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 September 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 September 30,
1998: 47,020 shares of Class A Common Stock and 8,663,867 shares of Class B
Common Stock.
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited) Audited
September 30 December 31
1998 1997
------------ ------------
Assets
- ------
Operating property:
Land and improvements ..................... $ 9,721,418 $10,146,068
Buildings and improvements ................ 25,173,898 25,155,646
Equipment ................................. 574,892 468,369
Prepaid lease ............................. 0 1,460,657
Construction-in-progress .................. 2,801,583 798,166
----------- -----------
Total operating property .................... 38,271,791 38,028,906
Accumulated depreciation and amortization ... (4,349,070) (5,146,943)
----------- -----------
33,922,721 32,881,963
Cash and cash equivalents ..................... 381,639 376,930
Accounts and note receivable, net ............. 2,040,431 771,992
Prepaid expenses .............................. 420,779 353,975
Deferred financing costs, net ................. 299,757 354,507
Other assets .................................. 1,222,854 964,213
----------- -----------
Total assets .................................. $38,288,181 $35,703,580
=========== ============
see accompanying notes
-1-
<PAGE>
(Unaudited) Audited
September 30 December 31
1998 1997
------------ ------------
Liabilities and shareholders' equity
- ------------------------------------
Liabilities:
Notes payable:
Mortgage notes ............................ $26,409,056 $25,552,581
Other notes ............................... 1,446,565 401,225
----------- -----------
Total notes payable ......................... 27,855,621 25,953,806
Bank overdraft .............................. 415,773 0
Property taxes payable ...................... 258,469 844,460
Tenant security deposits .................... 469,336 388,902
Accounts payable ............................ 432,977 473,771
Accrued expense and other liabilities ....... 326,377 453,727
Deferred revenue ............................ 176,667 200,000
Deferred income taxes ....................... 1,019,195 648,892
----------- -----------
Total liabilities ............................. 30,954,415 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 -- 47,020 in 1998
and 6,560 in 1997 ....................... 470 66
Class B common stock, 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 .................. 7,040,680 6,776,994
Retained earnings ........................... 205,977 (123,677)
----------- -----------
Total shareholders' equity .................... 7,333,766 6,740,022
----------- -----------
Total liabilities and shareholders' equity .... $38,288,181 $35,703,580
=========== ============
See accompanying notes
-2-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income:
Rental income .................... $1,035,199 $1,093,748 $3,164,048 $3,261,317
Tenant expense reimbursements .... 137,467 70,607 483,951 244,739
Premium Finance revenue .......... 95,931 0 95,931 0
Other operating income ........... 22,245 41,236 76,535 121,372
---------- ---------- ---------- ----------
Total income ....................... 1,290,842 1,205,591 3,820,465 3,627,428
Operating expenses:
Operating and maintenance ........ 98,303 90,637 257,428 253,523
Salaries and employee benefits ... 564,084 389,105 1,097,303 847,717
Utilities ........................ 61,133 71,802 208,699 211,120
Insurance ........................ 86,420 114,972 295,666 398,581
Other taxes ...................... 145,925 153,211 436,922 461,882
Professional fees ................ 20,213 12,226 107,054 128,612
Other general and administrative . 82,926 41,850 189,050 84,883
Depreciation and amortization .... 311,259 361,674 922,434 1,084,998
---------- ---------- ---------- ----------
Total operating expenses ........... 1,370,263 1,235,477 3,514,556 3,471,316
Operating Income ................... (79,421) (29,886) 305,909 156,112
Other income (expense):
Interest expense ................. (619,038) (562,201) (1,751,487) (1,671,312)
Other expenses ................... (10,273) 0 (23,498) 0
Gain (loss) on disposal of
operating property ............. 0 0 2,342,181 0
Other income ..................... 7,104 10,396 26,075 12,370
---------- ---------- ---------- ----------
Total other income (expense) ....... (622,207) (551,805) 593,271 1,658,942)
Income (loss) before taxes ......... (701,628) (581,691) 899,180 1,502,830)
Provision (benefit) for income taxes (264,054) (216,631) 336,249 (562,058)
---------- ---------- ---------- ----------
Net income (loss) .................. $ (473,574) $ (365,060) $ 562,931 $ (940,772)
---------- ---------- ---------- ----------
Net income (loss) per share ........ (0.05) (0.04) 0.06 (0.11)
---------- ---------- ---------- ----------
Weighted average shares outstanding 8,707,797 8,663,865 8,683,564 8,635,509
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes
-3-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating activities
- --------------------
Net income (loss) ....................................... $ 562,931 $ (940,772)
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization ....................... 922,434 1,084,998
Deferred income taxes ............................... 336,249 (562,058)
Gain on disposal of property ........................ (2,342,181) 0
Changes in operating assets and liabilites:
Accounts and note receivable ...................... (407,516) 239,670
Prepaid expenses .................................. (68,026) (68,633)
Other assets ...................................... (144,243) (230,262)
Tenant security deposits .......................... 80,434 28,958
Accounts payable and accrued expenses ............. (761,521) (65,248)
----------- -----------
Net cash (used in) provided by operating activities ..... (1,821,439) (513,347)
Investing activities
- --------------------
Acquisition of land and land improvements ............. (258,569) 0
Proceeds from sale of land ............................ 2,800,000 0
Acquisition of buildings and improvements ............. (1,666,367) (248,463)
Acquisition of equipment .............................. (26,988) (18,709)
Investment in PFC ..................................... (625,000) 0
----------- -----------
Net cash flows provided by (used in) investing activities 223,076 (267,172)
Financing activities
- --------------------
Principal payment on mortgage and other
notes payable ....................................... (2,156,093) (183,722)
Proceeds from issuance of mortgage and
other notes payable ................................. 3,778,415 795,773
Loan issuance costs ................................... (32,650) (2,685)
Proceeds from issuance of common stock ................ 262,990 107,122
Repurchase of common stock ............................ 0 (18,036)
Cash dividends ........................................ (249,591) (248,585)
----------- -----------
Net cash flows provided by (used in) financing activities 1,603,071 449,867
Net increase in cash .................................... 4,708 (330,652)
Cash at beginning of period ............................. 376,931 930,163
----------- -----------
Cash at end of period ................................... $ 381,639 $ 599,511
----------- -----------
</TABLE>
See accompanying notes
-4-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
1. Summary of Significant Accounting Policies
Organization
Lockhart Caribbean Corporation ("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. Through wholly-owned subsidiaries, LCC also finances insurance
premiums for individuals and businesses in the U.S. Virgin Islands and other
Caribbean islands. 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 LCC and to offer common stock to
the public in an initial public offering on a "best efforts" basis 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. On February 4, 1998, LCC's registration statement was
declared effective by the SEC and certain state regulatory authorities. Initial
public offering expenses, consisting primarily of legal fees amounting to
$826,195, were capitalized as of September 30, 1998.
On June 22, 1998, LCC purchased all the outstanding 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 recorded under the purchase
method of accounting. The excess of purchase price over net asset value was
recorded as goodwill and is being amortized over 15 years. 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, the British Virgin Islands, Anguilla, St.
Maarten, Antigua, St. Vincent, and Grenada. Since the acquisition was not
significant, pro forma information was not provided.
On July 31, 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 LCC'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 is also licensed to transact business in
Anguilla.
-5-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
As a result of entering into these acquisition agreements, LCC has
suspended its initial public offering. LCC's offering was scheduled to terminate
in February 1999. Management is currently considering whether to update LCC's
prospectus with a post-effective amendment or to terminate the offering. Any
decision will be based on numerous factors, including general economic and
market conditions.
Basis of Presentation
The consolidated financial statements of LCC as of September 30, 1998 and
for the nine months ended September 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.
-6-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
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 improvements are recorded as additions to operating property.
Capitalized Interest
Interest is capitalized as a component of the cost of operating property
constructed. For the nine months ended September 30, 1998 and fiscal year ended
December 31, 1997, interest amounting to $99,036 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 September 30, 1998 and December 31, 1997 are summarized as follows:
September 30 December 31
1998 1997
------------ -----------
Deferred financing costs ................. $431,785 $508,189
Less accumulated amortization ............ 132,028 153,682
-------- --------
Deferred financing costs, net ............ $299,757 $354,507
-------- --------
-7-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
Earnings Per Share
Basic earnings per share is determined by net income divided by the
weighted average number of common shares outstanding during the period. There
are currently no transactions that would result in a calculation of diluted
earnings per share.
Fair Values of Financial Instruments
The following methods and assumptions were used by LCC in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Note receivable: The carrying amount reported in the balance sheet
approximates fair value due to the underlying collateral on the note.
Mortgage and other notes payable: The carrying amounts of the mortgage
notes, which bear interest based on the financial institution's prime rate,
approximate fair value due to the periodic repricing of the interest rates.
The carrying amounts of the fixed rate mortgage note, the installment note,
and other notes payable approximate fair value based on discounted cash
flow analyses.
Foreign Exchange Gain or Loss
PFC-EC operates in countries of the Eastern Caribbean where the currency is
not the U.S. dollar. The financial statements of PFC-EC were converted from East
Caribbean currency (EC$) to U.S. currency using an exchange rate of 2.69 to the
U.S. dollar. Any fluctuation in this exchange rate would result in an adjustment
to stockholder's equity. The EC$ is a very stable currency that is pegged to the
U.S. dollar and has been trading at roughly 2.69 to the U.S. dollar over the
past ten years.
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 annual financial statements for periods beginning
after December 15, 1997. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application. The Company will adopt SFAS
No. 131 for fiscal year ending December 31, 1998.
-8-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
3. Accounts and Notes Receivable
Accounts and note receivable are summarized as follows:
September 30 December 31
1998 1997
------------ -----------
Tenant accounts receivable ............... $ 628,042 $671,846
Advanced premiums ........................ 1,430,536 0
Note receivable -- PFC ................... 0 78,187
Shareholders ............................. 100,404 101,193
Other .................................... 109,463 108,780
---------- --------
$2,268,445 $960,006
Less allowance for doubtful accounts ..... 228,014 188,014
---------- --------
$2,040,431 $771,992
---------- --------
4. Mortgage and Other Notes Payable
Mortgage notes payable at September 30, 1998 and December 31, 1997
consisted of the following:
September 30 December 31
1998 1997
------------ -----------
First and second mortgage note payable
to a financial institution at prime
plus 0.5% (9.00% at September 30, 1998
and December 31, 1997) ................... $14,319,521 $14,472,438
First mortgage note payable to a
financial institution at prime
plus 0.5% (9.00% at September 30, 1998
and December 31, 1997) ................... 4,413,551 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% ................................. 4,606,324 4,635,737
Non-revolving line of credit promissory
note to a financial institution at prime
plus 0.5% (9.00% at September 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
September 30, 1998 and December 31, 1997) 2,323,660 500,000
----------- -----------
$26,409,056 $25,552,581
----------- -----------
-9-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
The mortgage note to HELM with an outstanding balance of $14.3 million on
September 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
September 30, 1998 is payable in monthly installments of $38,537 commencing on
May 1, 1997 after a six-month 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.
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
September 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.
-10-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
The proceeds from $2,323,660 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.
Other Notes Payable
Other notes payable consists of two installment loans totaling $46,582 and
$57,502 on September 30, 1998 and December 31,1997, respectively, and lines of
credit totaling $1,399,983 and $343,723 on September 30, 1998 and December 31,
1997, respectively.
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 $544,852 has been drawn on the line as of
September 30, 1998. Advances on the line will bear interest at the institution's
prime rate and interest is payable monthly.
On May 22, 1998, HELM obtained a revolving line of credit for $336,000 from
a financial institution to fund premiums for property insurance coverage. As of
September 30, 1998 a balance of $151,131 is outstanding on this line of credit.
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 September 30, 1998, this facility had a
balance outstanding of $500,000.
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
September 30, 1998, $200,000 was outstanding on this line of credit.
5. Income Taxes
At December 31, 1997, LCC 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.
-11-
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
6. Leases
LCC, 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.
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, 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 September 30, 1998 and September 30, 1997, fees paid to the law firm
amounted to approximately $60,000 and $100,000 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.
LCC declared and paid quarterly dividends of approximately one cent per share
for each quarter in 1998 and 1997, amounting to aggregate dividends of $249,591
and $248,585 paid year-to-date through September 30, 1998 and September 30,
1997, respectively. LCC pays dividends to only Class B shareholders.
-12-
<PAGE>
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. Also, LCC, through wholly-owned subsidiaries, finances insurance
premiums for individuals and businesses in the U.S. Virgin Islands and other
Caribbean islands. For the nine months ended September 30, 1998, office and
retail space rentals generated 90.4% of total revenue, long-term ground lease
payments accounted for 7.1% and premium financing contributed 2.5%.
The Company's wholly-owned real estate subsidiaries, H.E. Lockhart
Management, Inc. ("HELM") and Lockhart Realty, Inc. ("LRI") account for 97.5% of
revenue generated through September 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 subsequent to June 22 has been included in the
financial statements of LCC. Such revenues from PFC and PFC-EC accounted for
2.5% of the total revenue for LCC through September 30, 1998.
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 shops 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.
-13-
<PAGE>
Lockhart Caribbean Corporation
Management's Discussion and Analysis
September 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. Although this acreage is zoned for residential
use, the Company has been successful in rezoning selective parcels for other
uses. HELM has realized increased revenues in 1998 from new lease agreements
negotiated with tenants at Drake's Passage Mall and from the new mini-mall in
Lockhart Gardens Shopping Center. In addition, HELM'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.
PFC finances insurance premiums for individuals and businesses in the U.S.
Virgin Islands, the British Virgin Islands, Anguilla and St. Maarten. PFC-EC
currently finances insurance premiums for individuals and businesses in Antigua,
St. Vincent and Grenada and expects to add Dominica and St. Lucia by early 1999.
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. The acquisition of PFC is a first step in the implementation of this
strategy. The Company expects growth in premium finance revenues from the
development of the new markets in the Eastern Caribbean islands where it has
introduced premium financing as a new service offering.
Results of Operations
September 30, 1998 Compared With September 30, 1997
Total revenue (rental income, tenant reimbursements, premium financing, and
other operating income) was $1,290,842 for the three months ended September 30,
1998, representing a 7% increase over total revenue of $1,205,591 for the same
period in 1997; however, tenant expense reimbursements were $137,467 for the
three months ended September 30, 1998, representing a 95% increase over tenant
expense reimbursements of $70,607 for the same period in 1997. For the nine
months ended September 30, 1998, total revenue was $3,820,465, or a 5.3 %
increase over total revenue of $3,627,428 for the nine months ended September
30, 1997; and tenant expense reimbursements were $483,951 for the nine months
ended September 30, 1998, representing a 98% 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.
-14-
<PAGE>
Lockhart Caribbean Corporation
Management's Discussion and Analysis
September 30, 1998
Increases in revenue from new leases negotiated with tenants at Drake's
Passage Mall, the new lease to Kmart in Lockhart Gardens Shopping Center, lease
payments from tenants in the new mini-mall, and premium financing revenues were
all 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.
For the three months ended September 30, 1998 and 1997, total operating
expenses were $1,370,263 and $1,235,477, respectively. For the nine months ended
September 30, 1998 and 1997, total operating expenses were $3,514,556 and
$3,471,316, respectively.
Exclusive of depreciation and amortization, other operating expenses
increased by 21% for the three months ended September 30, 1998 ($1,059,004) when
compared to the three months ended September 30, 1997 ($873,803). For the nine
months ended September 30, 1998, other operating expenses, exclusive of
depreciation and amortization, were $2,592,122 or a 9% increase over the same
period in the prior year. The increase in other operating expenses in the third
quarter of 1998 and for the nine months ended September 30, 1998 was due
primarily to the PFC acquisition and stock bonuses awarded to executives.
Depreciation and amortization decreased by $50,415 for the three months
ended September 30, 1998, and $162,564 for the nine months ended September 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 increased by $56,837 for the three months ended September
30, 1998 compared to the same period in 1997, and increased by $80,175 for the
nine months ended September 30, 1998 over the same period in 1997 as a result of
interest expense on lines of credit for the newly acquired PFC, interest on
additional amounts drawn on two lines of credit from two separate financial
institutions for HELM ($148,500) and LCC ($55,000) and interest on loans for
substantially completed construction projects at Market Square East ($1,767,499)
and the mini-mall at Lockhart Gardens Shopping Center ($507,138).
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.
-15-
<PAGE>
Lockhart Caribbean Corporation
Management's Discussion and Analysis
September 30, 1998
As a result of the foregoing, the Company had a net loss of $473,574 for
the three months ended September 30, 1998 compared to a net loss of $365,060 for
the three months ended September 30, 1997, and a net income of $562,931 for the
nine months ended September 30, 1998 compared to a net loss of $940,772 for the
same period in 1997.
Cash Flow
Net cash used in operating activities increased by $1,308,092 for the nine
month period ended September 30, 1998 due primarily to (1) an increase of
approximately $460,000 in accounts receivable from increased premium finance
contracts written by PFC in the quarter ended September 30, 1998, and (2) the
payment of $946,800 in accrued property taxes.
Net cash flow provided by investing activities increased by $490,248 for
the nine months ended September 30, 1998 due to the $2.8 million land sale,
which was partially offset by investments in PFC and construction projects at
Market Square East, the mini-mall at Lockhart Gardens Shopping Center, and
Drake's Passage.
Net cash flow provided by financing activities for the nine months ending
September 30, 1998 increased by $1.1 million when compared to the same period of
the prior year as a result of bank financing for the construction projects at
Market Square East and Lockhart Gardens.
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, a 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 was 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. At September 30, 1998, the Market Square East project was
approximately 98% complete, and the mini-mall project was approximately 90%
complete and 57% of the space had been leased.
-16-
<PAGE>
Lockhart Caribbean Corporation
Management's Discussion and Analysis
September 30, 1998
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.
Year 2000
The Company has made an assessment of its computer hardware and software
environment for Year 2000 ("Y2K") compliance.
Most of the Company's computers are fairly new and, therefore, already Y2K
compliant or upgradeable to be Y2K compliant. Three computers could not be
upgraded and replacement machines were just delivered to the Company.
Installation of the new machines as well as the final upgrade of existing
machines are expected to be completed by November 30, 1998.
The Company is in the process of replacing its word processing software
with a program that is already Y2K compliant. With the exception of one module
(property management), the accounting software package was recently upgraded to
Y2K versions. The property management Y2K upgrade will be released by the vendor
by December 31, 1998. Most machines have been upgraded from Windows 3.1 to
Windows95. The installation of Windows95 on the remaining machines is expected
to be completed by November 30, 1998. All other application and operating system
programs are already Y2K compliant.
The total cost to the Company of implementing the above changes is
projected to be approximately $20,000.
-17-
<PAGE>
Lockhart Caribbean Corporation
Management's Discussion and Analysis
September 30, 1998
The Company has taken definite steps to address the Y2K issues and does not
believe that the year 2000 issue will pose any significant operational problems.
Recent Developments
On July 31, 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
suspended its initial public offering. LCC's offering was scheduled to terminate
in February 1999. Management is currently considering whether to update LCC's
prospectus with a post-effective amendment, or to terminate the offering. Any
decision will be based on numerous factors, including general economic and
market conditions.
On September 21, 1998, the U.S. Virgin Islands were affected by Hurricane
Georges. Although the U.S. Virgin Islands experienced minimum hurricane force
winds, the Company experienced no significant damages at any of its properties.
-18-
<PAGE>
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.
None.
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
27.1 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 5 report on Form 8-K, dated August 5, 1998, filed to report a
press release announcing the execution of definitive agreements to acquire two
insurance companies and the resulting suspension of the Registrant's public
offering.
-19-
<PAGE>
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: November 13, 1998 By: /s/ John P. deJongh, Jr.
------------------------------------
John P. deJongh, Jr., President
(Principal Executive Officer)
Date: November 13, 1998 By: /s/ Cornel Williams
------------------------------------
Cornel Williams, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
-20-
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Statement re Computation of Earnings Per Share
Exhibit 11
Nine Months Ended September 30
------------------------------
1998 1997
---- ----
Average Shares Outstanding 8,683,564 8,635,509
Net (Loss) Income 562,931 (940,772)
Per Share Amount 0.06 (0.11)
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