-----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, Um9kTIQgUzZ9Jb55Mw9VEwZnsF4RsnFzoY7DaYL9tsiCU8ta4+zpCRUHwdFeeJ0F y+mq6CxkwnfcTtvB7Kg3gg== 0000923284-99-000010.txt : 19990413 0000923284-99-000010.hdr.sgml : 19990413 ACCESSION NUMBER: 0000923284-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INLAND REAL ESTATE CORP CENTRAL INDEX KEY: 0000923284 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99583932 BUSINESS ADDRESS: STREET 1: 2901 BUTTERFIELD RD CITY: OAK BROOK STATE: IL ZIP: 60523 BUSINESS PHONE: 7082188000 MAIL ADDRESS: STREET 1: 2901 BUTTERFIELD RD CITY: OAK BROOK STATE: IL ZIP: 60523 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, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File #33-79012 Inland Real Estate Corporation (Exact name of registrant as specified in its charter) Maryland 36-3953261 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2901 Butterfield Road, Oak Brook, Illinois 60523 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 630-218-8000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: None None Securities registered pursuant to Section 12(g) of the Act: Title of each class: Name of each exchange on which registered: Common Stock, $.01 par value None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 30, 1999, the aggregate market value of the Shares of Common Stock held by non-affiliates of the registrant was approximately $594,611,347. As of March 30, 1999, there were 54,075,577 Shares of Common Stock outstanding. Documents Incorporated by Reference: The Prospectus of the Registrant dated April 7, 1998 as amended, are incorporated by reference in Parts I, II and III of this Annual Report on Form 10-K. -1- INLAND REAL ESTATE CORPORATION (A Maryland corporation) TABLE OF CONTENTS Part I Page ------ ---- Item 1. Business...................................................... 3 Item 2. Properties.................................................... 5 Item 3. Legal Proceedings............................................. 12 Item 4. Submission of Matters to a Vote of Security Holders........... 12 Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 12 Item 6. Selected Financial Data....................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 16 Item 7(a) Quantitative and Qualitative Disclosures About Market Risk.... 23 Item 8. Financial Statements and Supplementary Data................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 54 Part III -------- Item 10. Directors and Executive Officers of the Registrant............ 54 Item 11. Executive Compensation........................................ 57 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 58 Item 13. Certain Relationships and Related Transactions................ 58 Part IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................. 59 SIGNATURES............................................................. 62 -2- PART I Item 1. Business The Company Inland Real Estate Corporation (the "Company") was formed on May 12, 1994. On October 14, 1994, the Company commenced an initial public offering, on a best effort basis, ("Initial Offering") of 5,000,000 shares of common stock ("Shares") at $10.00 per share. As of July 24, 1996, the Company had received subscriptions for a total of 5,000,000 Shares, thereby completing the Initial Offering. On July 24, 1996, the Company commenced an offering of an additional 10,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Second Offering"). As of July 10, 1997, the Company had received subscriptions for a total of 10,000,000 Shares, thereby completing the Second Offering. On July 14, 1997, the Company commenced an offering of an additional 20,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Third Offering"). As of March 19, 1998, the Company had received subscriptions for a total of 20,000,000 Shares, thereby completing the Third Offering. On April 7, 1998, the Company commenced an offering of an additional 27,000,000 Shares at $11.00 per Share, on a best efforts basis, (the "Fourth Offering"). In order to maximize the Company's flexibility in evaluating strategic alternatives, the Board of Directors decided to terminate the Fourth Offering on December 31, 1998. As of December 31, 1998, the Company had received subscriptions for a total of 16,642,397 Shares in the Fourth Offering. In addition, as of December 31, 1998, the Company has distributed 2,212,934 Shares through the Company's Distribution Reinvestment Program ("DRP). As of December 31, 1998, the Company has repurchased 198,375 Shares through its Share Repurchase Program. As a result, as of December 31, 1998, Gross Offering Proceeds total $539,331,413, net of Shares repurchased through the Share Repurchase program. Inland Real Estate Advisory Services, Inc. (the "Advisor"), an Affiliate of the Company, is the advisor to the Company. On September 28, 1998, the Company engaged Everen Securities, Inc. to advise the Company on strategic alternatives designed to increase stockholder value. These alternatives include, but are not limited to, evaluating whether: (1) the Company should become internally advised and managed by acquiring the Advisor and the Property Manager; (2) the Company should list its common stock on an exchange or other trading system; and (3) the Company should seek to merge with a third party that is already listed on an exchange or other trading system. Everen Securities, Inc. is expected to complete its advisor engagement by the third quarter 1999. The Company had no employees during 1998, 1997 and 1996. -3- Description of Business The Company is in the business of acquiring Neighborhood Retail Centers, with gross leasable area ranging from approximately 5,000 to 150,000 square feet, and Community Centers, with gross leasable area ranging from 150,000 to 300,000 square feet, located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois. The Company may also acquire single-user retail properties located throughout the United States. The Company is also permitted to construct or develop properties, or render services in connection with such development or construction, subject to the Company's compliance with the rules governing real estate investment trusts under the Internal Revenue Code of 1986, ("Code"), as amended. The Company anticipates that aggregate borrowings secured by all of the Company's properties will not exceed 50% of their combined fair market values, however, the maximum amount of borrowings in the absence of the consent of a majority of the Stockholders, may not exceed 300% of Net Assets. The Company has incurred mortgage indebtedness subsequent to acquisition on properties initially acquired on an all cash basis. The proceeds from such loans were used to acquire additional properties. The Company may also incur indebtedness to finance improvements to the properties it acquires. In certain instances, where the terms were more favorable than those that could be obtained by the Company or prepayment of the debt was not allowed, the Company has acquired properties subject to existing debt. The Company's real property investments are subject to competition from similar types of properties in the vicinity in which each is located. Approximate occupancy levels for the properties are in the table set forth in Item 2 below to which reference is hereby made. The Company's real property investments are all currently located within 400 miles of the Company's headquarters in Illinois. The Company does not segregate revenues or assets by geographic region, and such a presentation would not be material to an understanding of the Company's business taken as a whole. Certain risks exist due to a concentration of any single tenant within the portfolio. Currently the largest single tenant is Dominick's Finer Foods, which has eight leases totaling 543,977 square feet, or approximately 8.46% of the total gross leasable area owned by the Company. Annualized base rental income of these eight leases is projected to be $6,554,003 for the year ended December 31, 1999, or approximately 10.52% of the total annualized base rental income based on the current portfolio. Qualification as a Real Estate Investment Trust The Company qualified as a real estate investment trust ("REIT") under the Code for federal income tax purposes commencing with the tax year ending December 31, 1995. Since the Company qualified for taxation as a REIT, the Company generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed income. -4- Item 2. Properties As of December 31, 1998, the Company has acquired fee ownership of eighty-five properties, including fifteen single-user retail properties, fifty-seven Neighborhood Retail Centers and thirteen Community Centers. The Company owns property in Illinois, Wisconsin, Indiana, Minnesota and Ohio. Tenants of the properties are responsible for the payment of some or all of the real estate taxes, insurance and common area maintenance.
Gross Mortgages Leasable Year Payable Current Area Date Built/ at No. of Anchor Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants* - - ---------------------------- -------- ------ --------- ----------- -------- ---------- Single-User Retail Property - - --------------------------- Walgreens, Decatur, IL 13,500 01/95 1988 $ 714,443 1 Walgreens Pharmacy Zany Brainy, Wheaton, IL 12,499 07/96 1995 1,245,000 1 Zany Brainy Ameritech, Joliet, IL 4,505 05/97 1995 522,375 1 Ameritech Dominicks-Schaumburg Schaumburg, IL 71,400 05/97 1996 5,345,500 1 Dominick's Finer Foods Dominicks-Highland Park Highland Park, IL 71,442 06/97 1996 6,400,000 1 Dominick's Finer Foods Dominicks-Glendale Heights Glendale Heights, IL 68,923 09/97 1997 4,100,000 1 Dominick's Finer Foods Party City Store Oak Brook Terrace, IL 10,000 11/97 1985 987,500 1 Party City Eagle Country Market, Roselle, IL 42,283 11/97 1990 1,450,000 1 Eagle Foods Dominicks-West Chicago West Chicago, IL 78,158 01/98 1990 3,150,000 1 Dominick's Finer Foods Walgreens-Woodstock 15,856 06/98 1973 569,610 1 Walgreen's Pharmacy Woodstock, IL Bakers Shoes Chicago, IL 20,000 09/98 1891 - 1 Bakers Shoes Staples Freeport, IL 24,049 12/98 1998 - 1 Staples Carmax-Schaumburg Schaumburg, IL 93,333 12/98 1998 - 1 Carmax Carmax-Tinley Park Tinley Park, IL 94,518 12/98 1998 - 1 Carmax Hollywood Video-Hammond Hammond, IN 7,488 12/98 1998 - 1 Hollywood Video -5- Gross Mortgages Leasable Year Payable Current Area Date Built/ at No. of Anchor Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants* - - ---------------------------- -------- ------ --------- ----------- -------- ---------- Neighborhood Retail Centers - - --------------------------- Eagle Crest Shopping Center Naperville, IL 67,650 03/95 1991 2,350,000 12 Eagle Foods Montgomery-Goodyear 12,903 09/95 1991 630,000 2 Goodyear Tire & Rubber Montgomery, IL Merlin Corp. Hartford/Naperville Plaza 43,862 09/95 1995 2,310,000 8 Blockbuster Video Naperville, IL Sears Hardware Keller/Williams Realty Nantucket Square Shopping Center 56,981 09/95 1980 2,200,000 20 Hallmark Schaumburg, IL Trak Auto The Dental Store Ltd. Antioch Plaza, Antioch, IL 19,810 12/95 1995 875,000 5 Blockbuster Video Radio Shack Mundelein Plaza, Mundelein, IL 68,056 03/96 1990 2,810,000 8 Sears Regency Point, Lockport, IL 49,826 04/96 1993 4,312,036 18 Walgreens Pharmacy 5,050 04/96 1995 Ace Hardware Prospect Heights, 28,080 06/96 1985 1,095,000 5 Walgreens Pharmacy Prospect Hts., IL Blockbuster Video Montgomery-Sears, Montgomery, IL 34,600 06/96 1990 1,645,000 6 Sears Paint & Hardware Blockbuster Video Salem Square, Countryside, IL 112,310 08/96 1973/ $3,130,000 5 TJ Maxx 1985 Marshalls Hawthorn Village, Vernon Hills,IL 98,686 08/96 1979 4,280,000 22 Dominick's Finer Foods Walgreens Pharmacy Six Corners, Chicago, IL 80,650 10/96 1966 3,100,000 7 Chicago Health Club Illinois Masonic Medical Center Spring Hill Fashion Corner West Dundee, IL 125,198 11/96 1985 4,690,000 20 TJ Maxx Michaels Crafts Crestwood Plaza, Crestwood, IL 20,044 12/96 1992 904,380 2 Entenmann's Pet Supplies Plus Park St. Claire, Schaumburg, IL 11,859 12/96 1994 762,500 2 Ameritech Hallmark Showcase Summit of Park Ridge Park Ridge, IL 33,252 12/96 1986 1,600,000 14 LePeep Rest. Giappos Pizza Grand and Hunt Club, Gurnee, IL 21,222 12/96 1996 1,796,000 2 Jewelry 3 Super Crown Books Quarry Outlot, Hodgkins, IL 9,650 12/96 1996 900,000 3 Dunkin Donuts/ Baskin Robbins The Casual Male Jewelry 3 Aurora Commons, Aurora,IL 127,292 01/97 1988 9,205,252 24 Jewel/Osco -6- Gross Mortgages Leasable Year Payable Current Area Date Built/ at No. of Anchor Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants* - - ---------------------------- -------- ------ --------- ----------- -------- ---------- Neighborhood Retail Centers (cont.) - - ----------------------------------- Lincoln Park Place, Chicago, IL 10,678 01/97 1990 1,050,000 1 Lechters Housewares Niles Shopping Center, Niles, IL 26,117 04/97 1982 1,617,500 7 Jennifer Convertibles Acel Cellular Wolf Camera & Video Mallard Crossing, Elk Grove Village, IL 82,949 05/97 1993 4,050,000 11 Eagle Foods Cobblers Crossing, Elgin, IL 102,643 05/97 1993 5,476,500 13 Jewel Food Store Calumet Square, Calumet City, IL 39,936 06/97 1967/ 1,032,920 3 Aronson Furniture 1994 Super Trak Warehouse Sequoia Shopping Center Milwaukee, WI 35,407 06/97 1988 1,505,000 13 Kinko's U.S. Post Office Play It Again Sports Wong's Palace Riversquare Shopping Center Naperville, IL 58,158 06/97 1988 3,050,000 20 Salon Suites Limited Harbour Contractors, Inc. Shorecrest Plaza, Racine, WI 91,176 07/97 1977 2,978,000 13 Piggly Wiggly Grocery Wisconsin Health & Fitness Dominicks-Countryside Countryside, IL 62,344 12/97 1975 1,150,000 1 Dominick's Finer Foods Terramere Plaza, Arlington Heights, IL 40,965 12/97 1980 2,202,500 20 None Wilson Plaza, Batavia, IL 11,160 12/97 1986 650,000 7 White Hen Pantry Dimples Donuts Riverside Liquors Iroquois Center, Naperville, IL 140,981 12/97 1983 5,950,000 25 Total Beverage Sears Fashion Square, Skokie, IL 83,959 12/97 1984 6,200,000 19 Cost Plus Designer Shoe Outlet Shops at Coopers Grove Country Club Hills, IL 72,518 01/98 1991 2,900,000 10 Eagle Foods Maple Plaza Downers Grove, IL 31,298 01/98 1988 1,582,500 12 J.C. Licht Co. Goodyear Tire & Rubber Orland Park Retail Orland Park, IL 8,500 02/98 1997 625,000 3 Video Update All Cleaners Gianni's Pizza Wisner/Milwaukee Plaza Chicago, IL 14,677 02/98 1994 974,725 4 Blockbuster Video Giordano's Restaurant Spincycle Coin Laundry Homewood Plaza Homewood, IL 19,000 02/98 1993 1,013,201 3 Blockbuster Video Trak Auto -7- Gross Mortgages Leasable Year Payable Current Area Date Built/ at No. of Anchor Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants* - - ---------------------------- -------- ------ --------- ----------- -------- ---------- Neighborhood Retail Centers (cont.) - - ----------------------------------- Elmhurst City Center Elmhurst, IL 39,117 02/98 1994 2,513,765 12 Walgreen's Pharmacy Famous Footwear Ruby's Shoppes of Mill Creek Palos Park, IL 102,443 03/98 1989 9,500,000 23 Jewel Food Store Prairie Square Sun Prairie, WI 35,755 03/98 1995 1,550,000 13 Famous Footwear Blockbuster Video Oak Forest Commons Oak Forest, IL 108,360 03/98 1998 6,617,871 13 Dominick's Finer Foods Downers Grove Market Downers Grove, IL 104,445 03/98 1998 10,600,000 14 Dominick's Finer Foods St. James Crossing Westmont, IL 49,992 03/98 1990 3,847,599 21 Nevada Bob's Luciano's High Point Center Madison, WI 86,204 04/98 1984 5,360,988 28 Pier 1 Imports Western & Howard Chicago, IL 12,784 04/98 1985 992,681 3 Pearle Vision Payless Shoe Source Super Gap Wauconda Shopping Center Wauconda, IL 31,157 05/98 1988 1,333,834 4 Sears Hardware Spasso, Ltd. Berwyn Plaza Berwyn, IL 18,138 05/98 1983 708,638 5 Walgreens Radio Shack Woodland Heights Streamwood, IL 120,436 06/98 1956 3,940,009 10 Jewel Food Store U.S. Post Office Schaumburg Shopping Center Schaumburg, IL 61,485 06/98 1994 3,908,081 6 Sears Hardware Trak Auto Ulta 3 Winnetka Shopping Center New Hope, MN 42,415 07/98 1990 2,233,744 16 Walgreen's Big Wheel Auto Store Eastgate Shopping Center Lombard, IL 132,519 07/98 1959 - 40 Ace Hardware Secretary of State Orland Greens Shopping Center Orland Park, IL 45,031 09/98 1984 - 14 Walgreen's MacFrugals Two Rivers Plaza Bolingbrook, IL 57,900 10/98 1994 - 11 Kay-Bee Toy Store Sizes Unlimited Marshalls Edinburgh Festival Brooklyn Park, MN 91,613 10/98 1997 4,625,000 12 Knowlan's Super Markets Riverplace Center Noblesville, IN 74,414 11/98 1992 - 12 Fashion Bug Kroger Rose Plaza Elmwood Park, IL 18,264 11/98 1997 - 1 Binny's Marketplace at Six Corners Chicago, IL 117,000 11/98 1997 11,200,000 6 Jewel Food Store Marshalls -8- Gross Mortgages Leasable Year Payable Current Area Date Built/ at No. of Anchor Property (Sq Ft) Acq. Renovated 12/31/98 Tenants Tenants* - - ---------------------------- -------- ------ --------- ----------- -------- ---------- Community Centers - - ----------------- Lansing Square, Lansing, IL 233,508 12/96 1991 8,150,000 16 Sam's Club Baby Superstore Office Max Maple Park Place, Bolingbrook, IL 215,662 01/97 1992 7,650,000 19 K-Mart Corporation Eagle Foods Rivertree Court, Vernon Hills, IL 299,055 07/97 1988 17,547,999 42 Best Buy Plitt Theaters Naper West, Naperville, IL 165,311 12/97 1985 7,695,199 25 Douglas TV TJ Maxx Woodfield Plaza Schaumburg, IL 177,163 01/98 1992 9,600,000 10 Kohl's Linens 'N Things Barnes & Noble Lake Park Plaza Michigan City, IN 229,639 02/98 1990 6,489,618 15 Walmart Chestnut Court Darien, IL 170,027 03/98 1987 8,618,623 22 Just Ducky Stein Mart Bergen Plaza Oakdale, MN 270,283 04/98 1978 9,141,896 39 Rainbow Foods K-Mart Fairview Heights Plaza Fairview Heights, IL 167,491 08/98 1991 - 8 1/2 Price Store Michaels The Sports Authority Sears Homelife Woodfield Commons-East/West Schaumburg, IL 207,106 10/98 1973 13,500,000 16 Toys R Us 1975 Tower Records 1997 Comp USA Cost Plus Party City Joliet Commons Joliet, IL 159,184 10/98 1995 14,569,482 11 Barnes and Noble Old Navy M.C. Sports Springboro Plaza Springboro, OH 154,034 11/98 1992 - 4 K-Mart Kroger Park Center Plaza Tinley Park, IL 193,179 12/98 1988 - 24 Cub Foods * Anchor tenants include tenants leasing more than 10% of the gross leasable area of a property.
-9- The following table lists the approximate physical occupancy levels for the Company's investment properties as of the end of each year during 1998, 1997 and 1996. N/A indicates the property was not owned by the Company at the end of the year. As of December 31, --------------------- Properties 1998 1997 1996 ---------- -------- -------- -------- Walgreens, Decatur, IL ......................... 100% 100% 100% Eagle Crest, Naperville, IL..................... 100% 97% 100% Montgomery-Goodyear, Montgomery, IL............. 77% 77% 100% Hartford/Naperville Plaza, Naperville, IL....... 100% 100% 100% Nantucket Square, Schaumburg, IL................ 100% 96% 85% Antioch Plaza, Antioch, IL...................... 68% 68% 57% Mundelein Plaza, Mundelein, IL.................. 100% 100% 100% Regency Point, Lockport, IL..................... 97% 97% 97% Prospect Heights, Prospect Heights, IL.......... 92% 83% 100% Montgomery-Sears, Montgomery, IL................ 100% 95% 85% Zany Brainy, Wheaton, IL........................ 100% 100% 100% Salem Square, Countryside, IL................... 97% 97% 97% Hawthorn Village, Vernon Hills, IL.............. 100% 99% 98% Six Corners, Chicago, IL........................ 82%* 90% 92% Spring Hill Fashion Ctr., West Dundee, IL....... 95% 100% 95% Crestwood Plaza, Crestwood, IL.................. 100% 100% 100% Park St. Claire, Schaumburg, IL................. 100% 100% 100% Lansing Square, Lansing, IL..................... 98% 90% 89% Summit of Park Ridge, Park Ridge, IL............ 87% 83% 81% Grand and Hunt Club, Gurnee, IL................. 100% 100% 100% Quarry Outlot, Hodgkins, IL..................... 100% 100% 100% Maple Park Place, Bolingbrook, IL............... 99% 98% N/A Aurora Commons, Aurora, IL...................... 95% 98% N/A Lincoln Park Place, Chicago, IL................. 60% 60% N/A Ameritech, Joliet, IL........................... 100% 100% N/A Dominicks-Schaumburg, Schaumburg, IL............ 100% 100% N/A Dominicks-Highland Park, Highland Park, IL...... 100% 100% N/A Niles Shopping Center, Niles, IL................ 100% 60% N/A Mallard Crossing, Elk Grove Village, IL......... 97% 95% N/A Cobblers Crossing, Elgin, IL.................... 91% 89% N/A Calumet Square, Calumet City, IL................ 100% 100% N/A Sequoia Shopping Center, Milwaukee, WI.......... 100% 93% N/A Riversquare Shopping Ctr., Naperville, IL....... 97% 95% N/A Rivertree Court, Vernon Hills, IL............... 99%* 99% N/A Shorecrest Plaza, Racine, WI.................... 87% 96% N/A Dominicks-Glendale Hts., Glendale Hts., IL...... 100% 100% N/A Party City Store, Oak Brook Terrace, IL......... 100% 100% N/A Eagle Country Market, Roselle, IL............... 100% 100% N/A Dominicks-Countryside, Countryside, IL.......... 100% 100% N/A Terramere Plaza, Arlington Heights, IL.......... 95% 80% N/A Wilson Plaza, Batavia, IL....................... 100% 100% N/A Iroquois Center, Naperville, IL................. 73%* 81% N/A Fashion Square, Skokie, IL...................... 100% 88% N/A Naper West, Naperville, IL...................... 83%* 86% N/A Dominicks-West Chicago, West Chicago, IL........ 100% N/A N/A Shops at Coopers Grove, Country Club Hills, IL.. 100% N/A N/A Maple Plaza, Downers Grove, IL.................. 100% N/A N/A Orland Park Retail, Orland Park, IL............. 100% N/A N/A Wisner/Milwaukee Plaza, Chicago, IL............. 100% N/A N/A -10- As of December 31, --------------------- Properties 1998 1997 1996 ---------- -------- -------- -------- Homewood Plaza, Homewood, IL.................... 100% N/A N/A Elmhurst City Center, Elmhurst, IL.............. 100% N/A N/A Shoppes of Mill Creek, Palos Park, IL........... 98%* N/A N/A Oak Forest Commons, Oak Forest, IL.............. 100% N/A N/A Prairie Square, Sun Prairie, WI................. 90%* N/A N/A Downers Grove Plaza, Downers Grove, IL.......... 100% N/A N/A St. James Crossing, Westmont, IL................ 91%* N/A N/A Woodfield Plaza, Schaumburg, IL................. 97%* N/A N/A Lake Park Plaza, Michigan City, IN.............. 74%* N/A N/A Chestnut Court, Darien, IL...................... 98%* N/A N/A Western & Howard, Chicago, IL................... 100% N/A N/A High Point Center, Madison, WI.................. 90%* N/A N/A Wauconda Shopping Center, Wauconda, IL.......... 100% N/A N/A Berwyn Plaza, Berwyn, IL........................ 100% N/A N/A Woodland Heights, Streamwood, IL................ 81%* N/A N/A Schaumburg Shopping Center, Schaumburg, IL...... 93%* N/A N/A Bergen Plaza, Oakdale, MN....................... 98%* N/A N/A Walgreens-Woodstock, Woodstock, IL.............. 100% N/A N/A Winnetka Commons, New Hope, MN.................. 100% N/A N/A Eastgate Shopping Center, Lombard, IL........... 91%* N/A N/A Fairview Heights Plaza, Fairview Heights, IL.... 78%* N/A N/A Orland Greens, Orland Park, IL.................. 100% N/A N/A Bakers Shoes, Chicago, IL....................... 100% N/A N/A Staples, Freeport, IL........................... 100% N/A N/A Two Rivers Plaza, Bolingbrook, IL............... 100% N/A N/A Edinburgh Festival, Brooklyn Park, MN........... 97%* N/A N/A Woodfield Commons-East/West, Schaumburg, IL..... 89%* N/A N/A Riverplace Center, Noblesville, IN.............. 100% N/A N/A Rose Plaza, Elmwood Park, IL.................... 100% N/A N/A Marketplace at Six Corners, Chicago, IL......... 100% N/A N/A Joliet Commons, Joliet, IL...................... 97% N/A N/A Springboro Plaza, Springboro, OH................ 100% N/A N/A Carmax-Schaumburg, Schaumburg, IL............... 100% N/A N/A Carmax-Tinley Park, Tinley Park, IL............. 100% N/A N/A Hollywood Video-Hammond, Hammond, IN............ 100% N/A N/A Park Center Plaza, Tinley Park, IL.............. 71%* N/A N/A * As part of the purchase of these properties the Company receives rent under master lease agreements on the space which was vacant at the time of the purchase, resulting in 100% economic occupancy at December 31, 1998 for each of these centers, except Six corners, Iroquois Center, Naper West, Prairie Square, Lake Park Plaza and Woodland Heights where the master lease agreement and collection of rent on spaces vacated results in economic occupancy of 86%, 90%, 96%, 97%, 98% and 95%, respectively. The master lease agreements are for periods ranging from one to two years from the purchase date or until the spaces are leased. -11- Item 3. Legal Proceedings The Company is not subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1998. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market Information As of December 31, 1998, there were 19,286 stockholders of the Company. There is no public market for the shares. Distributions The Company declared distributions to Stockholders totaling $.88 per weighted average share outstanding during the year ended December 31, 1998. Of this amount, $.67 qualifies as distributions taxable as ordinary income for 1998 and the remainder constitutes a return of capital for tax purposes. Sales of Unregistered Securities On October 24, 1996, Roland Burris, a Director of the Company, exercised options to purchase 1,000 shares at a price equal to $9.05 per share. Both the option and the shares were issued pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1993, as amended. -12- Item 6. Selected Financial Data INLAND REAL ESTATE CORPORATION (a Maryland corporation) For the years ended December 31, 1998, 1997, 1996 and 1995 (not covered by the Independent Auditors' Report) 1998 1997 1996 1995 ---- ---- ---- ---- Total assets......... $ 787,608,547 333,590,131 104,508,686 18,750,877 Mortgages payable.... $ 288,982,470 106,589,710 30,838,233 750,727 Total income......... $ 73,302,278 29,421,585 6,327,734 1,180,422 Net income........... $ 24,085,871 8,647,221 2,452,221 496,514 Net income per share, basic and diluted (b)........ $ .60 .57 .55 .53 Distributions declared........... $ 35,443,213 13,127,597 3,704,943 736,627 Distributions per share (b).......... $ .88 .86 .82 .78 Funds from Operations (b)(c)............. $ 35,474,823 13,203,666 3,391,365 666,408 Funds available for distribution (c)... $ 35,698,975 13,141,242 3,680,824 787,011 Cash flows provided by operating activities......... $ 42,774,744 15,923,839 5,529,709 978,350 Cash flows used by investing activities......... $(344,384,056) (146,994,619) (68,976,841) (6,577,843) Cash flows provided by financing activities........ $ 373,520,427 173,724,632 71,199,936 6,327,490 Weighted average number of common shares outstanding. 40,359,796 15,225,983 4,494,620 943,156 (a) The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. -13- (b) The net income and distributions per share are based upon the weighted average number of common shares outstanding. The $.88 per share distributions for the year ended December 31, 1998, represented 99.6% of the Company's Funds From Operations ("FFO") and 99.0% of funds available for distribution for that period. See Footnote (c) below for information regarding the Company's calculation of FFO. Distributions by the Company to the extent of its current and accumulated earnings and profits for federal income tax purposes are taxable to stockholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the stockholder's basis in the shares to the extent thereof, and thereafter as taxable gain (a return of capital). These Distributions in excess of earnings and profits will have the effect of deferring taxation of the amount of the Distribution until the sale of the stockholder's shares. For the year ended December 31, 1998, $8,428,070 (or 23.78% of the $35,443,213 Distribution declared for 1998) represented a return of capital. The balance of the Distribution constitutes ordinary income. In order to maintain its qualification as a REIT, the Company must make annual Distributions to stockholders of at least 95% of its REIT taxable income, or approximately $25,265,000 for 1998. REIT taxable income does not include net capital gains. Under certain circumstances, the Company may be required to make Distributions in excess of cash available for distribution in order to meet the REIT distribution requirements. Distributions are determined by the Company's Board of Directors and are dependent on a number of factors, including the amount of funds available for distribution, the Company's financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute the funds, the Company's capital expenditures, the annual distribution required to maintain REIT status under the Code and other factors the Board of Directors may deem relevant. (c) One of the Company's objectives is to provide cash distributions to its Stockholders from cash generated by the Company's operations. Cash generated from operations is not equivalent to the Company's net operating income as determined under GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a standard known as "Funds from Operations" or "FFO" for short, which it believes more accurately reflects the operating performance of a REIT such as the Company. As defined by NAREIT, FFO means net income computed in accordance with GAAP, less extraordinary, unusual and non-recurring items, excluding gains (or losses) from debt restructuring and sales of property plus depreciation on real property and amortization and after adjustments for unconsolidated partnership and joint ventures in which the REIT holds an interest. The Company has adopted the NAREIT definition for computing FFO because management believes that, subject to the following limitations, FFO provides a basis for comparing the performance and operations of the Company to those of other REITs. The calculation of FFO may vary from entity to entity since capitalization and expense policies tend to vary from entity to entity. Items which are capitalized do not impact FFO, whereas items that are expensed reduce FFO. -14- Consequently, the presentation of FFO by the Company may not be comparable to other similarly titled measures presented by other REITs. FFO is not intended to be an alternative to "Net Income" as an indicator of the Company's performance nor to "Cash Flows from Operating Activities" as determined by GAAP as a measure of the Company's capacity to pay distributions. FFO and funds available for distribution are calculated as follows: Year ended December 31, 1998 1997 ---- ---- Net income........................... $ 24,085,871 8,647,221 Depreciation, net of minority interest 11,388,952 4,556,445 ------------- ------------ Funds from operations(1)........... 35,474,823 13,203,666 Principal amortization of debt....... (74,454) (67,300) Straight line rental income (2)...... (2,120,951) (654,978) Acquisition cost expenses (3)........ 437,783 249,493 Rental income received under master lease agreements (4)........ 1,981,774 410,361 ------------- ------------ Funds available for distribution... $ 35,698,975 13,141,242 ============= ============ (1) FFO does not represent cash generated from operating activities calculated in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (2) Certain tenant leases contain provisions providing for stepped rent increases. GAAP requires the Company to record rental income for the period of occupancy using the effective monthly rent, which is the average monthly rent for the entire period of occupancy during the term of the lease. (3) Acquisition cost expenses include costs and expenses relating to the acquisition of properties. These costs were estimated to be up to .5% of the Gross Offering Proceeds and were paid from the Proceeds of the Offering, thereby increasing funds available for distribution. (4) As part of several purchases, the Company will receive rent under master lease agreements on some of the spaces currently vacant for periods ranging from one to two years or until the spaces are leased. GAAP requires that as these payments are received, they be recorded as a reduction in the purchase price of the properties rather than as rental income. -15- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this annual report that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing forward- looking statements may be found throughout this report and particularly in the sections headed "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. These statements are subject to a number of risks and uncertainties. Actual results could differ materially from those expressed or implied in the forward-looking statements. For a discussion of the factors that may impact our ability to achieve these results, see the section headed "Risk Factors" contained in our registration statement dated April 7, 1998, as amended. Liquidity and Capital Resources Cash and cash equivalents consists of cash and short-term investments. Cash and cash equivalents, at December 31, 1998 and December 31, 1997, were $123,056,702 and $51,145,587, respectively. The increase in cash and cash equivalents since December 31, 1997 resulted primarily from the sale of Shares and loan proceeds from financing secured by the Company's properties. Partially offsetting the increase in cash and cash equivalents was the use of cash resources to purchase additional properties since December 31, 1997 and the payment of Offering Costs associated with the sale of Shares. The Company intends to use cash and cash equivalents to purchase additional properties, to pay distributions and for working capital requirements. As of December 31, 1998, the Company had acquired eighty-five properties. The properties owned by the Company are currently generating sufficient cash flow to cover operating expenses of the Company plus pay a monthly distribution on weighted average shares. Beginning June 1, 1998, the Company increased the distribution paid to stockholders from $.87 per annum to $.88 per annum on weighted average shares. Distributions declared for the year ended December 31, 1998 were $35,443,213, of which $8,428,070 represents a return of capital for federal income tax purposes. The Company monitors the various qualification tests it must meet to maintain its status as a real estate investment trust. Large ownership of the Company's stock is tested upon purchase to determine that no more than 50% in value of the outstanding stock is owned directly, or indirectly, by five or fewer persons or entities at any time. The Company also determines, on a quarterly basis, that the Gross Income, Asset and Distribution Tests imposed by the REIT requirements are met. On an ongoing basis, as due diligence is performed by the Advisor on potential real estate purchases or temporary investment of uninvested capital, the Company determines that the income from the new asset will qualify for REIT purposes. Beginning with the tax year ended December 31, 1995, the Company has qualified as a REIT. -16- Cash Flows From Operating Activities Net cash provided by operating activities increased from $5,529,709 for the year ended December 31, 1996 to $15,923,839 for the year ended December 31, 1997 to $42,774,744 for the year ended December 31, 1998. These increases are due primarily to increases in net income, depreciation and accrued real estate taxes all resulting from an increase in the number of properties owned by the Company. As of December 31, 1998 the Company had acquired eighty-five properties, as compared to forty-four properties as of December 31, 1997, and twenty-one properties as of December 31, 1996. Cash Flows From Investing Activities The Company used approximately $344 million in cash for investing activities during the year ended December 31, 1998 compared to approximately $147 million and $69 million for the years ended December 31, 1997 and 1996, respectively. Substantially all of the cash was used to purchase properties during each year. Cash Flows From Financing Activities For the year ended December 31, 1998, the Company generated $373,520,427 of cash flows from financing activities as compared to $173,724,632 of cash flows generated from financing activities for the year ended December 31, 1997 and $71,199,936 for the year ended December 31, 1996. These increases are due primarily to the increase in proceeds raised of $290,099,616 from the sale of shares, net of shares repurchased for the year ended December 31, 1998, as compared to $168,138,616 from the sale of shares, net of shares repurchased for the year ended December 31, 1997 and $61,116,826 from the sale of shares, net of shares repurchased for the year ended December 31, 1996. These increases are also due to the Company obtaining $166,352,000 in financing secured by thirty- seven of the Company's properties for the year ended December 31, 1998, as compared to $43,926,176 in financing secured by fifteen of the Company's properties for the year ended December 31, 1997, and $25,670,000 in financing secured by twelve of the Company's properties for the year ended December 31, 1996. The weighted annual average interest rate on the mortgages payable outstanding at December 31, 1998 was approximately 7.00%. See Note (7) of the Notes to Consolidated Financial Statements (Item 8 of the Annual Report) for a description of the terms of the mortgages payable. These increases are partially offset by an increase in the cash used to pay costs associated with selling shares for the year ended December 31, 1998 as compared to the years ended December 31, 1997 and 1996. For the year ended December 31, 1998, the Company paid offering costs totaling $28,881,991, as compared to $17,563,326 paid for the year ended December 31, 1997 and $7,305,153 paid for the year ended December 31, 1996. These increases are also partially offset by an increase in the amount of distributions paid for the year ended December 31, 1998 of $33,297,236 as compared to the distributions paid for the year ended December 31, 1997 of $11,899,431 and distributions paid for the year ended December 31 ,1996 of $3,285,528. -17- The Advisor has guaranteed payment of all public offering expenses (excluding selling commissions, the marketing contribution and the due diligence expense allowance fee) in excess of 5.5% of the Gross Offering Proceeds of the Offering (the "Gross Offering Proceeds") or all organization and offering expenses (including such selling expenses) which together exceed 15% of the Gross Offering Proceeds. As of December 31, 1998, organizational and offering costs totaling $57,572,899 did not exceed these limitations. Results of Operations At December 31, 1998, the Company owned fifteen single-user retail properties, fifty-seven Neighborhood Retail Centers and thirteen Community Centers. Total income for the years ended December 31, 1998, 1997 and 1996 was $73,302,278, $29,421,585 and $6,327,734 respectively. These increases are due primarily to increases in rental income resulting from an increase in the number of properties owned by the Company and a full twelve months of operations on properties acquired during 1997 and 1996. As of December 31, 1998, the Company had acquired eighty-five properties, as compared to forty-four properties as of December 31, 1997 and twenty-one properties as of December 31, 1996. The purchase of additional properties also resulted in increases in property operating expenses including depreciation expense. The increase in mortgage interest to Affiliates and non-affiliates for the year ended December 31, 1997, as compared to the year ended December 31, 1996, is due to an increase in mortgages payable from approximately $30,800,000 to approximately $106,600,000. Similarly, the increase in mortgage interest to non-affiliates for the year ended December 31, 1998, as compared to the year ended December 31, 1997, is due to an increase in mortgages payable from approximately $106,600,000 to approximately $289,000,000. Interest income is the result of cash and cash equivalents being invested in short-term investments until a property is purchased. The increases in professional services to Affiliates and non-affiliates and general and administrative expenses to Affiliates and non-affiliates for the year ended December 31, 1998, as compared to the year ended December 31, 1997 and 1996, is due to an increase in the number of properties owned by the Company and an increase in the number of stockholders. -18- The increase in general and administrative expenses to Affiliates and non- affiliates for the year ended December 31, 1998, as compared to the years ended December 31, 1997 and 1996 is due primarily to an increase in the number of stockholders. The Advisor may receive an annual Advisor Asset Management Fee of not more than 1% of the Average Invested Assets, paid quarterly. The Company paid an Advisor Asset Management Fee which represented .20%, .45% and .56% of the 1% of the Average Invested Assets for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in acquisition cost expenses to Affiliates and non-affiliates is due to the increased number of properties considered for acquisition by the Company and not purchased. The consolidated financial statements include the accounts of the Company and the limited liability company ("LLC") which owns the Joliet Commons Shopping Center. The Company entered into an LLC with an unaffiliated third party (the "Seller") for the purchase of Joliet Commons. The transaction was structured such that the Company contributed approximately $52,000 for a 1% interest in an LLC and the Seller contributed a property with a value of approximately $19,733,000 and debt of approximately $14,569,000 to the LLC for a 99% interest. The Company is the managing member of the LLC. Due to the Company's ability as managing member to directly control the LLC, it is consolidated for financial reporting purposes. The Seller's interest is reflected as a minority interest in the accompanying consolidated financial statements. -19- Year 2000 Issues General Many computer operating systems and software applications were designed such that the year 1999 is the maximum date that can be processed accurately. In conducting business, the Company relies on computers and operating systems provided by equipment manufacturers, and also on application software developed internally and, to a limited extent, by outside software vendors. The Company has assessed its vulnerability to the so-called "Year-2000 Issue" with respect to its equipment and computer systems. State of Readiness The Company has identified the following three areas for "Year-2000" compliance efforts: Business Computer Systems: The majority of the Advisor's information technology systems were developed internally and include accounting, lease management, investment portfolio tracking, and tax return preparation. The Company has rights to the source code for these applications and employs programmers who are knowledgeable regarding these systems. The process of testing these internal systems to determine year 2000 compliance is nearly complete. The Company does not anticipate any material costs relating to its business computer systems regarding year 2000 compliance since the Company's critical hardware and software systems use four digits to represent the applicable year. The Company does use various computers, so-called "PC's", that may run software that may not use four digits to represent the applicable year. The Company is in the process of testing the PC hardware and software to determine year 2000 compliance, but it must be noted that such PC's are incidental to the Company's critical systems. The Company is considering independent testing of its critical systems. Tenants and Suppliers: The Company is in the process of surveying tenants, suppliers and other parties with whom the Company does a significant amount of business to identify the Company's potential exposure in the event such parties are not year 2000 compliant in a timely manner. At this time, the Company is not aware of any of these parties anticipating a material Year 2000 compliance issue. However, since this area involves some parties over which the Company has no control, such as public utility companies, it is difficult, at best, to judge the status of the outside companies' year 2000 compliance. The Company is working closely with significant suppliers of goods and services in an effort to minimize the impact of the failure of any supplier to become year 2000 compliant by December 31, 1999. The Company's investigations and assessments of possible year 2000 issues are in a preliminary stage, and currently the Company is not aware of any material impact on its business, operations or financial condition even if one or more parties is not Year 2000 compliant in a timely manner, due to the number and nature of the Company's diverse tenant base. The Company will continue to investigate and assess its tenants through the year ended December 31, 1999. Non-Information Technology Systems: In the operation of its properties, the Company has acquired equipment with embedded technology such as microcontrollers, which operate heating, ventilation, and air conditioning systems, fire alarms, security systems, telephones and other equipment utilizing time-sensitive technology. The Company is in the process of evaluating its potential exposure and costs if such non-information technology systems are not year 2000 compliant and expects to be able to complete its assessment during the second quarter of 1999. -20- Year 2000 Costs The Company's Advisor and its Affiliates estimate that costs to achieve year 2000 compliance will not exceed $100,000. However, only approximately 10% of these costs will be directly allocated to and paid by the Company. The balance of the year 2000 compliance costs, approximately 97%, will be paid by the Advisor and its Affiliates. Total year 2000 compliance costs incurred through December 31, 1998 are estimated at approximately $5,000. Year 2000 Risks The most reasonable likely worst case scenario for the Company with respect to the year 2000 non-compliance of its business computer systems would be the inability to access information which could result in the failure to issue financial reports. The most reasonable likely worst case scenario for the Company with respect to the year 2000 non-compliance of its tenants is failure to receive rental income which could result in the Company being unable to meet cash requirements for monthly expenses and distributions. The most reasonable likely worst case scenario for the Company with respect to the year 2000 non- compliance of its suppliers is the failure to supply necessary utilities; including, but not limited to heating, as a result of a malfunctioning of non- information technology systems in some of the Company's properties. Contingency Plan The Company expects to be Year 2000 compliant in advance of the year 2000. The Company will continue to monitor its progress and state of readiness, and is in the process of formulating a contingency plan which the Company will be prepared to adopt with respect to areas in which evidence arises that it may not become Year 2000 compliant in sufficient time. As part of its contingency plan, the Company may consider obtaining a line of credit to meet short term cash needs. In the event of a failure of the Company's business computer systems, the Company may also consider the need to delay distributions until its business computer systems could again process distributions or its tenants could begin payment of rents. As information is obtained that may indicate such parties may not become Year 2000 compliant in sufficient time, the Company is prepared to develop contingency plans, accordingly. Subsequent Events In January 1999, the Company received $13,887,649 of offering proceeds for subscriptions received as of December 31, 1998, bringing total Gross Offering Proceeds to approximately $553,219,062. In January 1999, the Company paid a distribution of $3,809,911 to the Stockholders. On January 6, 1999, the Company purchased The Plymouth Collection Shopping Center from an unaffiliated third party for approximately $6,626,000. The property is located in Plymouth, Minnesota and contains approximately 40,815 square feet of leasable space. Its anchor tenants are Golf Galaxy, Vintage Liquors and Paper Warehouse. -21- On January 20, 1999, the Company purchased the Circuit City Store from an unaffiliated third party for approximately $2,900,000. The property is located in Traverse City, Michigan and contains approximately 21,337 square feet of leasable space. Its sole tenant is Circuit City. On February 1, 1999, the Company purchased the Loehmann's Plaza property from an unaffiliated third party for approximately $13,565,000. The property is located in Brookfield, Wisconsin and contains approximately 107,952 square feet of leasable space. Its anchor tenants are Loehmann's, Dickens Books and V. Richards Market. On February 8, 1999, the Company purchased the Baytowne Square, Baytowne Shoppes and Wendy's Outlot property from an unaffiliated third party for approximately $12,655,000. The property is located in Champaign, Illinois and contains approximately 119,014 square feet of leasable space. Its anchor tenants are Staples and PetSmart. On February 8, 1999, the Company purchased the Woodland Commons Shopping Center from an unaffiliated third party for approximately $20,036,511. The property is located in Buffalo Grove, Illinois and contains approximately 170,033 square feet of leasable space. As part of the purchase of this property, the Company agreed to assume the existing mortgage with Principal Life Insurance Company for $11,469,903. On March 2, 1999, the Company received $1,117,665 as payment for approximately 5.173 acres of land dedicated to the City of St. Charles for the development of public improvements relating to the Stuarts Crossing Shopping Center. On March 9, 1999, the Company purchased a single-user shopping center known as "Super Value - Indianapolis" from an unaffiliated third party for approximately $5,734,000. The property is located in Indianapolis, Indiana and contains approximately 67,541 square feet of leasable space. Its sole tenant is Cub Foods. On March 9, 1999, the Company purchased a single-user shopping center known as "Super Value - Plymouth" from an unaffiliated third party for approximately $5,465,000. The property is located in Plymouth, Minnesota and contains approximately 67,510 square feet of leasable space. Its sole tenant is Cub Foods. On March 17, 1999, the Company purchased the Gateway Square Shopping Center from an unaffiliated third party for approximately $6,940,000. The property is located in Hinsdale, Illinois and contains approximately 40,150 square feet of leasable space. Its anchor tenant is Calico Corners. -22- Impact of Accounting Principles Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities, was issued in 1998 and is effective for fiscal years beginning after June 15, 1999. In April 1998, the AICPA issued Statement of Position No. 98-5 "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up activities and organization costs. It requires that costs of start-up activities and organization costs be expensed when incurred. Adoption of this statement is required for fiscal years beginning after December 15, 1998, and the Company plans to adopt the statement effective January 1, 1999. This statement will have no material impact. Inflation For the Company's Neighborhood Retail Centers and Community Centers, inflation is likely to increase rental income from leases to new tenants and lease renewals, subject to market conditions. The Company's rental income and operating expenses for those properties owned or to be owned and operated under triple-net leases are not likely to be directly affected by future inflation, since rents are or will be fixed under the leases and property expenses are the responsibility of the tenants. The capital appreciation of triple-net leased properties is likely to be influenced by interest rate fluctuations. To the extent that inflation determines interest rates, future inflation may have an effect on the capital appreciation of triple-net leased properties. Item 7(a). Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate changes primarily as a result of its long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objectives is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instruments. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. 1999 2000 2001 2002 2003 ----------- ----------- ----------- ---------- ---------- Fixed rate debt 9,823,528 366,692 8,954,934 172,303 31,484,369 Average interest rate on maturing debt 8.00% - 9.00% - 7.32% Variable rate debt 70,849 4,241,187 - - - Average interest rate on maturing debt - 7.03% - - - The fair value of the Company's debt approximates its carrying amount. -23- The Company entered into rate lock agreements in connection with two separate loans between the Company and Lehman Brothers Holdings, Inc. and Column Financial, Inc., respectively. These Agreements allowed the Company to set the interest rate on the loan at time of execution of such Agreements rather than at the funding. These Agreements were designed to hedge against higher interest rates at the time of the loan closings. The Company paid Lehman Brothers Holdings, Inc. $636,000 of loan fees and $503,295 of other costs and paid Column Financial, Inc. $37,125 of loan fees and $267,884 of other costs in connection with these loans. The Lehman Brothers Holdings, Inc. loan and the Column Financial, Inc. loan closed in October and November 1998, respectively. Approximately $10,512,036 or 4% of the Company's mortgages payable at December 31, 1998 have variable interest rates averaging 4.73%. An increase in the variable interest rate on certain mortgages payable constitutes a market risk. Item 8. Consolidated Financial Statements and Supplementary Data INLAND REAL ESTATE CORPORATION (a Maryland corporation) Index ----- Page Independent Auditors' Report............................................. 25 Financial Statements: Consolidated Balance Sheets, December 31, 1998 and 1997................ 26 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996..................................... 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996..................................... 29 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..................................... 30 Notes to Consolidated Financial Statements............................. 32 Real Estate and Accumulated Depreciation (Schedule III).................. 47 Schedules not filed: All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. -24- INDEPENDENT AUDITORS' REPORT The Board of Directors Inland Real Estate Corporation: We have audited the consolidated financial statements of Inland Real Estate Corporation (the Company) as listed in the accompanying index. In connection with the audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inland Real Estate Corporation as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Chicago, Illinois January 29, 1999 except as to Note 13, which is as of March 17, 1999 -25- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Balance Sheets December 31, 1998 and 1997 Assets ------ 1998 1997 ---- ---- Investment properties (Notes 1 and 5): Land............................................ $193,093,898 75,801,319 Construction in progress (Note 9)............... 1,230,448 - Building and improvements....................... 452,885,969 200,509,519 ------------- ------------- 647,210,315 276,310,838 Less accumulated depreciation................... 17,161,998 5,665,483 ------------- ------------- Net investment properties....................... 630,048,317 270,645,355 ------------- ------------- Cash and cash equivalents including amount held by property manager (Note 1)............... 123,056,702 51,145,587 Restricted cash (Notes 1 and 9)................... 15,613,197 2,073,799 Accounts and rents receivable (net of allowance for doubtful accounts of $200,000 and -0- at December 31, 1998 and 1997, respectively) (Note 6)........................................ 12,720,962 4,926,643 Deposits and other assets (Note 8)................ 2,854,836 3,924,431 Deferred organization costs (net of accumulated amortization of $16,477 and $10,985 at December 31, 1998 and 1997, respectively) (Note 1)........................................ 19,746 16,477 Loan fees (net of accumulated amortization of $395,962 and $131,266 at December 31, 1998 and 1997, respectively,) (Note 1)............... 3,294,787 857,839 ------------- ------------- Total assets.................................. $787,608,547 333,590,131 ============= ============= See accompanying notes to consolidated financial statements. -26- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Balance Sheets (continued) December 31, 1998 and 1997 Liabilities and Stockholders' Equity ------------------------------------ 1998 1997 Liabilities: ---- ---- Accounts payable................................ $ 917,483 47,550 Accrued offering costs to Affiliates (Note 3)... 890,786 544,288 Accrued offering costs to non-affiliates........ 2,740 36,574 Accrued interest payable to Affiliates.......... 4,558 4,641 Accrued interest payable to non-affiliates...... 1,651,334 560,821 Accrued real estate taxes....................... 14,384,234 7,031,732 Distributions payable (Note 13)................. 3,844,649 1,777,113 Security deposits............................... 1,561,020 754,359 Mortgages payable (Note 7)...................... 288,982,470 106,589,710 Unearned income................................. 448,809 495,535 Other liabilities (Note 5)...................... 5,208,755 493,116 Due to Affiliates (Note 3)...................... 32,925 337,825 ------------- ------------- Total liabilities............................. 317,929,763 118,673,264 ------------- ------------- Minority interest (Note 2)........................ 5,214,298 - ------------- ------------- Stockholders' Equity (Notes 1 and 3): Preferred stock, $.01 par value, 6,000,000 Shares authorized; none issued and outstanding at December 31, 1998 and December 31, 1997.... - - Common stock, $.01 par value, 100,000,000 Shares authorized; 52,394,500 and 24,973,340 issued and outstanding at December 31, 1998 and 1997, respectively.................................. 523,945 249,733 Additional paid-in capital (net of offering costs of $57,536,374 and $28,341,719 at December 31, 1998 and 1997, respectively, of which $51,108,966 and $24,172,634 was paid to Affiliates, respectively).................. 481,271,094 220,640,345 Accumulated distributions in excess of net income................................. (17,330,553) (5,973,211) ------------- ------------- Total stockholders' equity.................... 464,464,486 214,916,867 ------------- ------------- Commitments and contingencies (Note 12)........... Total liabilities and stockholders' equity........ $787,608,547 333,590,131 ============= ============= See accompanying notes to consolidated financial statements. -27- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Statements of Operations For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 Income: ---- ---- ---- Rental income (Notes 1 and 6)..... $ 51,133,774 21,112,365 4,467,903 Additional rental income.......... 16,679,388 6,592,983 1,336,809 Interest income................... 5,185,534 1,615,520 438,188 Other income...................... 303,582 100,717 84,834 ------------- ------------ ------------ 73,302,278 29,421,585 6,327,734 ------------- ------------ ------------ Expenses: Professional services to Affiliates...................... 83,203 29,304 16,476 Professional services to non-affiliates.................. 357,142 96,681 46,790 General and administrative expenses to Affiliates.......... 330,651 115,468 42,904 General and administrative expenses to non-affiliates...... 811,952 241,501 77,389 Advisor asset management fee...... 965,108 843,000 238,108 Property operating expenses to Affiliates...................... 2,779,053 1,120,429 229,307 Property operating expenses to non-affiliates.................. 18,238,307 7,742,595 1,643,867 Mortgage interest to Affiliates... 55,154 86,455 64,165 Mortgage interest to non-affiliates.................. 13,366,445 5,568,109 533,320 Depreciation...................... 11,496,515 4,556,445 939,144 Amortization...................... 166,635 124,884 17,367 Acquisition cost expenses to Affiliates...................... 236,380 194,187 - Acquisition cost expenses to non-affiliates.................. 201,403 55,306 26,676 ------------- ------------ ------------ 49,087,948 20,774,364 3,875,513 ------------- ------------ ------------ Income before minority interest in earnings.......... $ 24,214,330 8,647,221 2,452,221 Minority interest in earnings..... (128,459) - - ------------- ------------ ------------ Net income...................... $ 24,085,871 - - ============= ============ ============ Basic net income per common share... $ .60 .57 .55 ============= ============ ============ Diluted net income per common share. $ .60 .57 .55 ============= ============ ============ See accompanying notes to consolidated financial statements. -28- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Statements of Stockholders' Equity For the years ended December 31, 1998, 1997 and 1996 Accumulated Additional Distributions Common Paid-in in excess of Stock Capital net income Total ----------- ------------ -------------- ------------ Balance January 1, 1996... 19,996 16,835,183 (240,113) 16,615,066 Net income................ - - 2,452,221 2,452,221 Distributions declared ($.82 per weighted average common stock shares outstanding)............ - - (3,704,943) (3,704,943) Proceeds from Offering including DRP (net of Offering costs of $7,378,933)............. 61,038 53,707,177 - 53,768,215 Repurchases of Shares..... (34) (30,287) - (30,321) ----------- ------------ -------------- ------------ Balance December 31, 1996. 81,000 70,512,073 (1,492,835) 69,100,238 Net income................ - - 8,647,221 8,647,221 Distributions declared ($.86 per weighted average common stock shares outstanding)............ - - (13,127,597) (13,127,597) Proceeds from Offering including DRP (net of Offering costs of $17,841,611)............ 169,198 150,548,641 - 150,717,839 Repurchases of Shares..... (465) (420,369) - (420,834) ----------- ------------ -------------- ------------ Balance December 31, 1997. 249,733 220,640,345 (5,973,211) 214,916,867 Net income................ - - 24,085,871 24,085,871 Distributions declared ($.88 per weighted average common stock shares outstanding)............ - - (35,443,213) (35,443,213) Proceeds from Offering including DRP (net of Offering costs of $29,194,655 and subscriptions receivable) (Note 13)................ 275,668 261,946,748 - 262,222,416 Repurchases of Shares..... (1,456) (1,315,999) - (1,317,455) ----------- ------------ -------------- ------------ Balance December 31, 1998. $ 523,945 481,271,094 (17,330,553) 464,464,486 =========== ============ ============== ============= See accompanying notes to consolidated financial statements. -29- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 Cash flows from operating activities: ---- ---- ---- Net income........................ $ 24,085,871 8,647,221 2,452,221 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................... 11,496,515 4,556,445 939,144 Amortization.................... 166,635 124,884 17,367 Minority interest in earnings...................... (128,459) - - Rental income under master lease agreements.............. 1,981,774 410,361 437,678 Straight line rental income..... (2,120,951) (654,978) (119,225) Allowance for doubtful accounts. 200,000 - - Interest on unamortized loan fees..................... 103,855 - - Changes in assets and liabilities: Accounts and rents receivable. (5,873,368) (2,356,909) (1,461,708) Other assets.................. (848,935) (810,073) 62,295 Accounts payable.............. 98,201 (242,362) 283,038 Accrued interest payable...... 1,090,430 508,342 51,878 Accrued real estate taxes..... 7,352,502 4,260,843 2,396,709 Security deposits............. 806,661 506,590 193,286 Other liabilities............. 4,715,639 460,296 3,968 Due to Affiliates............. (304,900) 82,234 248,314 Unearned income............... (46,726) 430,945 24,744 Net cash provided by operating -------------- -------------- ------------- activities........................ 42,774,744 15,923,839 5,529,709 -------------- -------------- ------------- Cash flows from investing activities: Restricted cash................... (13,539,398) (1,951,756) - Additions to investment properties net of related payables......... (2,514,122) (836,962) (136,819) Purchase of investment properties. (329,018,618) (141,187,371) (68,717,979) Deposit for tenant improvements... - - (122,043) Construction in progress.......... (1,230,448) - - Deposits on investment properties. 1,918,530 (3,018,530) - Net cash used in investing -------------- -------------- ------------- activities........................ (344,384,056) (146,994,619) (68,976,841) -------------- -------------- ------------- Cash flows from financing activities: Proceeds from offering............ 291,417,071 168,559,450 61,147,147 Repurchase of Shares.............. (1,317,455) (420,834) (30,321) Payments of offering costs........ (28,881,991) (17,563,326) (7,305,153) Loan proceeds..................... 166,352,000 43,926,176 25,670,000 Loan fees......................... (2,701,644) (638,819) (350,286) See accompanying notes to consolidated financial statements. -30- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Consolidated Statements of Cash Flows (continued) For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Distributions paid................ $ (33,297,236) (11,899,431) (3,285,528) Repayment of notes from Affiliate. - (8,000,000) (3,271,185) Principal payments of debt........ (18,041,255) (238,584) (1,374,738) Payment of deferred organization costs........................... (9,063) - - Net cash provided by financing -------------- -------------- ------------- activities........................ 373,520,427 173,724,632 71,199,936 -------------- -------------- ------------- Net increase in cash and cash equivalents.................. 71,911,115 42,653,852 7,752,804 Cash and cash equivalents at beginning of year................. 51,145,587 8,491,735 738,931 -------------- -------------- ------------- Cash and cash equivalents at end of year....................... $ 123,056,702 51,145,587 8,491,735 ============== ============== ============= Supplemental schedule of noncash investing and financing activities: 1998 1997 1996 ---- ---- ---- Purchase of investment properties.. $(368,364,949) (181,251,256) (77,421,408) Assumption of mortgage debt...... 34,082,015 32,063,885 5,803,429 Note payable to Affiliate........ - 8,000,000 2,900,000 Minority interest................ 5,264,316 - - -------------- -------------- ------------- $(329,018,618) (141,187,371) (68,717,979) ============== ============== ============= Distributions payable.............. $ 3,844,649 1,777,113 548,947 ============== ============== ============= Cash paid for interest............. $ 12,435,024 5,146,222 545,607 ============== ============== ============= See accompanying notes to consolidated financial statements. -31- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements For the years ended December 31, 1998, 1997, and 1996 (1) Organization and Basis of Accounting Inland Real Estate Corporation (the "Company") was formed on May 12, 1994. The Company may acquire existing Neighborhood Retail Centers and Community Centers located primarily within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois. The Company may also acquire single-user retail properties in locations throughout the United States, certain of which may be sale and leaseback transactions, net leased to creditworthy tenants. The Company is also permitted to construct or develop properties, or render services in connection with such development or construction, subject to the Company's compliance with the rules governing real estate investment trusts under the Internal Revenue Code of 1986, ("Code"), as amended. Inland Real Estate Advisory Services, Inc. (the "Advisor"), an Affiliate of the Company, is the advisor to the Company. On October 14, 1994, the Company commenced an initial public offering, on a best efforts basis, ("Initial Offering") of 5,000,000 shares of common stock ("Shares") at $10 per Share. As of July 24, 1996, the Company had received subscriptions for a total of 5,000,000 Shares, thereby completing the Initial Offering. On July 24, 1996, the Company commenced an offering of an additional 10,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Second Offering"). As of July 10, 1997, the Company had received subscriptions for a total of 10,000,000 Shares, thereby completing the Second Offering. On July 14, 1997, the Company commenced an offering of an additional 20,000,000 Shares at $10.00 per Share, on a best efforts basis, (the "Third Offering"). As of March 19, 1998, the Company had received subscriptions for a total of 20,000,000 Shares, thereby completing the Third Offering. On April 7, 1998, the Company commenced an offering of an additional 27,000,000 Shares at $11.00 per Share, on a best efforts basis, (the "Fourth Offering"). As of December 31, 1998, the Company had received subscriptions for a total of 16,642,397 Shares in the Fourth Offering. In addition, as of December 31, 1998, the Company has distributed 2,212,934 Shares through the Company's Distribution Reinvestment Program ("DRP"). As of December 31, 1998, the Company has repurchased a total of 198,375 Shares through the Share Repurchase Program. As a result, as of December 31, 1998, Gross Offering Proceeds total $539,331,413, net of Shares repurchased through the Share Repurchase Program. -32- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) On September 28, 1998, the Company engaged Everen Securities, Inc. to advise the Company on strategic alternatives designed to increase the stockholder value. These alternative include, but are not limited to, evaluating whether: (1) the Company should become internally advised and managed by acquiring the Advisor and the Property Manager; (2) the Company should list its common stock on an exchange or other trading system; and (3) the Company should seek to merge with a third party that is already listed on an exchange or other trading system. Everen Securities, Inc. is expected to complete its advisor engagement by the third quarter 1999. The Company qualified as a real estate investment trust ("REIT") under the Code for federal income tax purposes commencing with the tax year ending December 31, 1995. Since the Company qualified for taxation as a REIT, the Company generally will not be subject to federal income tax to the extent it distributes its REIT taxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed income. The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates fair value. Restricted cash includes amounts held in escrow for various properties. These escrows were established for principal payments of debt, payment of real estate tax and insurance on certain mortgaged properties, master lease, tenant improvements, leasing commissions and guarantees of previous owners obligations. -33- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) Deposits and other assets represent deposits made to third parties for financing in progress and potential acquisitions. Statement of Financial Accounting Standards No. 121 requires the Company to record an impairment loss on its property to be held for investment whenever its carrying value cannot be fully recovered through estimated undiscounted future cash flows from operations and sale of properties. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. As of December 31, 1998, the Company does not believe any such impairment of its properties exists. Depreciation expense is computed using the straight-line method. Buildings and improvements are depreciated based upon estimated useful lives of 30 years for the building and building improvements and 15 years for the site improvements. Loan fees are amortized on a straight line basis over the life of the related loans. Deferred organization costs are amortized over a 60-month period. Offering costs are offset against the Stockholders' equity accounts. Offering costs consist principally of printing, selling and registration costs. Rental income is recognized on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts and rents receivable in the accompanying consolidated balance sheets. The Company recognizes percentage rents as they are received. The Company believes that the interest rates associated with the mortgages payable approximate the market interest rates for these types of debt instruments, and as such, the carrying amount of the mortgages payable and notes payable to Affiliates approximate their fair value. -34- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) Certain reclassifications were made to the 1997 financial statements to conform with the 1998 presentation. The carrying amount of cash and cash equivalents, restricted cash, accounts and rents receivable, accounts payable and other liabilities, accrued offering costs to Affiliates, accrued offering costs to non-Affiliates, accrued interest payable to Affiliates, accrued real estate taxes, and distributions payable approximate fair value because of the relatively short maturity of these instruments. In 1997, the Company adopted FASB No. 123, "Accounting for Stock Based Compensation". As allowed by FASB No. 123, the Company plans to continue to use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock options. This accounting pronouncement did not have a material effect on the financial position or results of operations of the Company. In 1998, the Company adopted FASB No. 128, Earnings per Share. This Statement did not have a material effect on the Company's primary or diluted net income per share. In April 1998, the AICPA issued Statement of Position No. 98-5 "Reporting on the Costs of Start-up Activities." This statement provides guidance on the financial reporting of start-up activities and organization costs. It requires that costs of start-up activities and organization costs be expensed when incurred. Adoption of this statement is required for fiscal years beginning after December 15, 1998, and the Company plans to adopt the statement effective January 1, 1999, and report the impact as a cumulative effect of a change in accounting principle. This statment will have no material impact. The Company may enter into derivative financial instrument transactions in order to mitigate its interest rate risk on a related financial instrument. The Company has designated these derivative financial instruments as hedges and applies deferral accounting, as the instrument to be hedged exposes the Company to interest rate risk, and the derivative financial instrument reduces that exposure. Gains and losses related to the derivative financial instrument are deferred and amortized over the terms of the hedged instrument. If a derivative terminates or is sold, the gain or loss is deferred and amortized over the remaining life of the derivative. The Company has only entered into derivative transactions that satisfy the aforementioned criteria. -35- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (2) Basis of Accounting The consolidated financial statements include the accounts of the Company and the limited liability company ("LLC") which owns the Joliet Commons Shopping Center. The Company entered into an LLC with an unaffiliated third party (the "Seller") for the purchase of Joliet Commons. The transaction was structured such that the Company contributed approximately $52,000 for a 1% interest in an LLC and the Seller contributed a property with a value of approximately $19,733,000 and debt of approximately $14,569,000 to the LLC for a 99% interest. Due to the Company's ability as managing member to directly control the LLC, it is consolidated for financial reporting purposes. (3) Transactions with Affiliates The Advisor and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the Advisor and its Affiliates relating to each of the Offerings. Such expenses include postage, data processing and marketing and are reimbursed at cost. The collective costs to Affiliates incurred relating to the Offerings were $1,489,541 and $1,047,694 as of December 31, 1998 and 1997, respectively, of which $0 and $24,374 were unpaid as of December 31, 1998 and 1997, respectively. In addition, an Affiliate of the Advisor serves as Dealer Manager of each of the Offerings and is entitled to receive selling commissions, a marketing contribution and a due diligence expense allowance fee from the Company in connection with each of the Offerings. Such amounts incurred were $49,619,425 and $23,124,939 as of December 31, 1998 and 1997, respectively, of which $890,786 and $519,914 was unpaid as of December 31, 1998 and 1997, respectively. Approximately $42,235,726 and $19,581,000 of these commissions had been passed through from the Affiliate to unaffiliated soliciting broker/dealers as of December 31, 1998 and 1997, respectively. As of December 31, 1998, the Company had incurred $57,572,899 of organization and offering costs to Affiliates and non-affiliates. Pursuant to the terms of each of the Offerings, the Advisor is required to pay organizational and offering expenses (excluding sales commissions, the marketing contribution and the due diligence expense allowance fee) in excess of 5.5% of the gross proceeds of the Offerings (the "Gross Offering Proceeds") or all organization and offering expenses (including selling commissions) which together exceed 15% of Gross Offering Proceeds. As of December 31, 1998, organizational and offering costs expenses did not exceed the 5.5% and 15% limitations. The Company anticipates that these costs will not exceed these limitations upon payment of any remaining costs associated with the Fourth Offering. The Advisor and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the Advisor and its Affiliates relating to the administration of the Company. Such costs of $83,203, $86,171 and $262,233 are included in professional services to Affiliates, general and administrative expenses to Affiliates and acquisition costs expensed to Affiliates, respectively for the year ended December 31, 1998. -36- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) The Advisor may receive an annual Advisor Asset Management Fee of not more than 1% of the Average Invested Assets, paid quarterly. For any year in which the Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to the extent that the Advisor Asset Management Fee plus Other Operating Expenses paid during the previous calendar year exceed 2% of the Company's Average Invested Assets for the calendar year or 25% of the Company's Net Income for that calendar year; and (ii) to the extent that Stockholders have not received an annual Distribution equal to or greater than the 8% Current Return. The Advisor Asset Management Fee plus other operating expenses paid during the previous calendar year did not exceed 2% of the Company's Average Invested Assets for the calendar year or 25% of the Company's Net Income for that calendar year and Stockholder's received an annual Distribution greater than an 8% return. Accordingly, for the year ended December 31, 1998, the Company has incurred $965,108 of Advisor Asset Management Fees, of which $32,925 remained unpaid at December 31, 1998. The Advisor may receive an annual Advisor Asset Management Fee of not more than 1% of the Average Invested Assets, paid quarterly. The Company paid an Advisor Asset Management Fee which represented .20%, .45% and 56% of the 1% of the Average Invested Assets for the years ended December 31, 1998, 1997 and 1996, respectively. An Affiliate of the Advisor is entitled to receive Property Management Fees for management and leasing services. The Company incurred and paid Property Management Fees of $2,779,053, $1,120,429 and $229,307 for the years ended December 31, 1998, 1997 and 1996, respectively, all of which has been paid. The Advisor and its Affiliates are entitled to reimbursement for salaries and expense of employees of the Advisor and its Affiliates relating to selecting, evaluating and acquiring of properties. Such amounts are included in building and improvements for those costs relating to properties purchased. Such amounts are included in acquisition cost expenses to Affiliates for costs relating to properties not acquired. (4) Stock Option Plan and Soliciting Dealer Warrant Plan The Company adopted an amended and restated Independent Director Stock Option Plan which granted each Independent Director an option to acquire 3,000 Shares as of the date they become a Director and an additional 500 Shares on the date of each annual stockholders' meeting commencing with the annual meeting in 1995 if the Independent Director is a member of the Board on such date. The options for the initial 3,000 Shares granted shall be exercisable as follows: 1,000 Shares on the date of grant and 1,000 Shares on each of the first and second anniversaries of the date of grant. The succeeding options are exercisable on the second anniversary of the date of grant. As of December 31, 1998, options for 1,000 Shares have been exercised for $9.05 per Share. For the years ended December 31, 1998, 1997 and 1996, options to purchase 13,500, 12,500 and 7,500 shares of common stock at prices ranging from $9.05 to $10.45 per share were outstanding during each of the respective periods. -37- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) In addition to sales commissions, Soliciting Dealers may also receive one Soliciting Dealer Warrant for each 40 Shares sold by such Soliciting Dealer during the offerings, subject to state and federal securities laws. The holder of a Soliciting Dealer Warrant will be entitled to purchase one Share from the Company at a price stated in the Offering during the period commencing with the first date upon which the Soliciting Dealer Warrants are issued and ending upon the exercise period. Notwithstanding the foregoing no Soliciting Dealer Warrant will be exercisable until one year from the date of issuance. As of December 31, 1998, 1,159,421 warrants had been issued. As of December 31, 1998, none of these warrants were exercised. These warrants are assumed to have no value. (5) Investment Properties As part of several purchases, the Company receives rent under master lease agreements on the spaces currently vacant for periods ranging from one to two years or until the spaces are leased. GAAP requires that as these payments are received, they be recorded as a reduction in the purchase price of the properties rather than as rental income. The cumulative amount of such payments was $2,962,829 and $981,055 as of December 31, 1998 and 1997, respectively (Note 6). Pro Forma Information (unaudited) The Company acquired its investment properties at various times. The following table sets forth certain summary unaudited pro forma operating data as if the acquisitions had been consummated as of the beginning of the previous respective period. For the years ending December 31, 1998 1997 ---- ---- Rental income........................... $ 63,332,102 54,315,842 Additional rental income................ 21,603,337 19,312,169 Total revenues.......................... 90,422,448 75,343,248 Property operating expenses............. 27,096,436 25,327,075 Total depreciation...................... 14,643,015 13,021,126 Total expenses.......................... 59,789,811 52,607,842 Net income.............................. 30,632,637 22,735,406 The unaudited pro forma operating data are presented for comparative purposes only and are not necessarily indicative of what the actual results of operations would have been for each of the periods presented, nor does such data purport to represent the results to be achieved in future periods. -38- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (6) Operating Leases Master Lease Agreements As part of the purchases of several of the properties, the Company will receive rent under master lease agreements on spaces currently vacant for periods ranging from one to two years or until the spaces are leased and tenants begin paying rent. GAAP requires the Company to reduce the purchase price of the properties as these payments are received, rather than record the payments as rental income. Minimum lease payments under operating leases to be received in the future, excluding rental income under master lease agreements and assuming no expiring leases are renewed are as follows: Minimum Lease Payments ------------- 1999...................................... $ 66,603,241 2000...................................... 61,500,117 2001...................................... 55,708,073 2002...................................... 51,603,773 2003...................................... 46,854,812 Thereafter................................ 381,231,617 ------------- Total..................................... $663,501,633 ============= Remaining lease terms range from one year to forty-five 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 consolidated financial statements include increases of $2,120,951, $654,978 and $119,225 in 1998, 1997 and 1996, of rental income for the period of occupancy for which stepped rent increases apply and $2,907,567 and $786,616 in related accounts and rents receivable as of December 31, 1998 and 1997, respectively. The Company anticipates collecting these amounts over the terms of the related leases as scheduled rent payments are made. -39- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (7) Mortgages Payable Mortgages payable consist of the following at December 31, 1998 and 1997: Current Current Balance at Property as Interest Maturity Monthly Dec. 31, Dec. 31, Collateral Rate Date Payment(a) 1998 1997 - - ------------- ---------- --------- --------- ----------- ----------- Mortgage payable to Affiliate: Walgreens 7.65% 05/2004 $ 5,689 $ 714,443 727,472 Mortgages payable to non-affiliates: Regency Point 7.03% 08/2000 (b) 4,312,036 4,373,461 Eagle Crest 7.85% 10/2003 15,373 2,350,000 2,350,000 Nantucket Square 7.85% 10/2003 14,392 2,200,000 2,200,000 Antioch Plaza 7.85% 10/2003 5,724 875,000 875,000 Mundelein Plaza 7.85% 10/2003 18,382 2,810,000 2,810,000 Montgomery-Goodyear 7.85% 10/2003 4,121 630,000 630,000 Montgomery-Sears 7.85% 08/2003 10,761 1,645,000 1,645,000 Hartford/Naperville 7.85% 08/2003 15,111 2,310,000 2,310,000 Zany Brainy 7.59% 01/2004 7,875 1,245,000 1,245,000 Prospect Heights Plaza 7.59% 01/2004 6,926 1,095,000 1,095,000 Hawthorn Village Commons 7.59% 01/2004 27,071 4,280,000 4,280,000 Six Corners Plaza 7.59% 01/2004 19,608 3,100,000 3,100,000 Salem Square Shopping Center 7.59% 01/2004 19,797 3,130,000 3,130,000 Lansing Square 7.80% 01/2004 52,975 8,150,000 8,150,000 Spring Hill Fashion Mall 7.80% 01/2004 30,485 4,690,000 4,690,000 Aurora Commons (c) 9.00% 10/2001 85,423 9,205,252 9,392,602 Maple Park Place 7.65% 06/2004 48,769 7,650,000 7,650,000 Dominicks-Schaumburg 7.49% 06/2004 33,365 5,345,500 5,345,500 Summit Park Ridge 7.49% 06/2004 9,987 1,600,000 1,600,000 Lincoln Park Place 7.49% 06/2004 6,554 1,050,000 1,050,000 Crestwood Plaza 7.65% 06/2004 5,765 904,380 904,380 Park St. Claire 7.65% 06/2004 4,861 762,500 762,500 Quarry 7.65% 06/2004 5,738 900,000 900,000 Grand/Hunt Club 7.49% 06/2004 11,210 1,796,000 1,796,000 Rivertree Court (d) 10.03% 11/1998 - - 15,700,000 Niles Shopping Center 7.23% 01/2005 9,745 1,617,500 1,617,500 Ameritech 7.23% 01/2005 3,147 522,375 522,375 Calumet Square 7.23% 01/2005 6,223 1,032,920 1,032,920 Sequoia Shopping Center 7.23% 01/2005 9,068 1,505,000 1,505,000 Dominick's Highland Park 7.21% 12/2004 38,453 6,400,000 6,400,000 Fashion Square (e) 3.13% 12/2014 19,740 6,200,000 6,800,000 Mallard Crossing 7.28% 03/2005 25,041 4,050,000 - Prairie Square 7.00% 04/2005 9,215 1,550,000 - -40- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) Current Current Balance at Property as Interest Maturity Monthly Dec. 31, Dec. 31, Collateral Rate Date Payment(a) 1998 1997 - - ------------- ---------- --------- --------- ----------- ----------- Orland Park Retail 7.00% 04/2005 3,716 625,000 - Maple Plaza 7.00% 04/2005 9,408 1,582,500 - Iroquois Center 7.00% 04/2005 35,374 5,950,000 - Dominicks-Countryside 6.99% 04/2003 6,827 1,150,000 - Wilson Plaza 7.00% 04/2005 3,864 650,000 - Eagle Country Market 7.00% 04/2005 8,621 1,450,000 - Terramere Plaza 7.00% 04/2005 13,094 2,202,500 - Shops at Coopers Grove 7.00% 04/2005 17,241 2,900,000 - Party City 7.00% 04/2005 5,871 987,500 - Cobbler Crossing 7.00% 02/2005 31,946 5,476,500 - Dominicks-Glendale Heights 7.00% 01/2005 23,917 4,100,000 - Riversquare Shopping Center 7.15% 01/2005 18,173 3,050,000 - Shorecrest Plaza 7.10% 03/2003 17,620 2,978,000 - Shoppes of Mill Creek 8.00% 09/1999 63,333 9,500,000 - Woodfield Plaza 6.65% 05/2005 53,200 9,600,000 - Schaumburg Plaza (f) 9.25% 12/2009 30,125 3,908,082 - Downers Grove Market 6.82% 08/2005 60,243 10,600,000 - Woodfield Commons- East/West 6.50% 12/2005 72,123 13,500,000 - Dominicks-West Chicago 6.66% 10/2003 17,483 3,150,000 - Marketplace at Six Corners 7.00% 12/2003 65,333 11,200,000 - Joliet Commons 7.79% 10/2007 105,719 14,569,482 - Edinburgh Festival 6.75% 06/2008 26,015 4,625,000 - Lehman secured financing (g) 6.36% 10/2008 299,025 54,600,000 - Column secured financing (h) 7.00% 11/2008 150,695 25,000,000 - ------------ ----------- Mortgages Payable.................................... $288,982,470 106,589,710 ============ =========== -41- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (a) All payments are interest only, with the exception of the loans secured by the Walgreens, Regency Point, Aurora Commons and Joliet 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) This mortgage payable was refinanced prior to maturity. See footnote (h) for information on the new mortgage payable. (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 3.13%. 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 and a trustee fee of $250 paid quarterly. On January 15, 1998, the Company made a $600,000 paydown on the principal outstanding. (f) The seller deposited money into an escrow account, which together with interest earnings on the deposit, will provide a sum that will be drawn down on a monthly basis by the Company to reduce the effective interest rate paid on the loan to 7% per annum for a period of five years. (g) The Company paid $636,000 of loan fees and $503,295 of other costs associated with this financing with Lehman Brothers Holdings Inc. ("Lehman"). This agreement allowed the Company to secure a rate lock agreement to set the interest rate at the time of execution of this financing, thus protecting the Company from future interest rate increases. (h) The Company paid $37,125 of loan fees and $267,884 of other costs associated with this financing with Column Financial Inc. ("Column"). This agreement allowed the Company to secure a rate lock agreement to set the interest rate at the time of execution of this financing, thus protecting the Company from future interest rate increases. -42- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) As of December 31, 1998, the required future principal payments on the Company's mortgages payable over the next five years are as follows: 1999.................................... $ 9,894,377 2000.................................... 4,607,879 2001.................................... 8,954,934 2002.................................... 172,303 2003.................................... 31,484,369 (8) Deposits and Other Assets On September 15, 1998, the Company made initial deposits totaling $1,100,000 for the purchase of three properties. The balance of the purchase prices, approximately $14,300,000, will be paid upon completion of the construction of the centers. The final purchase price may vary depending upon the final net operating income of the properties after lease up. The Company earns interest on these deposits at the rate of 9.375% per annum. The remaining balance represents deposits made to third parties for potential acquisitions. (9) Construction in Progress On August 6, 1998, the Company acquired title to approximately 27 acres of land in St. Charles, Illinois, to be developed into a 204,640 square foot shopping center to be known as "Stuarts Crossing" from an unaffiliated third party. The initial purchase price of $14,176,627, was funded with cash and cash equivalents. Included in the purchase price paid by the Company is $5,351,744 of land and $8,824,883 in cash which has been placed in a development escrow for infrastructure development and the construction of a Jewel/Osco Food Store and adjacent stores. $7,467,500 of this development escrow is included in restricted cash and $1,230,448 is included in construction in progress net of interest income earned on the development escrow. -43- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (10) Earnings per Share Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by reflecting the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. For the years ended December 31, 1998, 1997 and 1996, options to purchase 13,500, 12,500 and 7,500 shares of common stock at prices ranging from $9.05 to $10.45 per share were outstanding during each of the respective periods. As of December 31, 1998, warrants to purchase 1,159,421 shares of common stock at a price of $12.00 per share were outstanding, but were not included in the computation of diluted EPS because the warrants' exercise price was greater than the average market prices of common shares. The weighted average number of common shares outstanding were 40,359,796, 15,225,983 and 4,494,620 for the years ended December 31, 1998, 1997 and 1996, respectively. (11) Segment Reporting The Company owns and seeks to acquire single-user retail centers, neighborhood and community shopping centers in the Midwest, generally consisting of the states of Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin. All of the Company's eighty-five shopping centers are located in these states. Such shopping centers are typically anchored by grocery and drug stores complemented with stores providing a wide range of other goods and services to shoppers. The Company assesses and measures operating results on an individual property basis for each of its eighty-five shopping centers based on net property operations. Since all of the Company's shopping centers exhibit highly similar economic characteristics, cater to the day-to-day living needs of their respective surrounding communities, and offer similar degrees of risk and opportunities for growth,the shopping centers have been aggregated and reported as one operating segment. -44- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) The property revenues, property net operations, and property assets of the reportable segments are summarized in the following tables as of December 31, 1998 and 1997, and for each of the years in the three-year period then ended, along with a reconciliation to net income: 1998 1997 1996 ---- ---- ---- Total property revenues......... $ 68,116,744 27,806,065 5,889,546 Total property operating expenses...................... 21,017,360 8,863,024 1,873,174 Mortgage interest................ 13,421,599 5,654,564 597,485 ------------- ------------- ------------ Net property operations.......... 33,677,785 13,288,477 3,418,887 ------------- ------------- ------------ Interest income.................. 5,185,534 1,615,520 438,188 Less non property expenses: Professional services.......... 440,345 125,985 63,266 General and administrative..... 1,142,603 356,969 120,293 Advisor asset management fee... 965,108 843,000 238,108 Depreciation and amortization.. 11,663,150 4,681,329 956,511 Acquisition cost expense....... 437,783 249,493 26,676 ------------- ------------- ------------ Net income before minority interest in earnings........... $ 24,214,330 8,647,221 2,452,221 ============= ============= ============ Net investment properties........ $630,048,317 270,645,355 ============= ============= (12) Commitments and Contingencies In connection with a tax increment financing district for one of the Company's properties, the Company is contingently liable for any shortfalls in the Tax Increment as defined. At December 31, 1998, the Company does not believe any shortfall under the Tax Increment will be due. As of December 31, 1998 the Company is in the process of surveying tenants, suppliers and other parties with whom the Company does a significant amount of business in order to evaluate potential exposure in the event these parties are not year 2000 compliant on a timely basis. As information is obtained the Company will be prepared to develop contingency plans accordingly. The Company's assessments are at a preliminary stage, however the Company is not currently aware of any material non-compliance by critical tenants or suppliers. Certain factors especially as it relates to the systems of third party suppliers or tenants are out of the Company's control. The failure of these suppliers or tenants systems could have a material adverse effect on the Company. -45- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Notes to Consolidated Financial Statements (continued) (13) Subsequent Events In January, 1999, the Company received $13,887,649 of offering proceeds for subscriptions received as of December 31, 1998, bringing total gross offering proceeds to approximately $553,219,062. In January 1999, the Company paid a distribution of $3,844,649 to the Stockholders. Subsequent to December 31, 1998, the Company has purchsed eight additional properties from unafilliated third parties for a combined purchase price of approximately $83,900,000. On March 2, 1999, the Company received $1,117,665 as payment for approximately 5.173 acres of land dedicated to the City of St. Charles for the development of public improvements relating to the Stuarts Crossing Shopping Center. On behalf of the Company, the Advisor is currently exploring the purchase of additional shopping centers from unaffiliated third parties. -46- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III Real Estate and Accumulated Depreciation December 31, 1998
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....... $ 714,443 $ 78,330 1,130,723 - 78,330 1,130,723 1,209,053 147,622 1988 01/95 Zany Brainy Wheaton, IL....... 1,245,000 838,000 1,626,033 664 838,000 1,626,697 2,464,697 135,537 1995 07/96 Ameritech Joliet, IL........ 522,375 170,000 883,293 2,544 170,000 885,837 1,055,837 49,484 1995 05/97 Dominicks-Schaumburg Schaumburg, IL.... 5,345,500 2,294,437 8,392,661 2,679 2,294,437 8,395,340 10,689,777 442,959 1996 05/97 Dominicks-Highland Park Highland Park, IL. 6,400,000 3,200,000 9,597,963 2,200 3,200,000 9,600,163 12,800,163 610,649 1996 06/97 Dominicks-Glendale Heights Glendale Heights, IL 4,100,000 1,265,000 6,942,997 9,194 1,265,000 6,952,191 8,217,191 309,970 1997 09/97 Party City Oakbrook Terrace, IL 987,500 750,000 1,231,271 - 750,000 1,231,271 1,981,271 47,842 1985 11/97 Eagle Country Market Roselle, IL....... 1,450,000 966,667 1,940,898 - 966,667 1,940,898 2,907,565 92,264 1990 11/97 Dominicks-West Chicago West Chicago, IL.. 3,150,000 1,980,130 4,325,331 - 1,980,130 4,325,331 6,305,461 155,809 1990 01/98 Walgreens-Woodstock Woodstock, IL..... 569,610 395,080 774,906 - 395,080 774,906 1,169,986 14,567 1973 06/98 Bakers Shoes Chicago, IL....... - 645,284 342,162 - 645,284 342,162 987,446 2,851 1891 09/98 Carmax-Schaumburg Schaumburg, IL.... - 7,142,020 13,460,108 - 7,142,020 13,460,108 20,602,128 37,389 1998 12/98 Carmax-Tinley Park Tinley Park, IL... - 6,788,880 12,112,120 - 6,788,880 12,112,120 18,901,000 33,645 1998 12/98 Staples Freeport, IL...... - 725,288 1,968,975 - 725,288 1,968,975 2,694,263 6,149 1998 04/98 Hollywood Video-Hammond Hammond, IN....... - 405,213 945,758 - 405,213 945,758 1,350,971 2,627 1998 12/98 -47- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998 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 ------------ ----------- ------------ ----------- ------------ ------------ -------- ------------ ---- ----- Neighborhood Retail Centers - - --------------------------- Eagle Crest Shopping Center Naperville, IL.... 2,350,000 1,878,618 2,938,352 269,531 1,878,618 3,207,883 5,086,501 389,258 1991 03/95 Montgomery-Goodyear Montgomery, IL.... 630,000 315,000 834,659 (11,158) 315,000 823,501 1,138,501 89,305 1991 09/95 Hartford/Naperville Plaza Naperville, IL.... 2,310,000 990,000 3,427,961 13,002 990,000 3,440,963 4,430,963 402,832 1995 09/95 Nantucket Square Schaumburg, IL.... 2,200,000 1,908,000 2,349,918 (69,881) 1,908,000 2,280,037 4,188,037 247,194 1980 09/95 Antioch Plaza Antioch, IL....... 875,000 268,000 1,360,445 (120,629) 268,000 1,239,816 1,507,816 136,741 1995 12/95 Mundelein Plaza Mundelein, IL..... 2,810,000 1,695,000 3,965,561 (38,893) 1,695,000 3,926,668 5,621,668 360,284 1990 03/96 Regency Point Lockport, IL...... 4,312,036 1,000,000 4,720,800 (19,377) 1,000,000 4,701,423 5,701,423 430,965 1993 04/96 Prospect Heights Prospect Heights, IL 1,095,000 494,300 1,683,005 32,061 494,300 1,715,066 2,209,366 139,285 1985 06/96 Montgomery-Sears Montgomery, IL.... 1,645,000 768,000 2,654,681 (77,754) 768,000 2,576,927 3,344,927 220,162 1990 06/96 Salem Square Countryside, IL... 3,130,000 1,735,000 4,449,217 (16,960) 1,735,000 4,432,257 6,167,257 357,219 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 8,554,031 474,302 1979 08/96 Six Corners Chicago, IL....... 3,100,000 1,440,000 4,532,977 3,638 1,440,000 4,536,615 5,976,615 334,195 1966 10/96 Spring Hill Fashion Corner West Dundee, IL... 4,690,000 1,794,000 7,415,396 8,955 1,794,000 7,424,351 9,218,351 525,442 1985 11/96 Crestwood Plaza Crestwood, IL..... 904,380 325,577 1,483,183 4,750 325,577 1,487,933 1,813,510 99,164 1992 12/96 -48- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998 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 ------------ ----------- ------------ ----------- ------------ ------------ -------- ------------ ---- ----- Park St. Claire Schaumburg, IL.... 762,500 319,578 986,920 226,674 319,578 1,213,594 1,533,172 145,054 1994 12/96 Summit of Park Ridge Park Ridge, IL.... 1,600,000 672,000 2,498,050 23,009 672,000 2,521,059 3,193,059 167,925 1986 12/96 Grand and Hunt Club Gurnee, IL........ 1,796,000 969,840 2,622,575 (52,811) 969,840 2,569,764 3,539,604 171,313 1996 12/96 Quarry Outlot Hodgkins, IL...... 900,000 522,000 1,278,431 8,872 522,000 1,287,303 1,809,303 85,772 1996 12/96 Aurora Commons Aurora, IL........ 9,205,252 3,220,000 8,318,861 11,391 3,220,000 8,330,252 11,550,252 587,845 1988 01/97 Lincoln Park Place Chicago, IL....... 1,050,000 819,000 1,299,902 (91,262) 819,000 1,208,640 2,027,640 80,795 1990 01/97 Niles Shopping Center Niles, IL......... 1,617,500 850,000 2,466,389 26,658 850,000 2,493,047 3,343,047 137,931 1982 04/97 Mallard Crossing Elk Grove Village, IL 4,050,000 1,778,667 6,331,943 (51,910) 1,778,667 6,280,033 8,058,700 369,202 1993 05/97 Cobblers Crossing Elgin, IL......... 5,476,500 3,200,000 7,763,940 (145,569) 3,200,000 7,618,371 10,818,371 445,527 1993 05/97 Calumet Square Calumet City, IL.. 1,032,920 527,000 1,540,046 63,664 527,000 1,603,710 2,130,710 82,874 1967/ 06/97 1994 Sequoia Shopping Center Milwaukee, WI..... 1,505,000 1,216,914 1,806,735 (21,826) 1,216,914 1,784,909 3,001,823 92,082 1988 06/97 Riversquare Shopping Center Naperville, IL.... 3,050,000 2,853,226 3,129,130 205,697 2,853,226 3,334,827 6,188,053 185,544 1988 06/97 Shorecrest Plaza Racine, WI........ 2,978,000 1,150,000 4,775,119 (41,121) 1,150,000 4,733,998 5,883,998 223,850 1977 07/97 Dominicks-Countryside Countryside, IL... 1,150,000 1,375,000 925,106 - 1,375,000 925,106 2,300,106 36,390 1975 12/97 Terramere Plaza Arlington Heights, IL 2,202,500 1,435,000 2,981,314 188,025 1,435,000 3,169,339 4,604,339 103,210 1980 12/97 Wilson Plaza Batavia, IL....... 650,000 310,000 999,366 - 310,000 999,366 1,309,366 38,279 1986 12/97 -49- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998 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 ------------ ----------- ------------ ----------- ------------ ------------ -------- ------------ ----- ---- Iroquois Center Naperville, IL.... 5,950,000 3,668,347 8,276,041 111,588 3,668,347 8,387,629 12,055,976 289,642 1983 12/97 Fashion Square Skokie, IL........ 6,200,000 2,393,534 6,901,769 162,000 2,393,534 7,063,769 9,457,303 237,896 1984 12/97 Shops at Coopers Grove Country Club Hills,IL 2,900,000 1,400,897 4,417,565 (32,729) 1,400,897 4,384,836 5,785,733 153,070 1991 01/98 Maple Plaza Downers Grove, IL. 1,582,500 1,364,202 1,821,820 - 1,364,202 1,821,820 3,186,022 61,119 1988 01/98 Orland Park Retail Orland Park, IL... 625,000 460,867 795,939 (20,291) 460,867 775,648 1,236,515 26,813 1997 02/98 Wisner/Milwaukee Plaza Chicago, IL....... 974,725 528,576 1,383,292 - 528,576 1,383,292 1,911,868 40,013 1994 02/98 Homewood Plaza Homewood, IL...... 1,013,201 534,599 1,398,042 - 534,599 1,398,042 1,932,641 42,683 1993 02/98 Elmhurst City Center Elmhurst, IL...... 2,513,765 2,050,217 2,882,110 (404,277) 2,050,217 2,477,833 4,528,050 72,152 1994 02/98 Shoppes of Mill Creek Palos Park, IL.... 9,500,000 3,305,949 8,001,283 15,938 3,305,949 8,017,221 11,323,170 245,369 1989 03/98 Prairie Square Sun Prairie, WI... 1,550,000 739,575 2,381,050 (21,652) 739,575 2,359,398 3,098,973 72,770 1995 03/98 Oak Forest Commons Oak Forest, IL.... 6,617,871 2,795,519 9,030,068 (5,628) 2,795,519 9,024,440 11,819,959 267,148 1998 03/98 Downers Grove Market Downers Grove, IL. 10,600,000 6,224,467 11,616,661 (29,297) 6,224,467 11,587,364 17,811,831 356,714 1998 03/98 St. James Crossing Westmont, IL...... 3,847,599 2,610,600 4,887,223 (55,593) 2,610,600 4,831,630 7,442,230 128,041 1990 03/98 High Point Center Madison, WI....... 5,360,988 1,449,560 8,812,673 (14,096) 1,449,560 8,798,577 10,248,137 203,179 1984 04/98 Western & Howard Chicago, IL....... 992,681 439,990 1,523,460 - 439,990 1,523,460 1,963,450 34,723 1985 04/98 Wauconda Shopping Center Wauconda, IL...... 1,333,834 454,500 2,067,622 - 454,500 2,067,622 2,522,122 49,027 1988 05/98 -50- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998 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 ------------ ----------- ------------ ----------- ------------ ------------ -------- ------------ ---- ----- Berwyn Plaza Berwyn, IL........ 708,638 769,073 1,078,379 - 769,073 1,078,379 1,847,452 24,215 1983 05/98 Woodland Heights Streamwood, IL.... 3,940,009 2,976,000 6,651,814 (99,166) 2,976,000 6,552,648 9,528,648 135,852 1956 06/98 Schaumburg Shopping Center Schaumburg, IL.... 3,908,082 2,445,555 4,565,548 (37,264) 2,445,555 4,528,284 6,973,839 80,530 1994 06/98 Winnetka Shopping Center New Hope, MN...... 2,233,744 1,596,600 2,858,630 - 1,596,600 2,858,630 4,455,230 56,988 1990 07/98 Eastgate Shopping Center Lombard, IL....... - 4,252,440 2,569,961 (23,447) 4,252,440 2,546,514 6,798,954 42,371 1959 07/98 Orland Greens Shopping Center Orland Park, IL... - 1,246,440 3,876,188 - 1,246,440 3,876,188 5,122,628 34,427 1984 09/98 Two Rivers Plaza Bolingbrook, IL... - 1,820,453 4,990,232 - 1,820,453 4,990,232 6,810,685 64,802 1994 10/98 Edinburgh Festival Brooklyn Park, MN. 4,625,000 2,472,746 6,366,292 (8,430) 2,472,746 6,357,862 8,830,608 49,479 1997 10/98 Riverplace Center Noblesville, IN... - 1,591,682 4,486,929 - 1,591,682 4,486,929 6,078,611 19,529 1992 11/98 Rose Plaza Elmwood Park, IL.. - 1,155,117 1,602,869 - 1,155,117 1,602,869 2,757,986 8,762 1997 11/98 Marketplace at Six Corners Chicago, IL....... 11,200,000 9,007,150 10,014,533 - 9,007,150 10,014,533 19,021,683 28,096 1997 11/98 -51- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998 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 ------------ ----------- ------------ ----------- ------------ ------------ --------- ------------ ---- ----- Community Centers - - ----------------- Lansing Square Lansing, IL....... 8,150,000 4,075,000 12,179,383 800,319 4,075,000 12,979,702 17,054,702 814,506 1991 12/96 Maple Park Place Bolingbrook, IL... 7,650,000 3,665,909 11,669,428 10,603 3,665,909 11,680,031 15,345,940 880,143 1992 01/97 Rivertree Court Vernon Hills, IL.. 17,547,999 8,651,875 22,941,725 (10,680) 8,651,875 22,931,045 31,582,920 1,195,241 1988 07/97 Naper West Naperville, IL.... 7,695,199 5,335,000 9,608,534 (196,681) 5,335,000 9,411,853 14,746,853 349,005 1985 12/97 Woodfield Plaza Schaumburg, IL.... 9,600,000 4,612,277 15,160,000 (94,543) 4,612,277 15,065,457 19,677,734 528,704 1992 01/98 Lake Park Plaza Michigan City, IN. 6,489,618 3,252,861 8,878,263 865,133 3,252,861 9,743,396 12,996,257 302,054 1990 02/98 Chestnut Court Darien, IL........ 8,618,623 5,719,982 10,274,916 125,396 5,719,982 10,400,312 16,120,294 277,398 1987 03/98 Bergen Plaza Oakdale, MN....... 9,141,896 5,346,781 11,700,498 26,841 5,346,781 11,727,339 17,074,120 278,394 1978 04/98 Fairview Heights Plaza Fairview Heights, IL - 2,350,493 8,914,458 - 2,350,493 8,914,458 11,264,951 103,976 1991 08/98 Stuarts Crossing St. Charles, IL... - 5,351,744 - - 5,351,744 - 5,351,744 1999 08/98 Woodfield Commons-East/West Schaumburg, IL.... 13,500,000 8,352,858 18,330,249 (92,451) 8,352,858 18,237,798 26,590,656 184,111 1973 10/98 1975 1997 Joliet Commons Joliet, IL........ 14,569,482 4,088,806 15,680,612 (14,602) 4,088,806 15,666,010 19,754,816 107,563 1995 10/98 Springboro Plaza Springboro, OH.... - 1,079,108 8,228,948 - 1,079,108 8,228,948 9,308,056 35,329 1992 11/98 Park Center Plaza Tinley Park, IL... - 5,363,000 9,610,202 - 5,363,000 9,610,202 14,973,202 30,859 1988 12/98 ------------ ----------- ----------- ----------- ----------- ----------- ----------- ------------ Total $288,982,470 193,093,898 451,538,030 1,347,939 193,093,898 452,885,969 645,979,867 17,161,998 ============ =========== =========== =========== =========== =========== =========== ============
-52- INLAND REAL ESTATE CORPORATION (a Maryland corporation) Schedule III (continued) Real Estate and Accumulated Depreciation December 31, 1998, 1997 and 1996 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, 1998 and 1997 for federal income tax purposes was approximately 626,000,000 and $277,000,000, unaudited respectively. (C) Adjustments to basis includes additions to investment properties net of 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. GAAP requires that as these payments are received, they be recorded as a reduction in the purchase price of the properties rather than as rental income. (D) Reconciliation of real estate owned: 1998 1997 1996 ------------- ------------ ------------- Balance at beginning of year $276,310,838 94,632,981 17,512,432 Purchases of property....... 368,364,949 181,251,256 77,421,408 Additions................... 3,285,854 836,962 136,819 Payments received under master leases............. (1,981,774) (410,361) (437,678) ------------- ------------ ------------- Balance at end of year...... $645,979,867 276,310,838 94,632,981 ============= ============= ============= (E) Reconciliation of accumulated depreciation: Balance at beginning of year $ 5,665,483 1,109,038 169,894 Depreciation expense........ 11,496,515 4,556,445 939,144 ------------- ------------ ------------- Balance at end of year...... $ 17,161,998 5,665,483 1,109,038 ============= ============= ============= -53- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements on accounting or financial disclosure during 1998. PART III Item 10. Directors and Executive Officers of the Registrant Officers and Directors The Company's current officers and directors 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 55) 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 member of the Real Estate Investment Association and the National Association of Real Estate Investment Trusts. G. JOSEPH COSENZA (age 55) 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 Inland's many enterprises. In addition, Mr. Cosenza immediately supervises a staff of nine persons who engage in property acquisition. 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. -54- 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 a Director on the Board of Westbank in Westchester and Hillside, Illinois. HEIDI N. LAWTON (age 37) 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 61) Independent Director since January 1996. Mr. Burris is serving as Of Counsel to the Chicago law firm of Buford, Peters, Ware & Zansitis, LLC. Prior to joining Buford, Peters, Ware & Zansitis, LLC, he was the Managing Partner of Jones, Ware & Grenard. His areas of practice are business transactions, estate and probate, wills and trust, environment and consumer affairs. 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 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. -55- ROBERTA S. MATLIN (age 54) 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 and Vice President of Inland Retail Real Estate Trust, Inc. Ms. Matlin is a Director of Inland Real Estate Investment Corporation, 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 36) 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 and Treasurer and Chief Financial Officer of Inland Retail Real Estate Trust, Inc. 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 46) 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. -56- Item 11. Executive Compensation The Company's executive officers are all employees of Inland Real Estate Investment Corporation, the owner of Inland Real Estate Advisory Services, Inc., the Company's Advisor. The Company does not pay any of these individuals for serving in their respective positions. For a discussion of these fees paid to the Advisor, see "Certain Relationships and Related Transactions" below. The Company pays its Independent Directors an annual fee of $1,000. In addition, each Independent Director receives $250 for attendance (in person or by telephone) at each meeting of the Board or committee thereof. Officers of the Company who are Directors (Messrs. Parks and Cosenza) are not paid fees for serving as directors. Under the Company's amended and restated Independent Director Stock Option Plan, each Independent Director is granted 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. -57- Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information as of March 30, 1999 regarding the number and percentage of shares beneficially owned by: (i) each director; (ii) each executive officer; (iii) all directors and executive officers as a group; and (iv) as of December 31, 1998, any person known to us to be the beneficial owner of more than 5% of the shares. Share amounts and percentages shown for each person or entity are adjusted to give effect to shares that are not outstanding but which may be acquired by the person or entity on exercise of all options exercisable by the person or entity within sixty dates of the date hereof. Those shares are not deemed to be outstanding for purposes of computing the percentage of shares beneficially owned by any other person. Amount of shares Beneficially Percent Title of Class Owned 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 69,472 Shares Less than 1% 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 For the year ended December 31, 1998, the Company incurred and paid $26,936,332 organizational and offering costs to Affiliates. The Advisor and its Affiliates are entitled to reimbursement for salaries and expenses of employees of the Advisor and its Affiliates relating to the offerings and the administration of the Company. During the year ended December 31, 1998, the Company incurred and paid $1,489,541 of these costs. In addition, an Affiliate of the Advisor served as dealer manager of an offering of securities by the Company and earned fees of $26,494,486, of which $890,786 was unpaid as of December 31, 1998. Approximately $22,654,438 of these commissions have been passed through from the Affiliate to unaffiliated soliciting broker/dealers. -58- 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, 1998, the Company has incurred $965,108 of such fees, of which $32,925 remained unpaid at December 31, 1998. An affiliate of the Advisor, Inland Commercial Property Management, is entitled to receive Property Management Fees for management and leasing services. Such fees may not exceed 4.5% of the gross income earned by the Company on properties managed. The Company incurred and paid Property Management Fees of $2,779,053 for the year ended December 31, 1998, all of which have 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, totalling $230,724, 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. An affiliate of the Advisor, Inland Mortgage Investment Corporation, holds the mortgage on the Walgreens/Decatur property. As of December 31, 1998, the remaining balance of the mortgage is $714,443. For the year ended December 31, 1998, the Company paid principal and interest payments totalling $68,183 on this mortgage. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed: (1) The consolidated financial statements of the Company are set forth in the report in Item 8. (2) Financial Statement Schedules: Financial statement schedule for the year ended December 31, 1998 is submitted herewith. Page Real Estate and Accumulated Depreciation (Schedule III)...... 47 Schedules not filed: All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. -59- (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: 21 Subsidiaries of the Registrant 23 Consent of KPMG LLP dated March 31, 1999. 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) 4.1 Specimen Stock Certificate (1) 10.1 Advisory Agreement between Inland Real Estate Corporation and Inland Real Estate Advisory Services dated October 14, 1994 (2) 10.1 (a) Amendment No. 1 to the Advisory Agreement dated October 13, 1995 (4) 10.1 (b) Amendment No. 2 to the Advisory Agreement dated October 13, 1996 (4) 10.1 (c) Amendment No. 3 to the Advisory Agreement effective as of October 13, 1997 (1) 10.2 Form of Management Agreement Between Inland Real Estate Corporation and Inland Commercial Property Management, Inc. (3) 10.3 Amended and Restated Independent Director Stock Option Plan (2) 10.5 Loan Agreement dated as of September 25, 1998 by and between Inland Real Estate LB I LLC, as Borrower and Lehman Brothers Holding Inc., d/b/a/ Lehman Capital, as Lender (5) 10.6 Promissory Note dated September 25, 1998 (5) 10.9 Limited Liability Company Agreement of Inland Real Estate LB I LLC (5) -60- 10.14 Loan Commitment dated as of October 23, 1998 by and between Inland Real Estate Column I, L.L.C., as Borrower and Column Financial, Inc. as Lender. (5) 10.15 Promissory Note dated November 1, 1998 (5) 10.16 Operating Agreement of Inland Real Estate Column I, L.L.C. (5) (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. (5) Included in the Registrant's Form 10-Q filed on November 13, 1998. (b) Reports on Form 8-K: Report on Form 8-K dated October 13, 1998 Item 2. Acquisition or Disposition of Assets Item 5. Other items Item 7. Financial Statements and Exhibits Report on Form 8-K dated October 22, 1998 Item 2. Acquisition or Disposition of Assets Item 7. Financial Statements and Exhibits Report on Form 8-K dated December 14, 1998 Item 2. Acquisition or Disposition of Assets Item 5. Other items Item 7. Financial Statements and Exhibits (c) See exhibit index included above. (d) None -61- 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: March 30, 1999 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: March 30, 1999 /s/ Kelly Tucek /s/ Heidi N. Lawton By: Kelly Tucek By: Heidi N. Lawton Chief Financial and Independent Director Accounting Officer Date: March 30, 1999 Date: March 30, 1999 /s/ G. Joseph Cosenza /s/ Roland W. Burris By: G. Joseph Cosenza By: Roland W. Burris Affiliated Director Independent Director Date: March 30, 1999 Date: March 30, 1999 /s/ Joel G. Herter By: Joel G. Herter Independent Director Date: March 30, 1999 -62- EX-21 2 Subsidiaries of the Registrant Inland Real Estate LB I, LLC, an Illinois limited liability company Inland Real Estate Column I, LLC, an Illinois limited liability company EX-23 3 Consent of KPMG LLP The Board of Directors Inland Real Estate Corporation We consent to incorporation by reference in the registration statement (No. 333-70699) on Form S-3 of Inland Real Estate Corporation of our report dated January 29, 1999, except for note 13, which is as of March 17, 1999, relating to the consolidated balance sheets of Inland Real Estate Corporation as of December 31, 1998, and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and related schedule, which report appears in the December 31, 1998 annual report of Form 10-K of Inland Real Estate Corporation. /s/ KPMG LLP Chicago, Illinois March 31, 1999 EX-27 4
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 123056702 0 12720962 0 0 154245697 647210315 17161998 787608547 21695784 0 0 0 523945 481271094 464464486 0 73302278 0 0 35666349 0 13421599 24085871 0 24085871 0 0 0 24085871 .60 .60
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