UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File #333-64391
Inland Retail Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland #36-4246655
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois 60523
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 630-218-8000
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of August 6, 1999, there were 2,147,244 Shares of Common Stock outstanding.
-1-
PART I - Financial Information
Item 1. Consolidated Financial Statements
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Balance Sheet
June 30, 1999
(unaudited)
Assets
------
Investment Properties:
Land............................................ $ 3,998,887
Building and site improvements.................. 16,282,139
------------
20,281,026
Less accumulated depreciation................... 86,618
------------
Net investment properties......................... 20,194,408
Cash and cash equivalents......................... 7,403,226
Restricted cash................................... 232,711
Accounts and rents receivable..................... 263,166
Real estate and insurance escrow deposits......... 328,343
Furniture and equipment (net of accumulated
depreciation of $1,201 at June 30, 1999)........ 10,804
Loan fees (net of accumulated amortization of
$199 at June 30, 1999).......................... 10,300
Other assets...................................... 43,961
------------
Total assets...................................... $28,486,919
============
See accompanying notes to consolidated financial statements.
-2-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Balance Sheet
June 30, 1999
(unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Liability for subscriptions received............ $ 232,711
Accounts payable................................ 86,673
Accrued offering costs to Affiliates............ 1,118,932
Accrued offering costs to non-affiliates........ 1,266,176
Accrued interest payable to non-affiliates...... 90,969
Accrued real estate taxes....................... 138,650
Distributions payable........................... 66,296
Security Deposits............................... 54,567
Mortgages payable............................... 14,379,884
Unearned income................................. 19,336
Other liabilities............................... 2,480
Due to Affiliates............................... 361,036
------------
Total liabilities............................. 17,817,710
------------
Minority interest in partnerships............... 2,000
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized, none outstanding............ -
Common stock, $.01 par value, 100,000,000 Shares
authorized; 1,399,971 issued and outstanding.. 13,980
Additional paid-in capital (net of costs of
offering of $3,185,726 at June 30, 1999
amount to Affiliate)........................... 10,778,469
Accumulated distributions in excess of
net income.................................... (125,240)
------------
Total stockholders' equity.................... 10,667,209
------------
Commitments and contingencies
Total liabilities and stockholders' equity........ $28,486,919
============
See accompanying notes to consolidated financial statements.
-3-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statements of Operations
For the three and six months ended June 30, 1999
(unaudited)
Three and Six months
ended
June 30, 1999
-------------------
Income:
Rental income..................................... $ 379,788
Additional rental income.......................... 226,698
Interest income................................... 35,592
------------
642,078
Expenses: ------------
Professional services to Affiliates............... 10,242
Professional services to non-affiliates........... 29,033
General and administrative to Affiliates.......... 40,186
General and administrative expenses to
non-affiliates.................................. 39,704
Property operating expenses to Affiliates......... 17,194
Property operating expenses to non-affiliates..... 255,656
Mortgage interest to Affiliates................... 1,445
Mortgage interest to non-affiliates............... 155,246
Acquisition costs expensed........................ 11,443
Depreciation...................................... 87,819
Amortization...................................... 199
------------
648,167
------------
Net loss............................................ $ (6,089)
============
Net loss per weighted average common stock
shares outstanding, basic and diluted (517,231
for the six months ended June 30, 1999)........... $ (.01)
============
See accompanying notes to consolidated financial statements.
-4-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Stockholders' Equity
June 30, 1999
(unaudited)
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
---------- ----------- ------------ ------------
Balance at
December 31, 1998......... $ 200 199,800 - 200,000
Net loss.................... - - (6,089) (6,089)
Distributions declared
($.23 for the six months
ended June 30, 1999 per
weighted average common
stock shares outstanding). - - (119,151) (119,151)
Proceeds from Offering (net
of Offering costs of
$3,185,726)............... 13,780 10,578,669 - 10,592,449
---------- ----------- ------------ ------------
Balance June 30, 1999....... $ 13,980 10,778,469 (125,240) 10,667,209
========== =========== ============ ============
See accompanying notes to consolidated financial statements.
-5-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Cash Flows
For the six months ended June 30, 1999
(unaudited)
1999
Cash flows from operating activities: ----
Net loss........................................ $ (6,089)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation.................................. 87,819
Amortization.................................. 199
Straight line rental income................... (9,645)
Changes in assets and liabilities:
Accounts and rents receivable............... (253,521)
Other assets................................ (43,961)
Real estate tax and insurance escrows....... (328,343)
Accrued interest payable.................... 90,969
Accrued real estate taxes................... 138,650
Accounts payable............................ 86,673
Unearned income............................. 19,336
Other liabilities........................... 2,480
Due to Affiliates........................... 361,036
Security deposits........................... 54,567
-------------
Net cash provided by operating activities......... 200,170
-------------
Cash flows from investing activities:
Purchase of investment properties............... (5,884,581)
Furniture and equipment......................... (12,005)
-------------
Net cash used in investing activities............. (5,896,586)
-------------
Cash flows from financing activities:
Proceeds from offering.......................... 13,778,175
Payments of offering costs...................... (800,618)
Principal payments on debt...................... (16,561)
Loan fees....................................... (10,499)
Distributions paid.............................. (52,855)
-------------
Net cash provided by financing activities......... 12,897,642
-------------
Net increase in cash and cash equivalents......... 7,201,226
Cash and cash equivalents at beginning of period.. 202,000
-------------
Cash and cash equivalents at end of period........ $ 7,403,226
=============
See accompanying notes to consolidated financial statements.
-6-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Cash Flows
(continued)
For the six months ended June 30, 1999
(unaudited)
Supplemental schedule of noncash investing and financing activities:
Purchase of investment properties................. $ (20,281,026)
Assumption of mortgage debt....................... 14,396,445
--------------
$ (5,884,581)
==============
Distributions payable............................. $ 66,296
==============
Cash paid for interest............................ $ 156,691
==============
See accompanying notes to consolidated financial statements.
-7-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
The accompanying consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X.
(1) Organization and Basis of Accounting
Inland Retail Real Estate Trust, Inc. (the "Company") was formed on September 3,
1998 to acquire and manage a diversified portfolio of real estate, primarily
multi-tenant shopping centers. It is anticipated that the Company will initially
focus on acquiring properties in the southeastern states, primarily Florida,
Georgia, North Carolina and South Carolina. The Company may also acquire
single-user retail properties in locations throughout the United States, certain
of which may be sale and leaseback transactions, net leased to creditworthy
tenants. Inland Retail Real Estate Advisory Services, Inc. (the "Advisor"), an
affiliate of the Company, is the advisor to the Company. On February 11, 1999,
the Company commenced an initial public offering ("Offering"), on a best efforts
basis of 50,000,000 Shares of common stock ("Shares") at $10 per Share and
4,000,000 Shares at $9.50 per Share which may be distributed pursuant to the
Company's Distribution Reinvestment Program ("DRP"). As of June 30, 1999, the
Company had received subscriptions for a total of 1,397,818 Shares. In addition
the Company has distributed 2,153 shares pursuant to the Company's DRP. As of
June 30, 1999, escrowed funds of $232,711 were reflected as restricted cash,
along with the corresponding liability for subscriptions received, in the
accompanying Consolidated Financial Statements. The escrowed funds of $232,711
represents subscriptions for Shares from Pennsylvania residents. Subscribers
residing in Pennsylvania may not be admitted as Stockholders to the Company
until subscriptions have been received and accepted for 2,500,000 Shares
($25,000,000) from all sources. Funds received from subscribers residing in
Pennsylvania are currently included in restricted cash and will be released to
the Company from the escrow immediately after subscriptions for at least
$25,000,000 have been received from all sources.
The Company intends to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1999. If the Company qualifies
for taxation as a REIT, the Company generally will not be subject to federal
income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and federal income and excise taxes on its undistributed income.
The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
-8-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
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 June 30, 1999, the Company
does not believe any such impairment of its properties exists.
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 market.
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.
Furniture and equipment is depreciated over five years.
Loan fees are amortized on a straight line basis over the life of the related
loans.
Offering costs are offset against the Stockholders' equity accounts and consist
principally of printing, selling and registration costs.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on a straight-line basis and
the cash rent due under the provisions of the lease agreements is recorded as
deferred rent receivable. The Company recognizes percentage rents as they are
received.
The Company believes that the interest rates associated with the mortgages
payable and notes payable to Affiliates approximate the market interest rates
for these types of debt instruments, and as such, the carrying amount of the
mortgages payable and notes payable to Affiliates approximate their fair value.
The net loss allocable to the minority interest is immaterial, and therefore,
has not been included in the accompanying Consolidated Financial Statements.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present fairly
the financial position and results of operations for the period presented
herein. Results of interim periods are not necessarily indicative of results to
be expected for the year.
-9-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
June 30, 1999
(unaudited)
(2) Basis of Presentation
The accompanying Consolidated Balance Sheet includes the accounts of the
Company, as well as the accounts of the operating partnership, in which the
Company has an approximately 99% controlling general partner interest. The
Advisor owns the remaining approximately 1% limited partner common units in the
operating partnership for which it paid $2,000 and which is reflected as a
minority interest in the accompanying Consolidated Balance Sheet. The effect of
all significant intercompany transactions have been eliminated.
(3) Transactions with Affiliates
As of June 30, 1999, the Company had incurred $3,185,726 of offering costs.
Pursuant to the terms of the Offering, the Advisor is required to pay
organizational and offering expenses (excluding sales commissions, the marketing
contribution and the due diligence expense allowance) in excess of 5.5% of the
gross proceeds of the Offering "Gross Offering Proceeds") or all organization
and offering expenses (including selling commissions) which together exceed 15%
of Gross Offering Proceeds. As of June 30, 1999, offering costs did exceed the
5.5% and 15% limitations, however the Company anticipates that these costs will
not exceed these limitations upon completion of the Offering. Any excess
amounts at the completion of the Offering will be reimbursed by the Advisor.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
Offering. In addition, an affiliate of the Advisor is entitled to receive
selling commissions, a marketing contribution and a due diligence expense
allowance from the Company in connection with the 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 are included in professional services
to Affiliates and general and administrative expenses to Affiliates.
The Advisor has contributed $200,000 to the capital of the Company for which it
received 20,000 Shares.
-10-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
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 7% current return. For the six
months ended June 30, 1999, the Company has not incurred any of such fees.
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 $17,194 for the six months ended June 30, 1999, all of which
has been paid.
(4) Stock Option Plan and Soliciting Dealer Warrants
The Company adopted an Independent Director Stock Option Plan which, subject to
certain conditions, provides for the grant to each Independent Director of an
option to acquire 3,000 Shares following their becoming a Director and for the
grant of additional options to acquire 500 Shares on the date of each annual
stockholders' meeting commencing with the annual meeting in 2000 if the
Independent Director is a member of the board of directors on such date. The
options for the initial 3,000 Shares to be 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 subsequent options will be
exercisable on the second anniversary of the date of grant. The initial options
will be exercisable at $9.05 per Share. The subsequent options will be
exercisable at the fair market value of a Share on the last business day
preceding the annual meeting of Stockholders, and shall be $9.05 per Share until
the earlier of the termination of the Offering or February 11, 2001. As of June
30, 1999, no options had been issued.
In addition to sales commissions, soliciting dealers will also receive one
soliciting dealer warrant for each 25 Shares sold by such soliciting dealer
during the Offering, subject to state and federal securities laws and subject to
the issuance of a maximum of 2,000,000 soliciting dealers warrants to purchase
an equivalent number of Shares. The holder of a soliciting dealer warrant will
be entitled to purchase one Share from the Company at a price of $12 during the
period commencing one year from the date of the first issuance of any of the
soliciting dealer warrants and ending five years after February 11, 1999. As of
June 30, 1999, no warrants had been issued.
-11-
<TABLE> INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
June 30, 1999
(unaudited)
(5) Investment Properties Initial Cost (A) Gross amount at which carried
<CAPTION> --------------------------- at end of period
Net -----------------------------------------
Buildings Adjustments Buildings,
Date and Site to and Site
Acquired Land improvements Basis (B) Land improvements Total
-------- ------------ ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-tenant Retail
- -------------------
Lake Walden Square
Plant City, FL.......... 05/1999 $ 3,006,662 11,532,321 - 3,006,662 11,532,321 14,538,983
Merchants Square
Zephyrhills, FL......... 06/1999 992,225 4,749,818 - 992,225 4,749,818 5,742,043
------------- ------------- ------------ ------------- ------------- -------------
Totals $ 3,998,887 16,282,139 - 3,998,887 16,282,139 20,281,026
(A) The initial cost to the Company, represents the original purchase price of
the property from an Affiliate of our Advisor, including amounts incurred
subsequent to acquisition, which were contemplated at the time the property
was acquired.
(B) Adjustments to basis includes additions to investment properties.
</TABLE>
-12-
-12-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Financial Statements
(continued)
June 30, 1999
(unaudited)
(6) Operating Leases
Certain tenant leases contain provisions providing for stepped rent increases.
GAAP requires the Company to record rental income for the period of occupancy
using the effective monthly rent, which is the average monthly rent for the
entire period of occupancy during the term of the lease. The accompanying
financial statements include an increase of $9,645 for the six months ended
June 30, 1999, of rental income for the period of occupancy for which stepped
rent increases apply and $9,645 in the related accounts and rents receivable as
of June 30, 1999. The Company anticipates collecting these amounts over the
terms of the related leases as scheduled rent payments are made.
(7) Mortgages Payable
Mortgages payable consist of the following at June 30, 1999:
Current Current Balance at
Property as Interest Maturity Monthly June 30,
Collateral Rate Date Payment(a) 1999
- ------------- ---------- --------- ---------- -----------
Mortgages payable to non-affiliates:
Lake Walden Square 7.63% 11/2007 $ 72,584 $10,100,831
Merchants Square 7.50% 11/2008 30,066 4,279,053
------------
$14,379,884
============
(a) All payments are principal and interest.
-13-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
June 30, 1999
(unaudited)
(8) Segment Reporting
The Company owns and seeks to acquire multi-tenant retail centers, neighborhood
and community shopping centers in the Southeastern states, primarily Florida,
Georgia, North Carolina, and South Carolina. All of the Company's shopping
centers are located within these states. The Company's shopping centers are
typically anchored by grocery and drug stores complemented with additional
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 properties based on net property operations. Since all
of the Company's properties 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
properties have been aggregated and reported as one operating segment.
The property revenues and net property operations of the reportable segments
are summarized in the following tables as of June 30, 1999, and for the six
month period then ended, along with a reconciliation to net income. Property
asset information is as of June 30, 1999.
1999
----
Total property revenues......... $ 606,486
Total property operating
expenses...................... 272,850
Mortgage interest................ 156,691
-------------
Net property operations.......... 176,945
-------------
Interest income.................. 35,592
Less non property expenses:
Professional services.......... 39,275
General and administrative..... 91,333
Depreciation and amortization.. 88,018
-------------
Net loss......................... $ (6,089)
=============
Net investment properties........ $ 20,194,408
=============
-14-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
June 30, 1999
(unaudited)
(9) 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. As of June 30, 1999,
options to purchase 3,000 shares of common stock at a price of $9.05 per share
were outstanding.
(10) Subsequent Events
On July 1, 1999, the Company purchased Town Center Commons by acquiring the
limited partnership interests in Inland Southeast Town Center Limited
Partnership, an affiliate of our Advisor, and acquiring all of the general
partnership interests in Inland Southeast Town Center Limited Partnership. The
Company purchased Town Center Commons for $9,656,381. The property is located
in Kennesaw, Georgia and contains 72,108 gross leasable square feet of an
existing 159,758 square foot shopping center. Its tenants leasing more than
10% of the total gross leasable area are J.C. Penney Home Store, a home
furnishings store, and Baptist Book Store, a religious retail store.
On July 27, 1999, the Company purchased Boynton Commons by acquiring all of the
membership interests in Inland Boynton Investment, L.L.C. and Inland Boynton
Acquisitions, L.L.C., and affiliate of our Advisor. The Company purchased
Boynton Commons for $30,563,440. The property is located in Boynton Beach,
Florida and contains 210,772 square feet of leasable space. Its tenants
leasing more than 10% of the total gross leasable area are The Sports
Authority, a sporting goods store; Bed, Bath & Beyond, a home furnishings
store; Barnes & Noble, a display and retail sale and/or rental of books,
magazines and other media store; and PetSmart, a pet and pet accessory retail
store.
-15-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this quarterly report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, limitations on the area in which the
Company may acquire properties; risks associated with borrowings secured by the
Company's properties; competition for tenants and customers; federal, state or
local regulations; adverse changes in general economic or local conditions;
competition for property acquisitions with third parties that have greater
financial resources than the Company; inability of lessees to meet financial
obligations; uninsured losses; risks of failing to qualify as a REIT; and
potential conflicts of interest between the Company and its affiliates
including the Advisor.
Liquidity and Capital Resources
The Company was formed on September 3, 1998 to acquire and manage a diversified
portfolio of real estate, primarily multi-tenant shopping centers. It is
anticipated that the Company will initially focus on acquiring properties in
the southeastern states, primarily Florida, Georgia, North Carolina and South
Carolina. 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. On February 11,
1999, the Company commenced the Offering of 50,000,000 shares at a price of $10
per Share and of 4,000,000 Shares at a price of $9.50 per Share which may be
distributed pursuant to the DRP. Inland Retail Real Estate Advisory Services,
Inc. is the Advisor to the Company. As of June 30, 1999, subscriptions for a
total of 1,397,818 Shares had been received from the public, which includes
20,000 Shares issued to the Advisor. In addition the Company has distributed
2,153 shares pursuant to the Company's DRP. The Advisor has guaranteed payment
of all public offering expenses (excluding selling commissions, the marketing
contribution and the due diligence expense allowance) in excess of 5.5% of the
Gross Offering Proceeds or all organization and offering expenses (including
such selling expenses) which together exceeds 15% of the Gross Offering
Proceeds.
The Company will provide the following programs to facilitate investment in the
Shares and to provide limited liquidity for Stockholders until such time as a
market for the Shares develops:
-16-
The distribution reinvestment program will allow stockholders who purchase
Shares pursuant to the Offering to automatically reinvest distributions by
purchasing additional Shares from the Company. Such purchases will not be
subject to selling commissions or the marketing contribution and due diligence
expense allowance and will be sold at a price of $9.50 per Share.
The Share Repurchase Program will, subject to certain restrictions, provide
existing stockholders with limited, interim liquidity by enabling them to sell
Shares back to the Company at a price of $9.05 per Share. Shares purchased by
the Company will not be available for resale.
Cash Flows From Operating Activities
Net cash provided by operating activities generated $200,170 for the six months
ended June 30, 1999. This is due primarily to the operations on the two
properties acquired during May and June, 1999.
Cash Flows From Investing Activities
Cash flows used in investing activities were utilized primarily for the
purchase of two properties.
Cash Flows From Financing Activities
For the six months ended June 30, 1999, the Company generated $12,897,642 of
cash flows from financing activities. This was due primarily to proceeds
raised of $13,778,175 from the sale of Shares for the six months ended June 30,
1999. The Company's cash flow from financing activities was partially offset by
an increase in the cash used to pay costs associated with selling Shares for
the six months ended June 30, 1999. For the six months ended June 30, 1999,
the Company paid offering costs totaling $800,618. In addition, the Company
also paid distributions for the six months ended June 30, 1999 of $52,855 and
paid loan fees of $10,499 for the six months ended June 30, 1999.
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 or all
organization and offering expenses (including such selling expenses) which
together exceed 15% of the Gross Offering Proceeds. As of June 30, 1999,
organizational and offering costs totaling $3,285,726 did exceed these
limitations, however the Company anticipates that these costs will not exceed
these limitations upon completion of the Offering. Any excess amounts at the
completion of the Offering will be reimbursed by the Advisor.
-17-
Results of Operations
Through June 30, 1999, the Advisor had advanced a total of approximately
$2,385,000 to the Company for costs incurred with the Offering. As of June 30,
1999, approximately $1,480,000 remained unpaid.
Rental income, additional rental income, property operating expenses, mortgage
interest and depreciation are all a result of the operations from the two
properties acquired during the quarter ended June 30, 1999.
Funds from Operations
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 properties plus depreciation 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. 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:
June 30,
1999
----
Net income................................... $ (6,089)
Depreciation................................. 87,819
------------
Funds from operations (1).................... 81,730
Principal amortization of debt............... (16,561)
Deferred rent receivable (2)................. (9,645)
Acquisition costs expenses (3)............... 11,443
------------
Funds available for distribution............. $ 66,967
============
-18-
(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 costs expenses include costs and expenses relating to the
acquisition of properties. These costs are estimated to be up to .5% of
the Gross Offering Proceeds and are paid from the Proceeds of the
Offering.
The following table lists the approximate physical occupancy levels for the
Company's properties as of the end of each quarter during 1999. N/A indicates
the property was not owned by the Company at the end of the quarter.
1999
-------------------------
at at at at
Properties 03/31 06/30 09/30 12/31
---------- ----- ----- ----- -----
Lake Walden Square N/A 93%
Plant City, FL
Merchants Square N/A 100%
Zephyrhills, FL
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.
-19-
State of Readiness
The Company has identified the following three areas for "Year-2000" compliance
efforts:
Business Computer Systems: The majority of the Company'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 Company has conducted tests of its
internal systems to determine year 2000 compliance, and these tests have
demonstrated that the Company should not experience any significant adverse
effects to its business as a result of the Year-2000 Issue. 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. Therefore,
the Company is not currently planning any independent testing of its critical
systems; however, should additional facts present themselves that would make it
prudent for the Company to have independent testing conducted, the Company will
do so. 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 has tested the PC hardware to determine year 2000 compliance, and the
results of these tests have demonstrated that the Company should not experience
any significant adverse effects to its business as a result of the Year-2000
Issue. It should be noted that such PC's are incidental to the Company's
critical systems.
Tenants and Suppliers: The Company has surveyed proposed tenants, suppliers and
other parties with whom the Company intends to do a significant amount of
business to identify the Company's potential exposure in the event such parties
are not year 2000 compliant. The survey consists of a questionnaire sent to the
significant tenants and suppliers of the properties initially intended to be
acquired by the Company. The Company is in the process of reviewing the
responses to such questionnaires. Since this method involves 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 will be working closely with all 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. Currently, the Company is not aware of any
material impact on its business, operations or financial condition due to year
2000 non-compliance by any one of the Company's proposed tenants or suppliers.
Non-Information Technology Systems: In the operation of its properties, the
Company will acquire 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 will evaluate 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 third quarter of 1999.
-20-
Year 2000 Costs
As of June 30, 1999, the Company's Advisor and its affiliates estimate that
costs to achieve year 2000 compliance will not exceed $100,000 for all such
affiliates. However, as of June 30, 1999, the Company's Advisor and its
affiliates anticipate that only approximately 3% 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 by such affiliates through June 30,
1999 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 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. However, the Company
is permitted to borrow funds to meet distribution requirements. 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 is in the process of formulating a contingency plan which will be
developed by September 1999. The contingency plan may include printing copies
of all computer records during December 1999 to ensure that such records are not
lost in the event that the Company's internal computer systems become
inoperative due to year 2000 non-compliance.
-21-
PART II - Other Information
Items 1 through 5 are omitted because of the absence of conditions under which
they are required.
Item 6. Exhibits and Reports on Form 8-K
(27) Financial Data Schedule
(a) Exhibits required by the Securities and Exchange Commission Regulations
S-K. Item 601. The following documents are incorporated by reference:
Registration Statement on Form S-11 and related exhibits, as amended,
File No. 333-64391, filed under the Securities Act of 1933.
(b) Report on Form 8-K dated May 3, 1999
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated June 4, 1999
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
-22-
SIGNATURES
Pursuant to the requirements 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 RETAIL REAL ESTATE TRUST, INC.
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman and Chief Executive Officer
Date: August 16, 1999
/S/ BARRY LAZARUS
By: Barry Lazarus
President and Chief Operating Officer
Treasurer and Chief Financial Officer
Date: August 16, 1999
-23-
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