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.
<PAGE>
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
----------- -----------
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<PAGE>
(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
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<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes
-4-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<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. 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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<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.
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-
<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: 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-
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)
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 1,140 377
<SECURITIES> 0 0
<RECEIVABLES> 1,732 960
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<CURRENT-ASSETS> 3,103 1,503
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<INCOME-PRETAX> 1,601 (921)
<INCOME-TAX> (600) 345
<INCOME-CONTINUING> 1,001 (576)
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