-----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, DcTGORBWPpAtQJ/O08qhl7vH3nBspbwFzWjxA2cWKPNw/y7so1ZoNg1RC6hobFrg YKmQvGSBd4jp8oMehwN51g== 0000950164-98-000118.txt : 19980817 0000950164-98-000118.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950164-98-000118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOCKHART CARIBBEAN CORP CENTRAL INDEX KEY: 0001041128 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 660491618 STATE OF INCORPORATION: VI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-35105 FILM NUMBER: 98689007 BUSINESS ADDRESS: STREET 1: #44 ESTATE THOMAS CITY: ST THOMAS US STATE: VI ZIP: 00812 BUSINESS PHONE: 3407761900 MAIL ADDRESS: STREET 1: P O BOX 7020 CITY: ST THOMAS STATE: VI ZIP: 00801 FORMER COMPANY: FORMER CONFORMED NAME: LOCKHART COMPANIES INC DATE OF NAME CHANGE: 19970617 10-Q 1 FORM 10-Q 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ Commission file number 333-35105 --------- Lockhart Caribbean Corporation ------------------------------ (Exact name of Registrant as specified in its Charter) U.S. Virgin Islands 65-0491618 ------------------- ---------- (State of other jurisdiction of (I.R.S. Employer or organization) Identification No.) No. 44 Estate Thomas, St. Thomas, U.S. Virgin Islands, 00802 ------------------------------------------------------------ (Address of principal executive offices) (340) 776-1900 -------------- (Registrant's telephone number, including area code) 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 ----- ----- Number of outstanding shares of Registrant=s Common Stock as of June 30, 1998: 11,830 shares of Class A Common Stock and 8,663,867 shares of Class B Common Stock. Lockhart Caribbean Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) Audited June 30 December 31 1998 1997 ----------- ----------- Assets - ------ Operating property: Land and improvements ........................ $ 9,721,418 $10,146,068 Buildings and improvement .................... 25,173,898 25,155,646 Equipment .................................... 565,951 468,369 Prepaid lease ................................ 0 1,460,657 Construction-in-progress ..................... 2,519,130 798,166 ----------- ----------- Total operating property ....................... 37,980,397 38,028,906 Accumulated depreciation and amortization ................................. (4,109,686) (5,146,943) ----------- ----------- 33,870,711 32,881,963 Cash and cash equivalents ...................... 1,140,429 376,930 Accounts and note receivable, net .............. 1,503,736 771,992 Prepaid expenses ............................... 458,365 353,975 Deferred financing costs, net .................. 326,179 354,507 Other assets ................................... 1,223,311 964,213 ----------- ----------- Total assets ................................... $38,522,731 $35,703,580 ----------- ----------- -2- (Unaudited) Audited June 30 December 31 1998 1997 ----------- ----------- Liabilities and shareholders' equity - ------------------------------------ Liabilities: Notes payable: Mortgage notes ............................. $26,338,778 $25,552,581 Other notes ................................ 1,096,605 401,225 ----------- ----------- Total notes payable .......................... 27,435,383 25,953,806 Property taxes payable ....................... 638,351 844,460 Tenant security deposits ..................... 452,810 388,902 Accounts payable ............................. 580,137 473,771 Accrued expenses and other liabilities ....... 320,356 453,727 Deferred revenue ............................. 186,667 200,000 Deferred income taxes ........................ 1,283,249 648,892 ----------- ----------- Total liabilities .............................. 30,896,953 28,963,558 Shareholders' equity: Preferred stock, par value $0.01: Authorized shares -- 1,000,000 none issued Class A common stock, par value $0.01: Authorized shares -- 40,000,000 Issued and outstanding -- 11,830 in 1998 and 6,560 in 1997 ........................ 118 66 Class B common shares, par value $0.01: Authorized shares -- 9,000,000 Issued and outstanding -- 8,663,867 in 1998 and 1997 ............................ 86,639 86,639 Additional paid-in-capital ................... 6,812,297 6,776,994 Retained earnings ............................ 726,724 (123,677) ----------- ----------- Total shareholders' equity ..................... 7,625,778 6,740,022 ----------- ----------- Total liabilities and shareholders' equity ..... $38,522,731 $35,703,580 =========== =========== See accompanying notes -3- Lockhart Caribbean Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Income: Rental income ............................... $1,059,496 $1,125,388 $2,128,849 $2,167,569 Tenant expense reimbursements ............... 233,892 91,410 346,484 174,132 Other operating income ...................... 28,912 31,865 54,290 80,136 ---------- ---------- ---------- ---------- Total income .................................. 1,322,300 1,248,663 2,529,623 2,421,837 Operating expenses: Operating and maintenance ................... 91,381 114,674 159,125 162,886 Salaries and employee benefits .............. 291,010 240,113 533,219 458,612 Utilities ................................... 80,442 87,705 147,566 139,318 Insurance ................................... 94,274 136,380 209,246 283,609 Other taxes ................................. 144,692 156,923 290,997 308,671 Professional fees ........................... 56,295 67,017 86,841 116,386 Other general and administrative ............ 58,908 16,802 106,124 43,033 Depreciation and amortization ............... 304,251 361,674 611,175 723,324 ---------- ---------- ---------- ---------- Total operating expenses ...................... 1,121,253 1,181,288 2,144,293 2,235,839 Operating Income .............................. 201,047 67,375 385,330 185,998 Other income (expense): Interest expense ............................ (561,351) (562,519) (1,132,449) (1,109,111) Other expenses .............................. (6,395) 1,400 (13,225) 0 Gain (loss) on disposal of operating property (111,650) (500) 2,342,181 0 Other income ................................ 15,944 7,774 18,971 1,974 ---------- ---------- ---------- ---------- Total other income (expense) .................. (663,452) (553,845) 1,215,478 (1,107,137) Income (loss) before taxes .................... (462,405) (486,470) 1,600,808 (921,139) Provision (benefit) for income taxes .......... (171,339) (182,861) 600,303 (345,427) ---------- ---------- ---------- ---------- Net income (loss) ............................. $ (291,066) $ (303,609) $1,000,505 $ (575,712) ---------- ---------- ---------- ---------- Net income per share .......................... (0.03) (0.04) 0.12 (0.07) ---------- ---------- ---------- ---------- Weighted average shares outstanding ........... 8,673,644 8,628,331 8,672,350 8,624,968 ---------- ---------- ---------- ----------
See accompanying notes -4- Lockhart Caribbean Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited) Six Months Ended June 30 ------------------------- 1998 1997 ---------- ---------- Operating activities Net income (loss) .................................... $1,000,505 $(575,712) Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: Depreciation and amortization .................... 611,175 723,324 Deferred income taxes ............................ 600,303 (345,427) Gain on disposal of property ..................... (2,342,181) 0 Changes in operating assets and liabilites: Accounts and note receivable ................... 129,179 262,261 Prepaid expenses ............................... (105,612) (171,653) Other assets ................................... (127,670) (75,000) Tenant security deposits ....................... 63,908 15,242 Accounts payable and accrued expenses .......... (364,955) 435,308 ---------- --------- Net cash (used in) provided by operating activities .. (535,348) 268,343 Investing activities Acquisition of land and land improvements .......... (258,569) 0 Proceeds from sales of land ........................ 2,800,000 0 Acquisition of buildings and improvements .......... (1,383,914) (162,986) Acquisition of equipment ........................... (18,047) (13,393) Investment in PFC .................................. (625,000) 0 ---------- --------- Net cash flows provided by (used in) investing activities ......................................... 514,470 (176,379) Financing activities Principal payment on mortgage and other notes payable .................................... (2,074,255) (89,798) Proceeds from issuance of mortgage and other notes payable .............................. 3,005,944 0 Loan issuance costs ................................ (15,150) (2,685) Proceeds from issuance of common stock ............. 34,255 36,823 Repurchase of common stock ......................... 0 (18,036) Cash dividends ..................................... (166,418) (165,316) ---------- --------- Net cash flows provided by (used in) financing activities ......................................... 784,376 (239,012) Net increase in cash ................................. 763,498 (147,048) Cash at beginning of period .......................... 376,931 930,163 ---------- --------- Cash at end of period ................................ $1,140,429 $ 783,115 ---------- --------- See accompanying notes. -5- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 1. Summary of Significant Accounting Policies Organization Lockhart Caribbean Corporation (the "Company" or "LCC") is organized as a United States Virgin Islands corporation and is primarily engaged in owning, managing, developing and leasing commercial real estate. LCC leases developed land, as well as retail and office building space to tenants, primarily under long-term agreements. The accompanying consolidated financial statements include the accounts of LCC and its wholly-owned subsidiaries H.E. Lockhart Management, Inc. ("HELM"), Lockhart Realty, Inc. ("LRI"), and Premium Finance Company of the V.I., Inc. ("PFC"). Significant intercompany balances and transactions have been eliminated in consolidation. On July 5, 1997, the shareholders of The Lockhart Companies Incorporated ("LCI") voted to restructure and recapitalize the company and to offer common stock to the public in an initial public offering to be registered with the Securities and Exchange Commission (the "SEC"). In connection with the restructuring and recapitalization, LCI changed its name to Lockhart Caribbean Corporation on August 22, 1997. On the same date, the shareholders of LCI exchanged each of their shares for 9.7 shares of Class B common stock of LCC. The transaction has been accounted for in a manner similar to a pooling-of-interests and, accordingly, the financial statements as of and for the six months ended June 30, 1997 were restated to give retroactive recognition to this transaction. Initial public offering expenses, consisting primarily of legal fees amounting to $798,831, were capitalized as of June 30, 1998. On February 4, 1998, LCC's registration statement was declared effective by the SEC and certain state regulatory authorities. The Company has temporarily suspended its public offering in order to update its prospectus for certain material corporate developments. See Note 9. On June 22, 1998, the Company purchased all the outstanding common stock of Premium Finance Company of the V.I., Inc. ("PFC") and its wholly-owned subsidiary, Premium Finance Company (E.C.), Ltd. ("PFC-EC"), for $550,000, approximately $204,000 above net asset value. The acquisition was treated as a "purchase" transaction. Also, a loan of $75,000 made to PFC in August 1997 for expansion of operations into the Eastern Caribbean was converted to a direct investment upon consummation of the acquisition. PFC and PFC-EC finance insurance premiums for individuals and businesses in the U.S. Virgin Islands, British Virgin Islands, Anguilla, St. Maarten, Antigua, St. Vincent, Grenada, Dominica and St. Lucia. -6- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 Basis of Presentation The consolidated financial statements of LCC as of June 30, 1998 and for the six months ended June 30, 1998 and 1997 are unaudited but have been prepared in accordance with generally accepted accounting principles for interim financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. Use of Estimates The consolidated financial statements have been prepared by management in conformity with generally accepted accounting principles which 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 period. Actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less when purchased. Construction in Progress Construction-in-progress consists primarily of costs (including applicable property taxes and interest) incurred relating to certain renovation and development projects. These costs are included in operating property when the projects are completed. Operating Property Operating property is stated on the basis of cost. LCC provides for depreciation using the straight-line method for financial reporting purposes and the modified accelerated cost recovery system for income tax purposes over their estimated useful lives which range from 5 to 31.5 years. Expenditures for maintenance and general repairs are charged to expense as incurred, whereas major -7- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 improvements are classified as additions to operating property. Capitalized Interest Interest is capitalized as a component of the cost of operating property constructed. For the six months ended June 30, 1998 and fiscal year ended December 31, 1997, interest amounting to $95,106 and $6,200 was capitalized, respectively. Deferred Revenue Amounts received from lessees for lease acquisitions are deferred and amortized over the initial term of the lease on the straight-line method. Deferred Financing Costs Deferred financing costs represent costs incurred related to the issuance of debt and are amortized over the term of the related debt. Deferred financing costs at June 30, 1998 and December 31, 1997 are summarized as follows: June 30 December 31 1998 1997 ------- ----------- Deferred financing costs ..................... 414,285 508,189 Less accumulated amortization ................ 88,106 153,682 ------- ------- Deferred financing costs, net ................ 326,179 354,507 Fair Values of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Note receivable: The carrying amount reported in the balance sheet approximates fair value due to the underlying collateral on the note. -8- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 Mortgage and other notes payable: The carrying amounts of the mortgage notes, which bear interest based on the financial institution's prime rate, approximate fair value due to the periodic repricing of the interest rates. The carrying amounts of the fixed rate mortgage note, the installment note, and other notes payable approximate fair value based on discounted cash flow analyses. 2. Recent Accounting Pronouncements Segment Disclosures In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. 3. Accounts and Notes Receivable Accounts and note receivable are summarized as follows: June 30 December 31 1998 1997 --------- ----------- Tenant accounts receivable ................... 569,149 671,846 Advanced Premiums ............................ 961,356 0 Note receivable -- PFC ....................... 0 78,187 Shareholders ................................. 100,404 101,193 Other ........................................ 100,841 108,780 --------- ------- 1,731,750 960,006 Less allowance for doubtful accounts ......... 228,014 188,014 --------- ------- 1,503,736 771,992 -9- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 4. Mortgage and Other Notes Payable Mortgage notes payable at June 30, 1998 and December 31, 1997 consisted of the following: June 30 December 31 1998 1997 ---------- ----------- First and second mortgage note payable to a financial institution at prime plus 0.5% (9.00% at June 30, 1998 and December 31, 1997) ... 14,371,640 14,472,438 First mortgage note payable to a financial institution at prime plus 0.5% (9.00% at June 30, 1998 and December 31, 1997) ............. 4,429,615 4,460,683 First mortgage note payable to a financial institution at prime plus 1.5% (10.00% at December 31, 1997) ............................... 0 737,723 First mortgage note payable to seller at 8.75% ... 4,616,339 4,635,737 Non-revolving line of credit promissory note to a financial institution at prime plus 0.5% (9.00% at June 30, 1998 and December 31, 1997) .......... 746,000 746,000 Construction loans payable to a financial institution at prime plus 0.5% (9.00% at June 30, 1998 and December 31, 1997) ............. 2,175,184 500,000 ---------- ---------- 26,338,778 25,552,581 The mortgage note to HELM with an outstanding balance of $14.4 million on June 30, 1998 is payable in monthly installments of $125,032 commencing in May 1997 after a six-month interest-only payment period. A final balloon payment of $14.1 million is due when the note matures in April 2000. However, if there are no events of default, the financial institution has agreed to convert the balance outstanding on April 1, 2000 to a term loan payable in 15 years and bearing interest at prime plus 0.5%. Proceeds of the note were used to retire (i) a mortgage note issued for the renovation of Grand Hotel, (ii) a mortgage note secured by Drakes Passage and issued for the acquisition of Red Hook Plaza, (iii) an interim loan issued for the acquisition of Fort Mylner Shopping Center, Fort Mylner Commercial Center and Orange Grove Shopping Center. The mortgage note to HELM with an outstanding balance of $4.4 million on June 30, 1998 is payable in monthly installments of $38,537 commencing on May 1, 1997 after a six-month -10- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 interest-only period. A final balloon payment of $4.3 million is payable when the note matures in April 2000. However, if there are no events of default, the financial institution has agreed to convert the balance outstanding on April 1, 2000 to a term loan payable in 15 years and bearing interest at prime plus 0.5%. The proceeds of the note were used to liquidate the mortgage note issued for the renovation of Lockhart Gardens Shopping Center. The mortgage note to LRI with an outstanding balance of $737,723 on December 31, 1997 was payable in monthly installments of $6,306 in principal payments plus interest. The note was retired on March 31, 1998 from the proceeds of the sale of 3.68 acres of land to the ground lessee. Proceeds of the mortgage note payable to a seller were used to finance the acquisition of Red Hook Plaza Shopping Center. The note is payable in monthly installments of $36,975 commencing in February 1996. A final installment comprised of the principal sum then outstanding together with any unpaid interest is payable when the note matures in January 2004. Red Hook Plaza, Inc., a wholly-owned subsidiary of HELM, is the borrower on this note. HELM obtained a $1 million non-revolving line of credit from a financial institution in October 1996. A total of $746,000 was drawn on the line as of June 30, 1998. The balance outstanding under the line of credit is due and payable on April 1, 2000. However, if there are no events of default, the financial institution has agreed to convert the balance outstanding on April 1, 2000 to a term loan payable in 15 years and bearing interest at 0.5% above the prime rate. Interest is accrued on the unpaid balance at 0.5% above the institution's prime rate and is payable monthly. The proceeds from $2,175,184 in construction loans to LRI and HELM were used for the infrastructure development of six acres of land at Market Square East, and build-out of a mini-mall at Lockhart Gardens Shopping Center. Interest is payable monthly on the loans and is calculated at 0.5% above the institution's prime rate. Installment Notes In February 1997, HELM purchased a vehicle for $13,800 through an installment note payable. The note matures on January 1, 2002 and is payable in monthly principal installments of $230 plus interest at 1.25% over prime rate (9.75% at June 30, 1998 and December 31, 1997). In July 1996, HELM purchased a vehicle for $59,000 through an installment note payable. The note matures on June 1, 2001 and is payable in monthly principal installments of $983 plus -11- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 interest at 1.25% over prime rate (9.75% at June 30, 1998 and December 31, 1997). Line of Credit On August 1, 1997, LCC obtained an additional line of credit for $400,000 from a financial institution. On March 1, 1998, LCC increased this line of credit to $550,000. A total of $489,852 has been drawn on the line as of June 30, 1998. Advances on the line will bear interest at the institution's prime rate and interest is payable monthly. The line of credit expires on September 30, 1998. PFC has a credit facility available in the amount of $1 million from the Bank of Nova Scotia. This is structured as a line of credit of $950,000 and an overdraft facility of $50,000. At June 30, 1998, this facility had a balance outstanding of $400,000. PFC-EC has a line of credit available in the amount of $200,000 from the Bank of St. Croix. This line of credit is secured by a guarantee of LCC. At June 30, 1998, this facility had a balance outstanding of $150,000. 5. Income Taxes At December 31, 1997, the Company had operating loss carryforwards of approximately $1,650,000 and $1,792,000 available to offset future taxable income through the years 2012 and 2011, respectively. 6. Leases The Company, through its wholly-owned subsidiaries LRI and HELM, receive rental income from noncancellable leases for ground space and retail and office building space. Most are long-term leases with renewal options of usually five-year terms. The leases provide for minimum annual rental payments plus adjustments, if applicable, for certain additional costs incurred by the lessor for property taxes, insurance, and common area maintenance. Some leases provide for a percentage of gross sales as payment in addition to the minimum annual rental amount. -12- Lockhart Caribbean Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1998 7. Transactions With Related Parties The amounts from shareholders are interest bearing and have no specific repayment terms. However, if the maximum offering of $13 million is sold in LCC's initial public offering (which is currently suspended -- see Note 9), LCC will use approximately $525,000 of the last one million raised to repurchase approximately 80,769 shares of Class B Common Stock from certain Class B shareholders including those holding notes payable to LCC. Those shareholders holding notes payable to LCC have agreed to use a portion of the proceeds from the sale of shares to LCC to repay their indebtedness to LCC. A shareholder of LCC and a member of the Board of Directors is also a partner of a law firm which renders legal services to LCC. During the periods ended June 30, 1998 and 1997, fees paid to the law firm amounted to approximately $41,906 and $69,980 respectively. In November 1997, HELM purchased a vehicle for $23,000 for a major shareholder who was also a long-time employee of LCC and a past member of the Board of Directors. 8. Dividends Dividend payment dates are scheduled for the last day of each month at a per share amount determined by the Board of Directors at its quarterly meetings. A dividend of $166,418 was declared and paid for the first two quarters of 1998. 9. Subsequent Events On August 5, 1998, LCC signed definitive agreements to purchase all of the outstanding common stock of Guardian Insurance Company ("Guardian") and Heritage Insurance Company (Caribbean) Ltd. ("Heritage"). The two companies will be purchased for a combination of cash and Class A Common Stock. Guardian is incorporated in the U.S. Virgin Islands and currently issues primarily automobile policies. Heritage is domiciled in the British Virgin Islands and sells automobile and home insurance policies in the British Virgin Islands and Turks and Caicos Islands. Heritage Insurance is also licensed to transact business in Anguilla. As a result of entering into these acquisition agreements, LCC has temporarily suspended its initial public offering until a post effective amendment has been filed with and declared effective by the SEC. -13- LOCKHART CARIBBEAN CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements of Lockhart Caribbean Corporation and subsidiaries and the notes thereto appearing elsewhere in this report. This report contains "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These statements are based on management's beliefs and assumptions, based on information currently available to management and are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations as well as statements preceded by, followed by, or that include, the words "believes," "expects," anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are not guarantees of performance, and future results may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements. Overview Lockhart Caribbean Corporation ("the Company" or "LCC") primarily owns, acquires, operates, develops, and manages shopping centers, commercial parks, and other commercial real estate, on the islands of St. Thomas and St. Croix, U.S. Virgin Islands. For the six months ended June 30, 1998, office and retail space rentals generated 93% of total revenue and long-term ground lease payments accounted for 7%. The Company's wholly-owned real estate subsidiaries, H.E. Lockhart Management, Inc. ("HELM") and Lockhart Realty, Inc. ("LRI") account for approximately 100% of revenue generated through June 30, 1998. On June 22, 1998, the Company purchased all the outstanding common stock of Premium Finance Company of the V.I., Inc. ("PFC") and its wholly-owned subsidiary, Premium Finance Company (E.C.), Ltd. ("PFC-EC") for $550,000 in cash, approximately $204,000 above net asset value. The acquisition was treated as a purchase transaction and, accordingly, only revenue for the period of June 22 through June 30 has been included in the financial statements of LCC. PFC and PFC-EC finance insurance premiums for individuals and businesses in the U.S. Virgin Islands, British Virgin Islands, Anguilla, St. Maarten, Antigua, St. Vincent, Grenada, Dominica and St. Lucia. HELM owns and manages seven shopping centers, serving both the tourist and local sectors, with a mix of office and retail space. Two of the seven shopping centers (Drake's Passage Mall and the Grand Hotel Court) are located in historic downtown Charlotte Amalie, St. Thomas, and are tenanted primarily by tourist-oriented retail entities serving the cruise ship and hotel guest traffic in St. Thomas. HELM also owns two parcels which it leases to tenants under long-term ground leases. LRI retains ownership of undeveloped real estate and operates Sugar Estate Park, Market Square East and Longford Industrial Park, the Company's three commercial parks. -14- Lockhart Caribbean Corporation Management's Discussion & Analysis June 30, 1998 LRI is expected to account for a greater portion of total revenue in the future as it develops the real property holdings of approximately 390 acres zoned for residential use and located near and overlooking the town and harbor of Charlotte Amalie, St. Thomas. HELM has realized increased revenues in 1998 from new lease agreements negotiated with tenants at Drake's Passage Mall and is expected to generate more revenues following the leasing of a mini-mall development in Lockhart Gardens Shopping Center. In addition, HELMS's planned renovation of the northern section of Lockhart Gardens Shopping Center and two of the four buildings of the Grand Hotel Court, each scheduled to start in 1999, will add an aggregate of approximately 30,000 square feet of retail space. The Company is pursuing a strategy to enhance revenue growth, and achieve geographic and line-of-business diversification. The strategy involves an entry into the consumer financial services industry and expanding into other Caribbean markets. On June 22, 1998, the Company acquired PFC, an insurance premium financing company that has an established business in the U.S. Virgin Islands and the British Virgin Islands. PFC, through a wholly-owned subsidiary PFC-EC, has also made inroads into certain other Caribbean markets, such as Anguilla, Antigua, Grenada, St. Vincent, Dominica, St. Lucia and St. Maarten. Results of Operations June 30, 1998 Compared With June 30, 1997 Total revenue (rental income, tenant reimbursements, and other operating income) was $1,322,300 for the three months ended June 30, 1998 representing a 6% increase over total revenue of $1,248,663 for the same period in 1997; however, tenant expense reimbursements were $233,892 for the three months ended June 30, 1998, representing a 156% increase over tenant expense reimbursements of $91,410 for the same period in 1997. For the six months ended June 30, 1998, total revenue was $2,529,623, or a 4% increase over total revenue of $2,421,837 for the six months ended June 30, 1997; and tenant expense reimbursements were $346,484 for the six months ended June 30, 1998, representing a 199% increase over tenant expense reimbursements for the same period in 1997. The significant increase in tenant expense reimbursements is due to the Company requiring such reimbursements in all new or renegotiated leases. Increases in revenue from new leases negotiated with tenants at Drake's Passage Mall and the new lease to Kmart in Lockhart Gardens Shopping Center were partially offset by vacancies at other properties and the reduction in rent due to the sale of 3.68 acres of land to the ground lessee on March 31, 1998. The land sale is part of the Company's strategy to fund its geographic and line-of-business diversification by the selective sale of properties for prices that reflect their embedded value, which can be significantly higher than their book value. -15- Lockhart Caribbean Corporation Management's Discussion & Analysis June 30, 1998 For the three months ended June 30, 1998 and 1997, total operating expenses were $1,121,253 and $1,181,288, respectively. For the six months ended June 30, 1998 and 1997, total operating expenses were $2,144,293 and $2,235,930, respectively. Exclusive of depreciation and amortization, other operating expenses were relatively unchanged for the three months ended June 30, 1998 ($817,002) when compared to the three months ended June 30, 1997 ($819,614). For the six months ended June 30, 1998, other operating expenses, exclusive of depreciation and amortization were $1,533,118 or a 1% increase over the same period in the prior year. Depreciation and amortization decreased by $57,423 for the three months ended June 30, 1998, and $112,149 for the six months ended June 30, 1998 when compared to the same periods in the prior year, primarily as a result of no further amortization on a capital lease that was fully amortized by November 1997. Interest expense was unchanged for the three months ended June 30, 1998 compared to the same period in 1997, and increased by $23,338 for the six months ended June 30, 1998 over the same period in 1997 as a result of additional amounts drawn on two lines of credit at two separate financial institutions. On March 31, 1998, LRI sold 3.68 acres of land in Sugar Estate Park to the ground lessee for $2.8 million. The Company recorded a gain on the sale of approximately $2.5 million. The Company used a portion of the proceeds to retire the $720,000 bank debt on Sugar Estate Park. As a result of the foregoing, the Company had a net loss of $291,066 for the three months ended June 30, 1998 compared to a net loss of $303,609 for the three months ended June 30, 1997, and a net income of $1,000,505 for the six months ended June 30, 1998 compared to a net loss of $575,712 for the same period in 1997. Cash Flow Net cash flow from operating activities decreased by $803,691 for the six month period ended June 30, 1998 due primarily to the payment of accrued property taxes. Net cash flow provided by investing activities increased by $690,849 for the six months ended June 30, 1998 due to the $2.8 million land sale, that was partially offset by investments in PFC and construction projects at Market Square East and Lockhart Mall. -16- Lockhart Caribbean Corporation Management's Discussion & Analysis June 30, 1998 Net cash flow provided by financing activities for the six months ending June 30, 1998 increased by $1 million when compared to the same period of the prior year as a result of bank financing for the two construction projects at Market Square East and Lockhart Gardens Shopping Center. Liquidity and Capital Resources On March 31, 1998, the Company sold 3.68 acres of land in Sugar Estate Park to the ground lessee for $2.8 million. A portion of the proceeds was used to retire the Sugar Estate Park loan which had an outstanding balance of approximately $720,000. The Company also used a portion of the proceeds to purchase all the outstanding common stock of PFC for $550,000. The balance of the proceeds from the land sale will be used for renovations at the Drake's Passage Mall and working capital needs. On May 22, 1998, the Company secured two construction loans from a financial institution. One loan for $1.8 million is being used for the construction of roads, parking lot, underground utilities and other infrastructure at Market Square East, a commercial park offering ground leases for tenant-built commercial facilities. Market Square East is already home to a 36,000 square foot discount bulk-food retail store, and will soon have a multi-screen cinema under construction. The second construction loan for $577,000 is being used for the conversion of 10,000 square feet on two floors in Lockhart Gardens Shopping Center into a mini-mall with a total of eight rental spaces. Both of these projects were under construction prior to the closing of the construction loans and were financed during that period by demand notes from the financial institution. The demand notes were retired from proceeds of the construction loans. The Company expects to meet its short-term liquidity requirements from cash flow from operations. The Company expects funds from operations to increase as a result of: (i) a reduction of net operating funds needed to service annual debt (ii) the acquisition of PFC and (iii) increased net rentable space from the continued development and renovation of two operating properties. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future, including capital maintenance expenditures. The Company expects to meet certain long-term liquidity requirements such as acquisitions, scheduled debt maturities, renovations, expansions, commercial and residential development ventures, and other non-recurring major capital improvements through long-term secured or unsecured debt and the issuance of equity securities. -17- Lockhart Caribbean Corporation Management's Discussion & Analysis June 30, 1998 Recent Developments On August 5, 1998, LCC signed definitive agreements to purchase all of the outstanding common stock of Guardian Insurance Company ("Guardian") and Heritage Insurance Company (Caribbean) Ltd. ("Heritage"). The two companies will be purchased for a combination of cash and the Company's Class A Common Stock. Guardian is incorporated in the U.S. Virgin Islands and currently issues primarily automobile policies. Heritage is domiciled in the British Virgin Islands and sells automobile and home insurance policies in the British Virgin Islands and Turks and Caicos Islands. Heritage Insurance is also licensed to transact business in Anguilla. In light of the materiality of these pending acquisitions, LCC has temporarily suspended its initial public offering until a post effective amendment has been filed with and made effective by the U.S. Securities and Exchange Commission. -18- OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. The Registrant held its annual meeting of shareholders on July 4, 1998. George H.T. Dudley, Wesley S. Williams, Jr., John P. de Jongh, Jr., Alton L. Adams, Lisa S. Curreri, William H. Hastie, Kathleen P. Goldberg, Herbert E. Lockhart, III and John E. Oxendine were nominated to serve as members of the Registrant's board of directors. Each of the nominees served as a member of the board prior to the annual meeting, and the Registrant's shareholders unanimously elected all of the nominees to the Registrant's board of directors at the annual meeting. Shareholders also unanimously approved the appointment of PricewaterhouseCoopers, LLP as the Registrant's principal independent accountants. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. *2.1 Plan of Recapitalization *3.1 Amended and Restated Articles of Incorporation of Lockhart Caribbean Corporation *3.2 Amended and Restated Bylaws of Lockhart Caribbean Corporation *4.1 Reference is made to Exhibits 3.1 and 3.2 *4.2 Specimen Class A Common Stock Certificate *4.3 Warrant Agreement (including Warrant Certificate) *4.4 Subscription Escrow Agreement 11 Statement re Computation of Earnings Per Share 27 Financial Data Schedule * Incorporated by reference to the corresponding exhibit filed with the Registrant's Registration Statement on Form S-11 (File No. 333-35105). (b) Forms 8-K. Item 4 report on Form 8-K, dated July 4, 1998, filed to report a change in the Registrant's independent auditors from Ernst & Young LLP to PricewaterhouseCoopers, LLP. -19- 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. LOCKHART CARIBBEAN CORPORATION Date: August 13, 1998 By: /s/ John P. deJongh, Jr. ------------------------------------ John P. deJongh, Jr., President (Principal Executive Officer) Date: August 13, 1998 By: /s/ Cornel Williams ------------------------------------ Cornel Williams, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -20- EX-11 2 EXHIBIT 11 LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES Statement re Computation of Earnings Per Share Exhibit 11 Six Months Ended June 30 ------------------------ 1998 1997 --------- --------- Average Shares Outstanding ......................... 8,672,350 8,624,968 Net (Loss) Income .................................. 1,000,505 (575,712) Per Share Amount ................................... 0.12 (0.07) EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 6-MOS DEC-31-1998 DEC-31-1997 JUN-30-1998 JUN-30-1997 1,140 377 0 0 1,732 960 (228) (188) 0 0 3,103 1,503 37,980 38,029 (4,110) (5,147) 38,523 35,704 1,992 2,161 27,435 25,954 0 0 0 0 6,899 6,864 727 (124) 38,523 35,704 0 0 2,530 2,422 0 0 2,144 2,236 (2,348) (2) 0 0 1,132 1,109 1,601 (921) (600) 345 1,001 (576) 0 0 0 0 0 0 1,001 (576) 0.12 (0.07) 0.12 (0.07)
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