second follow-on Offerings and the acquisition of properties. Operating cash flow is expected to increase as these additional properties are added to the portfolio. Distributions to Stockholders are determined by the Company's Board of Directors and are dependent upon a number of factors, including the amount of funds available for distribution, the Company's financial condition, capital expenditures, and the annual distribution required to maintain REIT status under the Code. -15- Cash and cash equivalents consists of cash and short-term investments. Cash and cash equivalents, at December 31, 1997 and December 31, 1996, were $51,145,587 and $8,491,735 respectively. The increase in cash and cash equivalents since December 31, 1996 is due to the additional Offering proceeds raised and additional loan proceeds from financing secured by the Company's properties. Partially offsetting the increase in cash and cash equivalents was the purchase of additional properties since December 31, 1996 and the payment of Offering Costs relating to the Second and Third Offerings. The Company intends to use cash and cash equivalents to purchase additional properties, to pay distributions and to pay Offering Costs. As of December 31, 1997, the Company had acquired forty-four 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. Commencing with the fourth quarter of 1996, the Company increased the monthly distributions from 8.0% to 8.3% per annum on weighted average shares. Beginning March 1, 1997, the Company increased the monthly distribution paid to 8.5% per annum on weighted average shares. Beginning August 1, 1997, the Company increased the monthly distribution paid to 8.7% per annum on weighted average shares. Distributions declared for the year ended December 31, 1997 were $13,127,597, of which $3,388,364 represents a return of capital for federal income tax purposes. Management of the Company monitors the various qualification tests the Company 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. Management of the Company also determines, on a quarterly basis, that the Gross Income, Asset and Distribution Tests as described in the section of the Prospectus entitled "Federal Income Tax Considerations--Taxation of the Company--REIT Qualification Tests" are met. On an ongoing basis, as due diligence is performed by management of both the Company and the Advisor on potential real estate purchases or temporary investment of uninvested capital, management of both entities determines that the income from the new asset will qualify for REIT purposes. For the year ended December 31, 1997, the Company qualified as a REIT. Cash Flows From Operating Activities Net cash provided by operating activities increased from $978,350 for the year ended December 31, 1995 to $5,529,709 for the year ended December 31, 1996 to $15,923,839 for the year ended December 31, 1997. These increases are due primarily to the purchase of additional properties. As of December 31, 1997 the Company had acquired forty-four properties, as compared to twenty-one properties as of December 31, 1996, and six properties as of December 31, 1995. -16- Cash Flows From Investing Activities Cash flows used in investing activities were utilized primarily for the purchase of and additions to properties. In addition, the Company made deposits totaling $3,018,530 for two centers to be purchased in 1998. Cash Flows From Financing Activities For the year ended December 31, 1997, the Company generated $173,724,632 of cash flows from financing activities as compared to $71,199,936 of cash flows generated from financing activities for the year ended December 31, 1996 and $6,327,490 for the year ended December 31, 1995. These increases are due primarily to the increase in proceeds raised from the Offering of $168,559,450 for the year ended December 31, 1997, as compared to $61,147,146 of Offering proceeds raised for the year ended December 31, 1996 and $19,803,163 of Offering proceeds raised for the year ended December 31, 1995. These increases are also due to $43,926,176 in financing placed on fifteen of the Company's properties for the year ended December 31, 1997, as compared to $25,670,000 in financing placed on twelve of the Company's properties for the year ended December 31, 1996. These increases are partially offset by an increase in the cash used for the payment of Offering costs for the years ended December 31, 1997 and 1996. These increases are also partially offset by an increase in the amount of distributions paid for the year ended December 31, 1997 of $11,899,431 as compared to the distributions paid for the year ended December 31, 1996 of $3,285,528 and distributions paid for the year ended December 31 ,1995 of $607,095. In December 1997, the Company committed to additional financing secured by Cobbler Crossing and Shorecrest Shopping Center properties totaling $8,454,500 from an unaffiliated lender. The funding of these loans is to occur in early 1998. The mortgage loan secured by Cobbler Crossing will have a term of seven years and, prior to maturity date, will require payments of interest only, fixed at 7.00%. The mortgage loan secured by Shorecrest Shopping Center will have a term of five years and, prior to maturity date, will require payments of interest only, fixed at 7.10%. 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, 1997, organizational and offering costs did not exceed either of these limitations. -17- Results of Operations As of December 31, 1997, subscriptions for a total of 25,026,140 Shares had been received from the public resulting in $249,231,797 in Gross Offering Proceeds, which includes the Advisor's capital contribution of $200,000 and Shares purchased through the DRP. At December 31, 1997, the Company owned thirty-six Neighborhood Retail Centers and eight single-user retail properties. Total income for the years ended December 31, 1997, 1996 and 1995 was $29,421,585, $6,327,734 and $1,180,422 respectively. These increases were due to the purchase of additional properties in 1997 and 1996. As of December 31, 1997, the Company had acquired forty-four properties, as compared to twenty-one properties as of December 31, 1996 and six properties as of December 31, 1995. The purchase of additional properties also resulted in increases in property operating expenses to Affiliates and non-affiliates and depreciation expense. The decrease in mortgage interest to Affiliates for the years ended December 31, 1996, as compared to the years ended December 31, 1995, is due to the payoff of the acquisition financing totaling $2,900,000. The increase in mortgage interest to non-affiliates for the year ended December 31, 1996, as compared to the year ended December 31, 1995, is due in part to the mortgage which was assumed as part of the purchase of Regency Point as well as financing placed on previously acquired properties. 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 financing placed on previously acquired centers as well as mortgages assumed as part of the purchases of Regency Point, Aurora Commons, Rivertree Court and Fashion Square. The mortgages payable totaled $106,589,710 for the year ended December 31, 1997 as compared to $30,838,233 for the year ended December 31, 1996. The Company continues to have a mortgage payable to an Affiliate collateralized by the Walgreens, Decatur property. 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, 1997, as compared to the year ended December 31, 1996 and 1995, is due to the management of an increased number of real estate assets. 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. -18- Subsequent Events As of February 3, 1998, subscriptions for a total of 27,259,012 Shares were received, bringing total gross offering proceeds to approximately $272,544,000. In January 1998, the Company paid a distribution of $1,777,113 to the Stockholders. On January 2, 1998, the Company purchased the Woodfield Plaza Shopping Center from an unaffiliated third party for approximately $19,200,000. The property is located in Schaumburg, Illinois and contains approximately 177,418 square feet of leasable space. Its anchor tenants include Kohl's, Barnes and Noble and Linens N' Things. On January 8, 1998, the Company purchased The Shops of Coopers Grove from an unaffiliated third party for approximately $5,700,000. The property is located in Country Club Hills, Illinois and contains approximately 72,518 square feet of leasable space. Its anchor tenant is Eagle Food Center. On January 15, 1998, the Company made a $600,000 paydown of the bond secured by the Fashion Square property. On January 22, 1998, the Company purchased the West Chicago Dominick's property from an unaffiliated third party for approximately $6,300,000. The property is located in West Chicago, Illinois and contains approximately 77,000 square feet of leasable space. It's sole tenant is Dominick's. In January 1998, the Company obtained additional financing secured by the Dominick's Glendale Heights and Riversquare Shopping Center properties totaling $7,150,000 from an unaffiliated lender. Loan fees total $53,625 in connection with these mortgage loans. The mortgage loans have a term of seven years and, prior to maturity date, requires payment of interest only. Interest is at 7.0% on the Dominick's Glendale Heights loan and 7.15% on the Riversquare Shopping Center loan. On January 30, 1998, the Company purchased Maple and Belmont property from an unaffiliated third party for approximately $3,165,000. The property is located in Downers Grove, Illinois and contains approximately 31,298 square feet of leasable space. Anchor tenants include J.C. Licht, Goodyear Tire and Copy Center. On February 2, 1998, the Company purchased Orland Park Retail from an unaffiliated third party for approximately $1,250,000. The property is located in Orland Park, Illinois and contains approximately 8,500 square feet of leasable space. Anchor tenants include Video Update and All Cleaners. At the completion of the Third Offering, the Company contemplates an additional offering (the "Fourth Offering") for 25,000,000 shares at $11.00 per Share, on a best efforts basis, plus 2,000,000 Shares to be issued through the Company's DRP at $10.45 per Share. The Company filed a registration statement with Securities and Exchange Commission on January 30, 1998. On behalf of the Company, the Advisor is currently exploring the purchase of additional shopping centers from unaffiliated third parties. -19- Impact of Accounting Principles Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" was issued in 1997. The Statement is effective for fiscal years beginning after December 31, 1997. This Statement requires the Company to report financial and descriptive information about its reportable operating segments. Inflation For the Company's Neighborhood Retail 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, like the Walgreens/Decatur property, 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 does not engage in any hedge transactions or derivative financial instruments. -20- Item 8. Financial Statements and Supplementary Data INLAND REAL ESTATE CORPORATION (a Maryland corporation) Index ----- Page ---- Independent Auditors' Report............................................. 22 Financial Statements: Balance Sheets, December 31, 1997 and 1996............................. 23 Statements of Operations for the years ended December 31, 1997, 1996 and 1995..................................... 25 Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995..................................... 26 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995..................................... 27 Notes to Financial Statements.......................................... 29 Real Estate and Accumulated Depreciation (Schedule III).................. 43 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. -21- INDEPENDENT AUDITORS' REPORT The Board of Directors Inland Real Estate Corporation: We have audited the financial statements of Inland Real Estate Corporation (the Company) as listed in the accompanying index. In connection with the audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inland Real Estate Corporation as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Chicago, Illinois January 23, 1998 -22- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Balance Sheets December 31, 1997 and 1996 Assets ------ 1997 1996 ---- ---- Investment properties (Notes 1 and 4): Land............................................ $ 75,801,319 24,705,743 Building and improvements....................... 200,509,519 69,927,238 ------------- ------------- 276,310,838 94,632,981 Less accumulated depreciation................... 5,665,483 1,109,038 ------------- ------------- Net investment properties....................... 270,645,355 93,523,943 ------------- ------------- Cash and cash equivalents including amount held by property manager (Note 1)............... 51,145,587 8,491,735 Restricted cash (Note 1).......................... 2,073,799 122,043 Accounts and rents receivable (Note 5)............ 4,926,643 1,914,756 Deposits and other assets (Note 7)................ 3,924,431 95,828 Deferred organization costs (net of accumulated amortization of $10,985 and $5,492 at December 31, 1997 and 1996, respectively) (Note 1)........................................ 16,477 21,970 Loan fees (net of accumulated amortization of $131,266 and $11,875 at December 31, 1997 and 1996, respectively,) (Note 1)............... 857,839 338,411 ------------- ------------- Total assets.................................. $ 333,590,131 104,508,686 ============= ============= See accompanying notes to financial statements. -23- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Balance Sheets (continued) December 31, 1997 and 1996 Liabilities and Stockholders' Equity ------------------------------------ 1997 1996 Liabilities: ---- ---- Accounts payable................................ $ 47,550 289,912 Accrued offering costs to Affiliates (Note 2)... 544,288 298,341 Accrued offering costs to non-affiliates........ 36,574 4,236 Accrued interest payable to Affiliates.......... 4,641 4,718 Accrued interest payable to non-affiliates...... 560,821 52,402 Accrued real estate taxes....................... 7,031,732 2,770,889 Distributions payable (Note 9).................. 1,777,113 548,947 Security deposits............................... 754,359 247,769 Mortgages payable (Note 6)...................... 106,589,710 30,838,233 Unearned income................................. 495,535 64,590 Other liabilities............................... 493,116 32,820 Due to Affiliates (Note 2)...................... 337,825 255,591 ------------- ------------- Total liabilities............................. 118,673,264 35,408,448 ------------- ------------- Stockholders' Equity (Notes 1 and 2): Common stock, $.01 par value, 106,000,000 Shares authorized; 25,026,140 and 24,973,340 issued and outstanding at December 31, 1997 and 8,144,116 and 8,137,766 Shares issued and outstanding at December 31, 1996, respectively............ 249,470 81,000 Additional paid-in capital (net of offering costs of $28,341,719 and $10,500,108 at December 31, 1997 and 1996, respectively, of which $24,172,634 and $8,096,213 was paid to Affiliates, respectively).................. 220,640,608 70,512,073 Accumulated distributions in excess of net income................................. (5,973,211) (1,492,835) ------------- ------------- Total stockholders' equity.................... 214,916,867 69,100,238 ------------- ------------- Commitments and contingencies (Note 8)............ Total liabilities and stockholders' equity........ $333,590,131 104,508,686 ============= ============= See accompanying notes to financial statements. -24- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Statements of Operations For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 Income: ---- ---- ---- Rental income (Notes 1 and 5)..... $21,112,365 4,467,903 869,485 Additional rental income.......... 6,592,983 1,336,809 228,024 Interest income................... 1,615,520 438,188 82,913 Other income...................... 100,717 84,834 - ------------ ------------ ------------ 29,421,585 6,327,734 1,180,422 ------------ ------------ ------------ Expenses: Professional services to Affiliates...................... 29,304 16,476 7,277 Professional services to non-affiliates.................. 96,681 46,790 1,615 General and administrative expenses to Affiliates.......... 115,468 42,904 - General and administrative expenses to non-affiliates...... 241,501 77,389 13,880 Advisor asset management fee...... 843,000 238,108 - Property operating expenses to Affiliates...................... 1,120,429 229,307 46,791 Property operating expenses to non-affiliates.................. 7,742,595 1,643,867 279,930 Mortgage interest to Affiliates... 86,455 64,165 146,821 Mortgage interest to non-affiliates.................. 5,568,109 533,320 17,340 Depreciation...................... 4,556,445 939,144 169,894 Amortization...................... 124,884 17,367 - Acquisition cost expenses to Affiliates...................... 194,187 - - Acquisition cost expenses to non-affiliates.................. 55,306 26,676 360 ------------ ------------ ------------ 20,774,364 3,875,513 683,908 ------------ ------------ ------------ Net income...................... $ 8,647,221 2,452,221 496,514 ============ ============ ============ Net income per weighted average common stock shares outstanding (15,225,983, 4,494,620 and 943,156 for the years ended December 31, 1997, 1996 and 1995, respectively) $ .57 .55 .53 ============ ============ ============ See accompanying notes to financial statements. -25- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Statements of Stockholders' Equity For the years ended December 31, 1997, 1996 and 1995 Accumulated Additional Distributions Common Paid-in in excess of Stock Capital net income Total ----------- ------------ ------------ ------------ Balance January 1, 1995... $ 200 199,800 - 200,000 Net income................ - - 496,514 496,514 Distributions declared ($.78 per weighted average common stock shares outstanding)............ - - (736,627) (736,627) Proceeds from Offering (net of Offering costs of $3,121,175)............. 19,826 16,662,162 - 16,681,988 Repurchases of Shares..... (30) (26,779) - (26,809) ----------- ------------ ------------ ------------ Balance December 31, 1995. 19,996 16,835,183 (240,113) 16,615,066 Net income................ - - 2,452,221 2,452,221 Distributions declared ($.82 per weighted average common stock shares outstanding)............ - - (3,704,943) (3,704,943) Proceeds from Offering (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 (net of Offering costs of $17,841,611)............ 168,935 150,548,904 - 150,717,839 Repurchases of Shares..... (465) (420,369) - (420,834) ----------- ------------ ------------ ------------- Balance December 31, 1997. $ 249,470 220,640,608 (5,973,211) 214,916,867 =========== ============ ============ ============= See accompanying notes to financial statements. -26- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Statements of Cash Flows For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 Cash flows from operating activities: ---- ---- ---- Net income........................ $ 8,647,221 2,452,221 496,514 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................... 4,556,445 939,144 169,894 Amortization.................... 124,884 17,367 - Rental income under master lease agreements.............. 410,361 437,678 133,016 Straight line rental income..... (654,978) (119,225) (12,413) Changes in assets and liabilities: Accounts and rents receivable. (2,356,909) (1,461,708) (321,410) Other assets.................. (810,073) 62,295 (4,006) Accounts payable.............. (242,362) 283,038 6,875 Accrued interest payable...... 508,342 51,878 5,242 Accrued real estate taxes..... 4,260,843 2,396,709 374,180 Security deposits............. 506,590 193,286 54,483 Other liabilities............. 460,296 3,968 28,852 Due to Affiliates............. 82,234 248,314 7,277 Unearned income............... 430,945 24,744 39,846 Net cash provided by operating -------------- ------------- ------------- activities........................ 15,923,839 5,529,709 978,350 -------------- ------------- ------------- Cash flows from investing activities: Restricted cash................... (1,951,756) - - Additions to investment properties (836,962) (136,819) (51,135) Purchase of investment properties. (141,187,371) (68,717,979) (6,376,708) Deposit for tenant improvements... - (122,043) (150,000) Deposits on investment properties. (3,018,530) - - Net cash used in investing -------------- ------------- ------------- activities........................ (146,994,619) (68,976,841) (6,577,843) -------------- ------------- ------------- Cash flows from financing activities: Repayment of loan from Advisor.... - - (193,300) Proceeds from offering............ 168,559,450 61,147,147 19,803,163 Repurchase of Shares.............. (420,834) (30,321) (26,809) Payments of offering costs........ (17,563,326) (7,305,153) (2,514,129) Loan proceeds..................... 43,926,176 25,670,000 - Loan fees......................... (638,819) (350,286) - See accompanying notes to financial statements. -27- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Statements of Cash Flows (continued) For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Distributions paid................ $ (11,899,431) (3,285,528) (607,095) Repayment of notes from Affiliate. (8,000,000) (3,271,185) - Principal payments of debt........ (238,584) (1,374,738) (10,106,878) Payment of deferred organization costs........................... - - (27,462) Net cash provided by financing -------------- ------------- ------------- activities........................ 173,724,632 71,199,936 6,327,490 -------------- ------------- ------------- Net increase in cash and cash equivalents.................. 42,653,852 7,752,804 727,997 Cash and cash equivalents at beginning of year................. 8,491,735 738,931 10,934 -------------- ------------- ------------- Cash and cash equivalents at end of year....................... $ 51,145,587 8,491,735 738,931 ============== ============= ============= Supplemental schedule of noncash investing and financing activities: 1997 1996 1995 ---- ---- ---- Purchase of investment properties.. $(181,251,256) (77,421,408) (17,594,313) Assumption of mortgage debt...... 32,063,885 5,803,429 4,595,178 Note payable to Affiliate........ 8,000,000 2,900,000 6,622,427 -------------- ------------- ------------- $(141,187,371) (68,717,979) (6,376,708) ============== ============= ============ Distributions payable.............. $ 1,777,113 548,947 129,532 ============== ============= ============ Cash paid for interest............. $ 5,146,222 545,607 158,919 ============== ============= ============ See accompanying notes to financial statements. -28- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements For the years ended December 31, 1997, 1996, and 1995 (1) Organization and Basis of Accounting Inland Real Estate Corporation (the "Company") was formed on May 12, 1994 to invest in neighborhood retail centers located within an approximate 150-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. 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 $10.00 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 December 31, 1997, the Company had received subscriptions for a total of 9,326,186 Shares from the Third Offering. In addition, as of December 31, 1997, the Company has distributed 699,954 shares through the Company's Distribution Reinvestment Program ("DRP"). As of December 31, 1997, the Company has repurchased a total of 52,800 Shares through the Share Repurchase Program. As a result, as of December 31, 1997, Gross Offering Proceeds total $249,231,797, net of Shares repurchased through the Share Repurchase Program. The Company qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, 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 financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. -29- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) 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 at December 31, 1997 includes $861,716 held in escrow for the principal payments payable on the Aurora Commons mortgage and $87,496 held in escrow by the mortgagee for the payment of real estate taxes at Aurora Commons. Restricted cash at December 31, 1997 also includes amounts held as vacancy escrows on Cobbler Crossing, Mallard Crossing and Shorecrest Shopping Center. The monthly amounts drawn for rent under the master lease escrows decrease the basis of the respective properties. Restricted cash at December 31, 1997 also includes $325,000 held in escrow for tenant improvement costs at Fashion Square and $600,000 held at Cole Taylor bank to redeem a portion of the bonds at Fashion Square (Note 9). 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, 1997, the Company does not believe any such impairments 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. The Company believes that the interest rates associated with the mortgages payable and notes payable to Affiliates 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. -30- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) 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 1997, the FASB issued Statement No. 128, Earnings per Share, which the company will adopt in fiscal year 1998. This Statement will have no material effect on the Company's primary or diluted net income per share. (2) 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 $1,047,694 and $692,248 as of December 31, 1997 and 1996, respectively, of which $24,374 and $27,976 were unpaid as of December 31, 1997 and 1996, 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 $23,124,939 and $7,403,965 for the years ended December 31, 1997 and 1996, respectively, of which $519,914 and $270,365 was unpaid as of December 31, 1997 and 1996, respectively. As of December 31, 1997, approximately $19,581,000 of these commissions had been passed through from the Affiliate to unaffiliated soliciting broker/dealers. -31- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) As of December 31, 1997, the Company had incurred $28,369,181 of total 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 the completion of the initial and second Offerings, organizational and offering did not exceed the 5.5% or 15% limitations. As of December 31, 1997, organizational and offering costs of the Third Offering did not exceed the 5.5% and 15% limitations. The Company anticipates that these costs will not exceed either of these limitations upon completion of the offerings, however, any excess amounts will be reimbursed by the Advisor. 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 are included in professional services to Affiliates, general and administrative expenses to Affiliates and acquisition costs expensed. As of December 31, 1997, the Advisor has contributed $200,000 to the capital of the Company for which it received 20,000 Shares. 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, 1997, the Company has incurred $843,000 of Advisor Asset Management Fees, of which $320,000 remained unpaid at December 31, 1997. 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 $1,120,429 and $229,307 for the years ended December 31, 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. -32- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (3) Stock Option Plan and Soliciting Dealer Warrant Plan The Company adopted an 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, 1996, options for 1,000 Shares have been exercised for $9.05 per Share. In addition to sales commissions, Soliciting Dealers will 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 of $12 during the period commencing with the first date upon which the Soliciting Dealer Warrants are issued and ending upon the first to occur of: (i) October 14, 1999 or (ii) the closing date of a secondary offering of the Shares by the Company. Notwithstanding the foregoing no Soliciting Dealer Warrant will be exercisable until one year from the date of issuance. As of December 31, 1997, none of these warrants were exercised. -33- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (4) Investment Properties Gross amount at which carried
Initial Cost (A) at end of period -------------------------- Net ---------------------------------------- Buildings Adjustments Land Buildings Date and to and and Acq Land improvements Basis (B) improvements improvements Total ------- ------------ ------------- ------------ ------------- ------------- ------------ Single-user Retail - ------------------ Walgreens/Decatur Decatur, IL............. 01/95 $ 78,330 1,130,723 - 78,330 1,130,723 1,209,053 Zany Brainy Wheaton, IL............. 07/96 838,000 1,626,033 664 838,000 1,626,697 2,464,697 Ameritech Joliet, IL.............. 05/97 170,000 883,293 2,544 170,000 885,837 1,055,837 Dominicks-Schaumburg Schaumburg, IL.......... 05/97 2,294,437 8,388,263 2,679 2,294,437 8,390,942 10,685,379 Dominicks-Highland Park Highland Park, IL....... 06/97 3,200,000 9,593,565 2,200 3,200,000 9,595,765 12,795,765 Dominicks-Glendale Heights Glendale Heights, IL.... 09/97 1,265,000 6,934,230 9,194 1,265,000 6,943,424 8,208,424 Party City Oakbrook Terrace, IL.... 11/97 750,000 1,230,030 - 750,000 1,230,030 1,980,030 Eagle Country Market Roselle, IL............. 11/97 966,667 1,935,350 - 966,667 1,935,350 2,902,017 Neighborhood Retail Centers - --------------------------- Eagle Crest Shopping Center Naperville, IL.......... 03/95 1,878,618 2,938,352 115,828 1,878,618 3,054,180 4,932,798 Montgomery-Goodyear Montgomery, IL.......... 09/95 315,000 834,659 (11,158) 315,000 823,501 1,138,501 Hartford/Naperville Plaza Naperville, IL.......... 09/95 990,000 3,427,961 13,002 990,000 3,440,963 4,430,963 Nantucket Square Schaumburg, IL.......... 09/95 1,908,000 2,349,918 (69,881) 1,908,000 2,280,037 4,188,037 Antioch Plaza Antioch, IL............. 12/95 268,000 1,360,445 (120,629) 268,000 1,239,816 1,507,816 Mundelein Plaza Mundelein, IL........... 03/96 1,695,000 3,965,560 (53,429) 1,695,000 3,912,131 5,607,131 ------------ ------------- ----------- ------------ ------------ ------------ Subtotal $16,617,052 46,598,382 (108,986) 16,617,052 46,489,396 63,106,448 -34- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (4) Investment Properties (continued) Gross amount at which carried Initial Cost (A) at end of period -------------------------- Net ---------------------------------------- Buildings Adjustments Land Buildings Date and to and and Acq Land improvements Basis (B) improvements improvements Total ------- ------------ ------------- ------------ ------------- ------------- ------------ Subtotal $16,617,052 46,598,382 (108,986) 16,617,052 46,489,396 63,106,448 Regency Point Lockport, IL............ 04/96 1,000,000 4,720,800 (19,377) 1,000,000 4,701,423 5,701,423 Prospect Heights Prospect Heights, IL.... 06/96 494,300 1,683,755 (9,724) 494,300 1,674,031 2,168,331 Montgomery-Sears Montgomery, IL.......... 06/96 768,000 2,714,173 (48,504) 768,000 2,665,669 3,433,669 Salem Square Countryside, IL......... 08/96 1,735,000 4,449,217 (16,960) 1,735,000 4,432,257 6,167,257 Hawthorn Village Vernon Hills, IL........ 08/96 2,619,500 5,887,640 46,891 2,619,500 5,934,531 8,554,031 Six Corners Chicago, IL............. 10/96 1,440,000 4,538,152 3,638 1,440,000 4,541,790 5,981,790 Spring Hill Fashion Corner West Dundee, IL......... 11/96 1,794,000 7,415,396 3,955 1,794,000 7,419,351 9,213,351 Crestwood Plaza Crestwood, IL........... 12/96 325,577 1,483,183 4,750 325,577 1,487,933 1,813,510 Park St. Claire Schaumburg, IL.......... 12/96 319,578 986,920 226,674 319,578 1,213,594 1,533,172 Lansing Square Lansing, IL............. 12/96 4,075,000 12,179,383 18,087 4,075,000 12,197,470 16,272,470 Summit of Park Ridge Park Ridge, IL.......... 12/96 672,000 2,497,950 5,886 672,000 2,503,836 3,175,836 Grand and Hunt Club Gurnee, IL.............. 12/96 969,840 2,622,575 (52,811) 969,840 2,569,764 3,539,604 Quarry Outlot Hodgkins, IL............ 12/96 522,000 1,278,431 8,872 522,000 1,287,303 1,809,303 Maple Park Place Bolingbrook, IL......... 01/97 3,665,909 11,669,428 10,603 3,665,909 11,680,031 15,345,940 Aurora Commons Aurora, IL.............. 01/97 3,220,000 8,318,661 3,901 3,220,000 8,322,562 11,542,562 ------------ ------------- ----------- ------------ ------------ ------------ Subtotal $40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697 -35- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (4) Investment Properties (continued) Gross amount at which carried Initial Cost (A) at end of period -------------------------- Net ---------------------------------------- Buildings Adjustments Land Buildings Date and to and and Acq Land improvements Basis (B) improvements improvements Total ------- ------------ ------------- ------------ ------------- ------------- ------------ Subtotal $40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697 Lincoln Park Place Chicago, IL............. 01/97 819,000 1,299,902 (11,788) 819,000 1,288,114 2,107,114 Niles Shopping Center Niles, IL............... 04/97 850,000 2,408,467 (22,157) 850,000 2,386,310 3,236,310 Mallard Crossing Elk Grove Village, IL... 05/97 1,778,667 6,331,943 (22,929) 1,778,667 6,309,014 8,087,681 Cobblers Crossing Elgin, IL............... 05/97 3,200,000 7,763,940 (67,400) 3,200,000 7,696,540 10,896,540 Calumet Square Calumet City, IL........ 06/97 527,000 1,537,316 6,664 527,000 1,543,980 2,070,980 Sequoia Shopping Center Milwaukee, WI........... 06/97 1,216,914 1,802,336 (8,060) 1,216,914 1,794,276 3,011,190 Riversquare Shopping Center Naperville, IL.......... 06/97 2,853,226 3,124,732 103,872 2,853,226 3,228,604 6,081,830 Rivertree Court Vernon Hills, IL........ 07/97 8,651,875 22,861,547 6,233 8,651,875 22,867,780 31,519,655 Shorecrest Plaza Racine, WI.............. 07/97 1,150,000 4,749,758 (17,469) 1,150,000 4,732,289 5,882,289 Dominicks-Countryside Countryside, IL......... 12/97 1,375,000 925,106 - 1,375,000 925,106 2,300,106 Terramere Plaza Arlington Heights, IL... 12/97 1,435,000 2,966,411 - 1,435,000 2,966,411 4,401,411 Wilson Plaza Batavia, IL............. 12/97 310,000 984,720 - 310,000 984,720 1,294,720 Iroquois Center Naperville, IL.......... 12/97 3,668,347 8,258,584 - 3,668,347 8,258,584 11,926,931 Fashion Square Skokie, IL.............. 12/97 2,393,534 6,822,071 - 2,393,534 6,822,071 9,215,605 Naper West Naperville, IL.......... 12/97 5,335,000 9,584,779 - 5,335,000 9,584,779 14,919,779 ------------ ------------- ----------- ------------ ------------ ------------ Total $75,801,319 200,465,658 43,861 75,801,319 200,509,519 276,310,838 =========== ============ =========== ============ ============ ============
-36- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) December 31, 1997 (4) Investment Properties (continued) (A) The initial cost to the Company, represents the original purchase price of the property, including amounts incurred subsequent to acquisition, which were contemplated at the time the property was acquired. (B) Adjustments to basis includes additions to investment properties and payments received under master lease agreements. As part of several purchases, the Company will receive rent under master lease agreements on the spaces currently vacant for periods ranging from one to two years or until the spaces are leased. Generally Accepted Accounting Principles ("GAAP") require 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 $981,055 and $570,694 as of December 31, 1997 and 1996, respectively (Note 5). Cost and accumulated depreciation of the above properties are summarized as follows: 1997 1996 Single User Retail Properties: ---- ---- Cost.................................... $ 41,301,202 3,673,086 Less accumulated depreciation........... 674,772 112,871 ------------- ------------ 40,626,430 3,560,215 Neighborhood Retail Centers: ------------- ------------ Cost.................................... 235,009,636 90,959,895 Less accumulated depreciation........... 4,990,711 996,167 ------------- ------------ 230,018,925 89,963,728 ------------- ------------ Total................................... $270,645,355 93,523,943 ============= ============ Pro Forma Information (unaudited) The Company acquired its investment properties at various times over the three year period ended December 31, 1997 as described in Note 4. 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, 1997 1996 ---- ---- Total revenues.......................... $ 43,073,222 38,856,382 Total depreciation...................... 6,947,224 6,693,622 Total expenses.......................... 30,975,575 27,294,953 Net income.............................. 12,097,647 11,561,429 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. -37- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (5) 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: Number of Minimum Lease Leases Payments Expiring ------------- ----------- 1998...................................... $ 30,852,420 66 1999...................................... 27,815,045 101 2000...................................... 24,678,197 73 2001...................................... 21,377,331 49 2002...................................... 18,920,519 55 Thereafter................................ 137,903,729 82 ------------- Total..................................... $261,547,241 ============= No assumptions were made regarding the releasing of expired leases. It is the opinion of the Company's management that the space will be released at market rates. Remaining lease terms range from one year to thirty two years. Pursuant to the lease agreements, tenants of the property are required to reimburse the Company for some or all of their pro rata share of the real estate taxes and operating expenses of the property. Such amounts are included in additional rental income. 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. The accompanying financial statements include increases of $654,978, $119,225 and $12,413 in 1997, 1996 and 1995, of rental income for the period of occupancy for which stepped rent increases apply and $786,616 and $131,638 in related accounts receivable as of December 31, 1997 and 1996, respectively. The Company anticipates collecting these amounts over the terms of the related leases as scheduled rent payments are made. -38- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (6) Mortgages and Note Payable Mortgages payable consist of the following at December 31, 1997 and 1996: Current Current Balance at Property as Interest Maturity Monthly Dec. 31, Dec. 31, Collateral Rate Date Payment(a) 1997 1996 - ------------ ---------- --------- --------- ------------ ------------ Mortgage payable to Affiliate: Walgreens 7.655% 05/2004 $ 5,689 $ 727,472 739,543 Mortgages payable to non-affiliates: Regency Point 7.4875% 08/2000 (b) 4,373,461 4,428,690 Eagle Crest 7.850% 10/2003 15,373 2,350,000 2,350,000 Nantucket Square 7.850% 10/2003 14,392 2,200,000 2,200,000 Antioch Plaza 7.850% 10/2003 5,724 875,000 875,000 Mundelein Plaza 7.850% 10/2003 18,382 2,810,000 2,810,000 Montgomery-Goodyear 7.850% 10/2003 4,121 630,000 630,000 Montgomery-Sears 7.850% 08/2003 10,761 1,645,000 1,645,000 Hartford/Naperville 7.850% 08/2003 15,111 2,310,000 2,310,000 Zany Brainy 7.590% 01/2004 7,875 1,245,000 1,245,000 Prospect Heights Plaza 7.590% 01/2004 6,926 1,095,000 1,095,000 Hawthorn Village Commons 7.590% 01/2004 27,071 4,280,000 4,280,000 Six Corners Plaza 7.590% 01/2004 19,608 3,100,000 3,100,000 Salem Square Shopping Center 7.590% 01/2004 19,797 3,130,000 3,130,000 Lansing Square 7.800% 01/2004 52,975 8,150,000 - Spring Hill Fashion Mall 7.800% 01/2004 30,485 4,690,000 - Aurora Commons (c) 9.000% 10/2001 70,556 9,392,602 - Maple Park Place 7.650% 06/2004 48,769 7,650,000 - Dominicks-Schaumburg 7.49% 06/2004 33,365 5,345,500 - Summit Park Ridge 7.49% 06/2004 9,987 1,600,000 - Lincoln Park Place 7.49% 06/2004 6,554 1,050,000 - Crestwood Plaza 7.650% 06/2004 5,765 904,380 - Park St. Claire 7.650% 06/2004 4,861 762,500 - Quarry 7.650% 06/2004 5,738 900,000 - Grand/Hunt Club 7.49% 06/2004 11,210 1,796,000 - Rivertree Court (d) 10.030% 11/1998 131,226 15,700,000 - Niles Shopping Center 7.23% 01/2005 9,745 1,617,500 - Ameritech 7.23% 01/2005 3,147 522,375 - Calumet Square 7.23% 01/2005 6,223 1,032,920 - -39- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) Current Current Balance at Property as Interest Maturity Monthly Dec. 31, Dec. 31, Collateral Rate Date Payment(a) 1997 1996 - ------------ ---------- --------- --------- ------------ ---------- Sequoia Shopping Center 7.23% 01/2005 9,068 1,505,000 - Dominick's Highland Park 7.21% 12/2004 38,453 6,400,000 - Fashion Square (e) 4.10% 12/2014 27,642 6,800,000 - ------------ ----------- Mortgages Payable.................................... $106,589,710 30,838,233 ============ =========== (a) All payments are interest only, with the exception of the loans secured by the Walgreens, Regency Point and Aurora Commons properties. (b) Payments on this mortgage are based on a floating interest rate of 180 basis points over the 30-day LIBOR rate, which adjusts monthly, amortizing over 25 years. (c) The Company received a credit for interest expense on the debt at closing, which is included in restricted cash along with an amount set aside by the Company for principal payments on the debt. Interest income earned on the restricted cash amounts, when netted with interest expense on the debt, results in an adjusted interest rate on the debt of approximately 8.2%. (d) The Company received a credit for interest expense on the debt at closing. (e) As part of the purchase of this property, the Company assumed the existing mortgage-backed Economic Development Revenue Bonds, Series 1994 offered by the Village of Skokie, Illinois. The interest rate floats and is reset weekly by a re-marketing agent. The current rate is 4.10%. The bonds are further secured by an Irrevocable Letter of Credit, issued by LaSalle Bank at a fee of 1.25% of the bond outstanding. In addition, there is a .125% re-marketing fee paid annually. As of December 31, 1997, the required future principal payments on the Company's long-term debt over the next five years are as follows: 1998.................................... $ 845,541 1999.................................... 288,310 2000.................................... 4,474,649 2001.................................... 8,812,017 2002.................................... 17,679 -40- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) (7) Deposits on Investment Properties On February 7, 1997, the Company made an initial deposit of $1,228,510 for the purchase of Oak Forest Commons. On July 31, 1997, the Company made an additional deposit of $524,390. The balance of the purchase price, approximately $10,083,000, will be paid upon completion of the redevelopement of the center and when the anticipated main tenant, Dominick's Finer Foods, Inc., begins paying rent under a lease agreement. On February 7, 1997, the Company made an initial deposit of $1,265,630 for the purchase of Downers Grove Plaza. The balance of the purchase price, approximately $15,382,000, will be paid upon completion of the redevelopement of the center and when the anticipated main tenant, Dominick's Finer Foods, Inc. begins paying rent under a lease agreement. The Company earns interest on these deposits at the rate of 9.3% per annum. (8) Loan Commitments In December 1997, the Company committed to additional financing secured by Cobbler Crossing and Shorecrest Shopping Center properties totaling $8,454,500 from an unaffiliated lender. The funding of these loans is to occur in early 1998. The mortgage loan secured by Cobbler Crossing will have a term of seven years and, prior to maturity date, will require payments of interest only, fixed at 7.00%. The mortgage loan secured by Shorecrest Shopping Center will have a term of five years and, prior to maturity date, will require payments of interest only, fixed at 7.10%. (9) Subsequent Events, unaudited As of February 3, 1998, subscriptions for a total of 27,259,012 Shares were received, bringing total gross offering proceeds to approximately $272,544,000. In January 1998, the Company paid a distribution of $1,777,113 to the Stockholders. On January 2, 1998, the Company purchased the Woodfield Plaza Shopping Center from an unaffiliated third party for approximately $19,200,000. The property is located in Schaumburg, Illinois and contains approximately 177,418 square feet of leasable space. Its anchor tenants include Kohl's, Barnes and Noble and Linens N' Things. On January 8, 1998, the Company purchased The Shops of Coopers Grove from an unaffiliated third party for approximately $5,700,000. The property is located in Country Club Hills, Illinois and contains approximately 72,518 square feet of leasable space. Its anchor tenant is Eagle Food Center. On January 15, 1998, the Company made a $600,000 paydown of the bond secured by the Fashion Square property. -41- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Financial Statements (continued) On January 22, 1998, the Company purchased the West Chicago Dominick's property from an unaffiliated third party for approximately $6,300,000. The property is located in West Chicago, Illinois and contains approximately 77,000 square feet of leasable space. It's sole tenant is Dominick's. In January 1998, the Company obtained additional financing secured by the Dominick's Glendale Heights and Riversquare Shopping Center properties totaling $7,150,000 from an unaffiliated lender. Loan fees total $53,625 in connection with these mortgage loans. The mortgage loans have a term of seven years and, prior to maturity date, requires payment of interest only. Interest is at 7.0% on the Dominick's Glendale Heights loan and 7.15% on the Riversquare Shopping Center loan. On January 30, 1998, the Company purchased Maple and Belmont property from an unaffiliated third party for approximately $3,165,000. The property is located in Downers Grove, Illinois and contains approximately 31,298 square feet of leasable space. Anchor tenants include J.C. Licht, Goodyear Tire and Copy Center. On February 2, 1998, the Company purchased Orland Park Retail from an unaffiliated third party for approximately $1,250,000. The property is located in Orland Park, Illinois and contains approximately 8,500 square feet of leasable space. anchor tenants include Video Update and All Cleaners. At the completion of the Third Offering, the Company contemplates an additional offering (the "Fourth Offering") for 25,000,000 shares at $11.00 per Share, on a best efforts basis, plus 2,000,000 Shares to be issued through the Company's DRP at $10.45 per Share. The Company filed a registration statement with the Securities and Exchange Commission on January 30, 1998. On behalf of the Company, the Advisor is currently exploring the purchase of additional shopping centers from unaffiliated third parties. -42- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III Real Estate and Accumulated Depreciation December 31, 1997
Initial Cost Gross amount at which carried (A) at end of period (B) ------------------------ -------------------------------------------------- Date Buildings Adjustments Land Buildings Accumulated Con- and to and and Total Depreciation stru- Date Encumbrance Land improvements Basis (C) improvements improvements (D) (E) cted Acq ----------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- ----- ----- Single-user Retail - ------------------ Walgreens/Decatur Decatur, IL.......... $ 727,472 78,330 1,130,723 - 78,330 1,130,723 1,209,053 109,931 1988 01/95 Zany Brainy Wheaton, IL.......... 1,245,000 838,000 1,626,033 664 838,000 1,626,697 2,464,697 81,313 1995 07/96 Ameritech Joliet, IL........... 522,375 170,000 883,293 2,544 170,000 885,837 1,055,837 19,595 1995 05/97 Dominicks-Schaumburg Schaumburg, IL....... 5,345,500 2,294,437 8,388,263 2,679 2,294,437 8,390,942 10,685,379 163,147 1996 05/97 Dominicks-Highland Park Highland Park, IL.... 6,400,000 3,200,000 9,593,565 2,200 3,200,000 9,595,765 12,795,765 224,931 1996 06/97 Dominicks-Glendale Heights Glendale Heights, IL. - 1,265,000 6,934,230 9,194 1,265,000 6,943,424 8,208,424 61,949 1997 09/97 Party City Oakbrook Terrace, IL. - 750,000 1,230,030 - 750,000 1,230,030 1,980,030 6,809 1985 11/97 Eagle Country Market Roselle, IL.......... - 966,667 1,935,350 - 966,667 1,935,350 2,902,017 7,097 1990 11/97 Neighborhood Retail Centers - --------------------------- Eagle Crest Shopping Center Naperville, IL....... 2,350,000 1,878,618 2,938,352 115,828 1,878,618 3,054,180 4,932,798 281,851 1991 03/95 Montgomery-Goodyear Montgomery, IL...... 630,000 315,000 834,659 (11,158) 315,000 823,501 1,138,501 61,859 1991 09/95 Hartford/Naperville Plaza Naperville, IL....... 2,310,000 990,000 3,427,961 13,002 990,000 3,440,963 4,430,963 277,899 1995 09/95 Nantucket Square Schaumburg, IL....... 2,200,000 1,908,000 2,349,918 (69,881) 1,908,000 2,280,037 4,188,037 171,240 1980 09/95 Antioch Plaza Antioch, IL.......... 875,000 268,000 1,360,445 (120,629) 268,000 1,239,816 1,507,816 90,049 1995 12/95 Mundelein Plaza Mundelein, IL........ 2,810,000 1,695,000 3,965,560 (53,429) 1,695,000 3,912,131 5,607,131 229,796 1990 03/96 Regency Point Lockport, IL......... 4,373,461 1,000,000 4,720,800 (19,377) 1,000,000 4,701,423 5,701,423 274,247 1993 04/96 ------------ ----------- ------------ ----------- ----------- ------------ ----------- ------------- Subtotal $ 29,788,808 17,617,052 51,319,182 (128,363) 17,617,052 51,190,819 68,807,871 2,061,713 -43- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1997 Initial Cost Gross amount at which carried (A) at end of period (B) ------------------------ -------------------------------------------------- Date Buildings Adjustments Land Buildings Accumulated Con- and to and and Total Depreciation stru- Date Encumbrance Land improvements Basis (C) improvements improvements (D) (E) cted Acq ----------- ----------- ------------ ----------- ----------- ------------ ---------- ------------ ----- ----- Subtotal $ 29,788,808 17,617,052 51,319,182 (128,363) 17,617,052 51,190,819 68,807,871 2,061,713 Prospect Heights Prospect Heights, IL. 1,095,000 494,300 1,683,755 (9,724) 494,300 1,674,031 2,168,331 83,479 1985 06/96 Montgomery-Sears Montgomery, IL....... 1,645,000 768,000 2,714,173 (48,504) 768,000 2,665,669 3,433,669 134,141 1990 06/96 Salem Square Countryside, IL...... 3,130,000 1,735,000 4,449,217 (16,960) 1,735,000 4,432,257 6,167,257 209,482 1973 08/96 Hawthorn Village Vernon Hills, IL..... 4,280,000 2,619,500 5,887,640 46,891 2,619,500 5,934,531 8,554,031 274,230 1979 08/96 Six Corners Chicago, IL.......... 3,100,000 1,440,000 4,538,152 3,638 1,440,000 4,541,790 5,981,790 182,845 1966 10/96 Spring Hill Fashion Corner West Dundee, IL...... 4,690,000 1,794,000 7,415,396 3,955 1,794,000 7,419,351 9,213,351 278,079 1985 11/96 Crestwood Plaza Crestwood, IL........ 904,380 325,577 1,483,183 4,750 325,577 1,487,933 1,813,510 49,565 1992 12/96 Park St. Claire Schaumburg, IL....... 762,500 319,578 986,920 226,674 319,578 1,213,594 1,533,172 59,391 1994 12/96 Lansing Square Lansing, IL.......... 8,150,000 4,075,000 12,179,383 18,087 4,075,000 12,197,470 16,272,470 407,128 1991 12/96 Summit of Park Ridge Park Ridge, IL....... 1,600,000 672,000 2,497,950 5,886 672,000 2,503,836 3,175,836 83,749 1986 12/96 Grand and Hunt Club Gurnee, IL........... 1,796,000 969,840 2,622,575 (52,811) 969,840 2,569,764 3,539,604 85,654 1996 12/96 Quarry Outlot Hodgkins, IL......... 900,000 522,000 1,278,431 8,872 522,000 1,287,303 1,809,303 42,860 1996 12/96 Maple Park Place Bolingbrook, IL...... 7,650,000 3,665,909 11,669,428 10,603 3,665,909 11,680,031 15,345,940 440,388 1992 01/97 Aurora Commons Aurora, IL........... 9,392,602 3,220,000 8,318,661 3,901 3,220,000 8,322,562 11,542,562 281,096 1988 01/97 ------------ ---------- ------------ ------------ ---------- ------------ ----------- ----------- Subtotal $ 78,884,290 40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697 4,673,800 -44- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1997 Initial Cost Gross amount at which carried (A) at end of period (B) ------------------------ -------------------------------------------------- Date Buildings Adjustments Land Buildings Accumulated Con- and to and and Total Depreciation stru- Date Encumbrance Land improvements Basis (C) improvements improvements (D) (E) cted Acq ----------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- ----- ----- Subtotal $ 78,884,290 40,237,756 119,044,046 76,895 40,237,756 119,120,941 159,358,697 4,673,800 Lincoln Park Place Chicago, IL.......... 1,050,000 819,000 1,299,902 (11,788) 819,000 1,288,114 2,107,114 39,828 1990 01/97 Niles Shopping Center Niles, IL............ 1,617,500 850,000 2,408,467 (22,157) 850,000 2,386,310 3,236,310 56,614 1982 04/97 Mallard Crossing Elk Grove Village, IL - 1,778,667 6,331,943 (22,929) 1,778,667 6,309,014 8,087,681 148,038 1993 05/97 Cobblers Crossing Elgin, IL............ - 3,200,000 7,763,940 (67,400) 3,200,000 7,696,540 10,896,540 179,263 1993 05/97 Calumet Square Calumet City, IL..... 1,032,920 527,000 1,537,316 6,664 527,000 1,543,980 2,070,980 29,861 1967/ 06/97 1994 Sequoia Shopping Center Milwaukee, WI........ 1,505,000 1,216,914 1,802,336 (8,060) 1,216,914 1,794,276 3,011,190 32,470 1988 06/97 Riversquare Shopping Center Naperville, IL....... - 2,853,226 3,124,732 103,872 2,853,226 3,228,604 6,081,830 64,297 1988 06/97 Rivertree Court Vernon Hills, IL.... 15,700,000 8,651,875 22,861,547 6,233 8,651,875 22,867,780 31,519,655 375,277 1988 07/97 Shorecrest Plaza Racine, WI........... - 1,150,000 4,749,758 (17,469) 1,150,000 4,732,289 5,882,289 66,035 1977 07/97 Countryside Countryside, IL...... - 1,375,000 925,106 - 1,375,000 925,106 2,300,106 - 1975 12/97 Terramere Plaza Arlington Heights, IL - 1,435,000 2,966,411 - 1,435,000 2,966,411 4,401,411 - 1980 12/97 Wilson Plaza Batavia, IL.......... - 310,000 984,720 - 310,000 984,720 1,294,720 - 1986 12/97 Iroquois Center Naperville, IL....... - 3,668,347 8,258,584 - 3,668,347 8,258,584 11,926,931 - 1983 12/97 Fashion Square Skokie, IL........... 6,200,000 2,393,534 6,822,071 - 2,393,534 6,822,071 9,215,605 - 1984 12/97 Naper West Naperville, IL....... - 5,335,000 9,584,779 - 5,335,000 9,584,779 14,919,779 - 1985 12/97 ------------ ----------- ------------ ----------- ---------- ------------ ----------- ----------- Total $105,989,710 75,801,319 200,465,658 43,861 75,801,319 200,509,519 276,310,838 5,665,483 ============ =========== ============ =========== ========== ============ =========== =========== -45- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1997, 1996 and 1995 Notes: (A) The initial cost to the Company represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated at the time the property was acquired. (B) The aggregate cost of real estate owned at December 31, 1997 and 1996 for federal income tax purposes was approximately $277,000,000 and $95,000,000, unaudited respectively. (C) As part of the Montgomery-Goodyear, Hartford/Naperville Plaza, Nantucket Square, Antioch Plaza, Mundelein Plaza, Regency Point, Prospect Heights Plaza, Montgomery-Sears and Salem Square purchases, the Company will receive rent under master lease agreements on the spaces currently vacant for periods ranging from one year to eighteen months or until the spaces are leased. GAAP requires that as these payments are received, the Company record the payments as a reduction in the purchase price of the properties rather than as rental income. The Company has recorded $410,361, $437,678 and $133,016 of such payments as of December 31, 1997, 1996 and 1995, respectively. (D) Reconciliation of real estate owned: 1997 1996 1995 ------------- ------------- ------------- Balance at beginning of year $ 94,632,981 17,512,432 - Purchases of property....... 181,251,256 77,421,408 17,594,313 Additions................... 836,962 136,819 51,135 Payments received under master leases............. (410,361) (437,678) (133,016) ------------- ------------- ------------- Balance at end of year...... $276,310,838 94,632,981 17,512,432 ============= ============= ============= (E) Reconciliation of accumulated depreciation: Balance at beginning of year $ 1,109,038 169,894 - Depreciation expense........ 4,556,445 939,144 169,894 ------------- ------------- ------------- Balance at end of year...... $ 5,665,483 1,109,038 169,894 ============= ============= ============= -46- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements on accounting or financial disclosure during 1997. PART III Item 10. Directors and Executive Officers of the Registrant Officers and Directors The Company's current officers, directors and key employees are as follows: Functional Title ---------------- Robert D. Parks......... President, Chief Executive Officer, Chief Operating Officer and Affiliated Director G. Joseph Cosenza....... Affiliated Director Heidi N. Lawton......... Independent Director Roland W. Burris........ Independent Director Joel G. Herter.......... Independent Director Roberta S. Matlin....... Vice President - Administration Kelly Tucek............. Secretary, Treasurer and Chief Financial Officer Patricia A. Challenger.. Assistant Secretary ROBERT D. PARKS (age 54) President, Chief Executive Officer, Chief Operating Officer and Director of the Company since its formation in 1994. Mr. Parks joined The Inland Group, Inc. ("TIGI") and its affiliates in 1968. Mr. Parks is a Director of TIGI and is Chairman of Inland Real Estate Investment Corporation ("IREIC") and is a Director of both Inland Securities Corporation and the Advisor. Mr. Parks is responsible for the ongoing administration of existing partnerships, corporate budgeting and administration for IREIC. In this capacity he oversees and coordinates the marketing of all investments nationwide and has overall responsibility for investor relations. Mr. Parks received his B.A. Degree from Northeastern Illinois University in 1965 and M.A. from the University of Chicago in 1968. He is a registered Direct Participation Program Principal with the National Association of Securities Dealers, Inc. and a licensed real estate broker. He is a member of the Real Estate Investment Association and the National Association of Real Estate Investment Trusts. G. JOSEPH COSENZA (age 54) Director of the Company since its formation in 1994. Mr. Cosenza is a Director and Vice Chairman of The Inland Group, Inc. Mr. Cosenza oversees, coordinates and directs TIGI's many enterprises and, in addition, immediately supervises a staff of eight property acquisition personnel. Mr. Cosenza has been a consultant to other real estate entities and lending institutions on property appraisal methods. Mr. Cosenza received his B.A. Degree from Northeastern Illinois University in 1966 and his M.S. Degree from Northern Illinois University in 1972. From 1967 to 1968, he taught at the LaGrange School District in Hodgkins, Illinois and from 1968 to 1972, he served as Assistant Principal and taught in the Wheeling, Illinois School District. -47- Mr. Cosenza has been a licensed real estate broker since 1968 and an active member of various national and local real estate associations, including the National Association of Realtors and the Urban Land Institute. Mr. Cosenza has also been Chairman of the Board of American National Bank of DuPage and has served on the Board of Directors of Continental Bank of Oakbrook Terrace. He is presently Chairman of the Board of Westbank in Westchester, Illinois. HEIDI N. LAWTON (age 36) Independent Director since October 1994, Ms. Lawton is managing broker, owner and president of Lawton Realty Group, an Oak Brook, Illinois real estate brokerage firm which she founded in 1989. The firm specializes in commercial, industrial and investment real estate brokerage. Ms. Lawton is responsible for all aspects of the operations of the company, including structuring real estate investments, procuring partner/investors, acquiring land and properties and obtaining financing for development and/or acquisition. Prior to founding Lawton Realty Group and while she was earning her B.S. Degree in business management from the National College of Education, Ms. Lawton was managing broker for VCR Realty in Addison, Illinois. Ms. Lawton has been licensed as a real estate professional since 1982 and has served as a member of the Certified Commercial Investment Members, secretary of the Northern Illinois Association of Commercial Realtors, and is a past board member and commercial director of the DuPage Association of Realtors. ROLAND W. BURRIS (age 60) Independent Director since January 1996, Mr. Burris has been the Managing Partner of Jones, Ware & Grenard, a Chicago law firm since June 1995, where he practices primarily in the areas of environmental, banking and consumer protection. From 1973 to 1995, Mr. Burris held various governmental positions in the State of Illinois including State Comptroller (1979 to 1991) and Attorney General (1991 to 1995). Mr. Burris completed his undergraduate studies at Southern Illinois University in 1959 and studied international law as an exchange student at the University of Hamburg in Germany. Mr. Burris graduated from Howard University Law School in 1963. Mr. Burris serves on the board of the Illinois Criminal Justice Authority, the Financial Accounting Foundation, the Law Enforcement Foundation of Illinois, the African American Citizens Coalition on Regional Development and the Boy Scouts of America. He currently serves as chair of the Illinois State Justice Commission and is an adjunct professor in the Master of Public Administration Program at Southern Illinois University. JOEL G. HERTER, CPA (age 60) Independent Director of the Company since 1997, Mr. Herter is a senior partner of Wolf & Company LLP ("Wolf") where he has been employed since 1978. Mr. Herter graduated from Elmhurst College in 1959 with a Bachelor of Science degree in business administration. His business experience includes accounting and auditing, tax and general business services including venture and conventional financing, forecasts and projections, and strategic planning to a variety of industries. From 1978 to 1991, Mr. Herter served as managing partner for Wolf. Mr. Herter is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society and was a past president and director of the Elmhurst Chamber of Commerce and was appointed by Governor Thompson of the State of Illinois to serve on the 1992 World's Fair Authority. Mr. Herter currently serves as chairman of the Board of Trustees, Elmhurst Memorial Hospital; director of Suburban Bank and Trust Company,; "chairman elect" of the Board of Trustees, Elmhurst College; chairman of the DuPage Water Commission; treasurer to the House Republican Campaign Committee and Friends of Lee Daniels Committee; treasurer for Illinois Attorney General, Jim Ryan. Mr. Herter has also been appointed by Governor Edgar of the State of Illinois to the Illinois Sports Facilities Authority. -48- ROBERTA S. MATLIN (age 53) Vice President - Administration of the Company since March 1995. Ms. Matlin joined TIGI in 1984 as Director of Investor Administration and currently serves as Senior Vice President-Investments of IREIC directing the day-to-day internal operations. Ms. Matlin is a Director of both Inland Securities Corporation and the Advisor. Prior to joining TIGI, Ms. Matlin was employed for eleven years by the Chicago Region of the Social Security Administration of the United States Department of Health and Human Services. Ms. Matlin received her B.A. Degree from the University of Illinois in 1966 and is registered with the National Association of Securities Dealers, Inc. as a general securities principal. KELLY TUCEK (age 35) Secretary, Treasurer and Chief Financial Officer of the Company since August 1996. Ms. Tucek joined TIGI in 1989 and is an Assistant Vice President of Inland Real Estate Investment Corporation. Ms. Tucek is responsible for the Investment Accounting Department which includes the accounting for the Company and all public limited partnership accounting functions along with quarterly and annual SEC filings. Prior to joining TIGI, Ms. Tucek was on the audit staff of Coopers and Lybrand since 1984. She received her B.A. Degree in Accounting and Computer Science from North Central College in 1984. PATRICIA A. CHALLENGER (age 45) Assistant Secretary of the Company since March 1995. Ms. Challenger joined Inland in 1985. She is currently a Senior Vice President of IREIC in charge of the Asset Management Department, where she is responsible for developing operating and disposition strategies for properties owned by IREIC related entities. Ms. Challenger received her B.S. degree from George Washington University in 1975 and her Master's Degree from Virginia Tech University in 1980. Ms. Challenger was selected and served from 1980 to 1984 as Presidential Management Intern, where she was part of a special government- wide task force to eliminate waste, fraud and abuse in government contracting and also served as Senior Contract Specialist responsible for capital improvements in 109 governmental properties. Ms. Challenger is a licensed real estate broker, a National Association of Securities Dealers registered securities sales representative and a member of the Urban Land Institute. -49- Item 11. Executive Compensation As of December 31, 1997, the Company incurred $28,341,719 of organizational and offering costs. Pursuant to the terms 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 offering proceeds or all organization and offering expenses (including selling commissions) which together exceed 15% of Gross Offering Proceeds. As of the completion of the prior Offerings, organizational and offering costs did not exceed the 5.5% or 15% limitations. As of December 31, 1997, organizational and offering costs of the Third Offering did not exceed the 5.5% and 15% limitations. The Company anticipates that these costs will not exceed these limitations upon completion of the current offering, however, any excess amounts will be reimbursed by the Advisor. The Advisor and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the Advisor and its Affiliates relating to the offering and to the administration of the Company. Such costs to Affiliates incurred relating to the offering were $1,047,694 as of December 31, 1997 of which $24,374 was unpaid as of December 31, 1997. In addition, an Affiliate of the Advisor serves as dealer manager of the offering and is entitled to receive selling commissions, a marketing contribution and a due diligence expense allowance fee from the Company in connection with the offering. Such amounts incurred were $23,124,939 for the year ended December 31, 1997 of which $519,914 was unpaid as of December 31, 1997. As of December 31, 1997, approximately $19,581,288 of these commissions has been passed through from the Affiliate to unaffiliated broker/dealers. 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. For the year ended December 31, 1997, the Company has incurred $843,000 of such fees, of which $320,000 remained unpaid at December 31, 1997. The Company adopted an 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 so long as the Independent Director remains a member of the Board on such date. The options for the initial 3,000 Shares granted are 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, 1997, options for 1,000 Shares have been exercised for $9.05 per Share. The Company pays its Independent Directors an annual fee of $1,000. In addition, Independent Directors receive $250 for attendance (in person or by telephone) at each quarterly meeting of the Board or committee thereof. Officers of the Company who are Directors are not paid fees. -50- Item 12. Security Ownership of Certain Beneficial Owners and Management (a) As of December 31, 1997, the Advisor owned 20,000 Shares of Common Stock which represented less than a 1% ownership of the Company. (b) The officers and directors of the Company own as a group the following Shares of the Company as of December 31, 1997: Amount and Nature of Beneficial Percent Title of Class Ownership of Class -------------- ----------------- -------------- Name of Beneficial Owner ------------------------ Robert D. Parks G. Joseph Cosenza Roland W. Burris Joel G. Herter Heidi N. Lawton Patricia A. Challenger Kelly Tucek Roberta S. Matlin Common Stock 49,832 Shares Less than 1% No officer or director of the Company possesses a right to acquire beneficial ownership of Shares. (c) There exists no arrangement, known to the Company, the operation of which may, at a subsequent date, result in a change in control of the Company. Item 13. Certain Relationships and Related Transactions There were no significant transactions or business relationships with the Advisor, Affiliates or their management other than those described in Items 10 and 11 above. Reference is made to Note (2) of the Notes to Financial Statements (Item 8 of this Annual Report) for information regarding related party transactions. -51- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed: (1) The financial statements listed in the index at page 21 of this Annual Report are filed as part of this Annual Report. (2) Financial Statement Schedules: Financial statement schedule for the year ended December 31, 1997 is submitted herewith. Page ---- Real Estate and Accumulated Depreciation (Schedule III)...... 43 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. (3) Exhibits. Required by the Securities and Exchange Commission Regulation S-K, Item 601. Item No. Description The following exhibits are filed as part of this document: 27 Financial Data Schedule The following exhibits are incorporated herein by reference: 3.1 Inland Monthly Income Fund III, Inc. Second Articles of Amendment and Restatement (2) 3.2 Amend and Restated bylaws of Inland Real Estate Corporation (3) 3.3 Inland Monthly Income Fund III, Inc. Articles of Amendment (3) 3.4 Inland Real Estate Corporation Articles of Amendment of Second Articles of Amendment and Restatement (1) 4 Specimen Stock Certificate (1) 10.1 Escrow Agreement between Inland Real Estate Corporation and LaSalle National Bank, N.A. (1) 10.2 Advisory Agreement between Inland Real Estate Corporation and Inland Real Estate Advisory Services dated October 14, 1994 (2) 10.2 (a) Amendment No. 1 to the Advisory Agreement dated October 13, 1995 (4) 10.2 (b) Amendment No. 2 to the Advisory Agreement dated October 13, 1996 (4) -52- 10.2 (c) Amendment No. 3 to the Advisory Agreement effective as of October 13, 1997 (1) 10.3 Form of Management Agreement Between Inland Real Estate Corporation and Inland Commercial Property Management, Inc. (3) 10.4 Amended and Restated Independent Director Stock Option Plan (2) (1) Included in the Registrant's Registration Statement on Form S-11 as filed by Registrant on January 30, 1998. (2) Included in the Registrant's Registration Statement on Form S-11 (file number 333-6459) as filed by Registrant on June 20, 1996. (3) Included in Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (file number 333-6459) as filed by the Registrant on July 18, 1996. (4) Included in Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-11 (file number 333-6459) as filed by the Registrant on November 1, 1996. (b) Reports on Form 8-K: There were no reports of Form 8-K filed during the quarter ended December 31, 1997. No Annual Report or proxy materials for the year 1997 have been sent to the Stockholders of the Company. An Annual Report and proxy materials will be sent to the Stockholders subsequent to this filing and the Company will furnish copies of such materials to the Commission when they are sent to the Stockholders. -53- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INLAND REAL ESTATE CORPORATION /s/ Robert D. Parks By: Robert D. Parks Chief Executive Officer and Affiliated Director Date: February 4, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ Robert D. Parks By: Robert D. Parks Chief Executive Officer and Affiliated Director Date: February 4, 1998 /s/ Kelly Tucek /s/ Heidi N. Lawton By: Kelly Tucek By: Heidi N. Lawton Chief Financial and Independent Director Accounting Officer Date: February 4, 1998 Date: February 4, 1998 /s/ G. Joseph Cosenza /s/ Roland W. Burris By: G. Joseph Cosenza By: Roland W. Burris Affiliated Director Independent Director Date: February 4, 1998 Date: February 4, 1998 /s/ Joel G. Herter By: Joel G. Herter Independent Director Date: February 4, 1998 -54-
EX-27 2
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