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 March 31, 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 March 31, 1998:
8,750 shares of Class A Common Stock and 8,663,867 shares of Class B Common
Stock.
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Lockhart Caribbean Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
March 31
--------------------------------
1998 1997
---- ----
Assets
Operating property:
Land and improvements .............. $ 9,721,418 $ 10,012,272
Buildings and improvement .......... 25,155,646 25,068,409
Equipment .......................... 482,915 426,660
Prepaid lease ...................... 1,460,657 1,460,657
Construction-in-progress ........... 1,517,907 379,614
------------ ------------
Total operating property ............... 38,338,543 37,347,612
Accumulated depreciation and
amortization ....................... (5,301,689) (4,292,173)
------------ ------------
33,036,854 33,055,439
Cash and cash equivalents ................ 1,982,965 1,139,975
Accounts and note receivable, net ........ 585,013 485,814
Prepaid expenses ......................... 233,093 249,825
Deferred financing costs, net ............ 361,082 535,253
Other assets ............................. 986,584 309,061
------------ ------------
Total assets ............................. $ 37,185,591 $ 35,775,367
------------ ------------
2
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(Unaudited)
March 31
-------------------------
1998 1997
---- ----
Liabilities and shareholders' equity
Liabilities:
Notes payable:
Mortgage notes ........................ $25,418,064 $24,857,743
Other notes ........................... 496,085 54,852
----------- -----------
Total notes payable ....................... 25,914,149 24,912,595
Property taxes payable .................... 535,391 983,139
Tenant security deposits .................. 420,582 320,885
Accounts payable .......................... 410,735 1,403
Accrued expenses and other liabilities .... 263,942 306,315
Deferred revenue .......................... 196,667
Deferred income taxes ..................... 1,454,577 1,260,779
----------- -----------
Total liabilities .................................. 29,196,043 27,785,116
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 - 8,750 in 1998 ... 88
Class B common shares, par value $0.01:
Authorized shares - 9,000,000
Issued and outstanding - 8,663,867 in 1998
and 8,616,335 in 1997 ................. 86,639 86,163
Additional paid-in-capital .................. 6,792,307 6,660,419
Retained earnings ........................... 1,110,514 1,243,669
----------- -----------
Total shareholders' equity ......................... 7,989,548 7,990,251
----------- -----------
Total liabilities and shareholders' equity ......... $37,185,591 $35,775,367
----------- -----------
See accompanying notes
3
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Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31
---------------------------
1998 1997
---- ----
Income:
Rental income ........................... $ 1,069,353 $ 1,042,181
Tenant expense reimbursements ........... 112,592 82,722
Other operating income .................. 25,378 48,271
----------- -----------
Total income ..................................... 1,207,323 1,173,174
Operating expenses:
Operating and maintenance ............... 67,744 48,212
Salaries and employee benefits .......... 242,209 218,499
Utilities ............................... 67,124 51,613
Insurance ............................... 114,972 147,229
Other taxes ............................. 146,305 151,748
Professional fees ....................... 30,546 49,369
Other general and administrative ........ 47,216 26,231
Depreciation and amortization ........... 306,924 361,650
----------- -----------
Total operating expenses ......................... 1,023,040 1,054,551
Other income (expense):
Interest expense ........................ (571,098) (546,592)
Other expenses .......................... (6,830) (1,400)
Gain (loss) on disposal of operating
property .............................. 2,453,831 500
Other income ............................ 3,027 (5,800)
----------- -----------
Total other income (expense) ..................... 1,878,930 (553,292)
Income (loss) before taxes ....................... 2,063,213 (434,669)
Provision (benefit) for income taxes ............. 771,642 (162,566)
----------- -----------
Net income (loss) ................................ $ 1,291,571 $ (272,103)
----------- -----------
Net income per share ............................. 0.15 (0.03)
----------- -----------
Weighted average shares outstanding .............. 8,670,697 8,618,275
----------- -----------
See accompanying notes
4
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Lockhart Caribbean Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended March 31
---------------------------
1998 1997
---- ----
Operating activities
Net income (loss) .................................. $ 1,291,571 $ (272,103)
Adjustments to reconcile net income (loss)
to cash (used in) provided by
operating activities:
Depreciation and amortization ............. 306,924 361,650
Deferred income taxes ..................... 771,642 (162,566)
(Gain) loss on disposal of property ....... (2,453,831)
Changes in operating assets
and liabilites:
Accounts and note receivable ........... 201,546 288,102
Prepaid expenses ....................... 117,283 152,782
Other assets ........................... (87,359)
Tenant security deposits ............... 31,680 6,850
Accounts payable and accrued expenses .. (591,508) 22,000
Deferred revenue ....................... (3,333)
----------- -----------
Net cash (used in) provided by
operating activities ............................ (415,385) 396,715
Investing activities
Sale of land .............................. 2,800,000
Acquisition of buildings
and improvements ........................ (218,558) (64,371)
Acquisition of equipment .................. (14,546)
Acquisition of other operating property ... (422,702)
----------- -----------
Net cash flows provided by (used in) investing
activities ..................................... 2,144,194 (64,371)
Financing activities
Principal payment on mortgage
and other notes payable ................ (816,145) (30,885)
Proceeds from issuance of mortgage and
other notes payable .................... 776,500
Repurchase of common stock ................ (9,018)
Cash dividends ............................ (83,130) (82,629)
----------- -----------
Net cash flows used in financing activities ........ (122,775) (122,532)
Net increase in cash ............................... 1,606,034 209,812
Cash at beginning of period ........................ 376,931 930,163
Cash at end of period .............................. $ 1,982,965 $ 1,139,975
----------- -----------
5
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998
1. Summary of Significant Accounting Policies
Organization
Lockhart Caribbean Corporation ("LCC") is organized as a United States
Virgin Islands corporation engaged in owning, managing, developing and leasing
commercial real estate. LCC leases developed land, and 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") and Lockhart
Realty, Inc. ("LRI"). 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. 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 three months ended March 31, 1997 were restated to give retroactive
recognition to this transaction. Initial public offering expenses, consisting
primarily of legal fees, amounting to $775,162 were capitalized as of March 31,
1998.
On October 3, 1997, the Company executed a Stock Purchase Agreement to
purchase 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"). PFC and PFC-EC finance insurance premiums for
individuals and businesses in the U.S. Virgin Islands, British Virgin Islands,
Anguilla, St.Martin/St.Maarten, Antigua, St.Vincent, and Grenada.
On February 4, 1998, LCC's registration statement was declared
effective by the U.S. Securities and Exchange Commission and certain state
regulatory authorities. The Company started conducting its public offering
primarily over the World Wide Web.
Basis of Presentation
The consolidated financial statements of LCC as of March 31, 1998 and
1997 and for the three months ended March 31, 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
6
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Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
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 rebuilding 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. Expenditures for maintenance and general repairs are
charged to expense as incurred, whereas major 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 three months ended March 31, 1998, interest
amounting to $16,710 was capitalized. No interest was capitalized for the three
months ended March 31, 1997.
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.
7
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
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 March 31, 1998 and 1997 are summarized as follows:
1998 1997
---- ----
Deferred financing costs 405,135 575,344
Less accumulated amortization 44,053 40,091
------- -------
Deferred financing costs, net 361,082 535,253
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.
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
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 for the year ending
December 31, 1998.
8
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
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 the 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. The Company will adopt SFAS No. 131 for the
year ending December 31, 1998.
3. Accounts and Notes Receivable
The Company loaned $75,000 to Premium Finance Company of the Virgin
Islands, Inc. ("PFC") which will be converted into a capital contribution upon
consummation of the acquisition of PFC. The outstanding principal is payable on
demand and interest income is accrued based on prime rate (8.5% on March 31,
1998). The note is personally secured and pledged by 50,000 shares in the stock
of PFC.
Accounts and note receivable are summarized as follows:
March 31
----------------------
1998 1997
---- ----
Tenant accounts receivable ....................... 497,131 337,904
Note receivable - PFC ............................ 78,187
Shareholders ..................................... 100,404 96,386
Other ............................................ 97,305 114,324
------- -------
773,027 548,614
Less allowance for doubtful accounts ............. 188,014 97,800
------- -------
585,013 450,814
9
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
4. Mortgage and Other Notes Payable
Mortgage notes payable at March 31, 1998 and March 31, 1997 consisted of the
following:
March 31
-----------------------
1998 1997
---- ----
First and second mortgage note payable
to a financial institution at prime plus
0.5% (9.00% and 8.75% at
March 31, 1998 and 1997, respectively) ............... 14,422,603 14,600,000
First mortgage note payable to a financial
institution at prime plus 0.5% (9.00%
and 8.75% at March 31, 1998
and 1997, respectively) .............................. 4,445,323 4,500,000
First mortgage note payable to a financial
institution at prime plus 1.5% (9.75%
at March 31, 1997) ................................... 794,476
First mortgage payable to seller at 8.75% ............ 4,626,138 4,663,267
Non-revolving line of credit promissory note to a
financial institution at prime plus 0.5% (9.00% and
8.75% at March 31, 1998 and 1997, respectively) ...... 746,000 300,000
Demand notes payable to a financial institution
at prime plus 0.5% (9.00% at March 31, 1998) ......... 1,178,000
---------- ----------
25,418,064 24,857,743
The $14.6 million mortgage note to HELM 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 March 31, 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.
The mortgage note to LRI with an outstanding balance of $794,476 on
March 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 3.64 acres of land to a land lessee.
10
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Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
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 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. Amounts of $746,000 and $300,000 were
drawn on the line as of March 31, 1998 and 1997, respectively. 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 $1,093,000 in demand notes to LRI and HELM were used
for the infrastructure development of six acres of land at Market Square East,
and build-out of Lockhart Mall at Lockhart Gardens Shopping Center. The notes
are payable on demand and represent advances to HELM and LRI until the final
closing of two construction loans ($1.8 million for Market Square East and
$577,000 for Lockhart Mall) that were already committed by the financial
institution. Interest is payable monthly on the demand notes 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% and 9.50% at March 31, 1998 and 1997, respectively).
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 interest at 1.25% over prime rate
(9.75% and 9.50% at March 31, 1998 and 1997, respectively).
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 $442,223 has been drawn on the line as of
March 31, 1998. Advances on the line will bear
11
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
interest at the institution's prime rate and interest is payable monthly. The
line of credit expires on September 30, 1998.
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.
7. Lease Termination and Deferred Revenue
In July 1997, Woolworth Corporation (Woolworth) decided to close its
department store operations throughout the United States including the U.S.
Virgin Islands, and as of October 31, 1997, ceased retail sales at Lockhart
Gardens Shopping Center. Woolworth's lease did not expire until 2001, and it was
obligated to make rental payments and tenant reimbursements until lease
expiration. The Company, through HELM, negotiated a lease termination agreement
with Woolworth. The new tenant that took possession of the space formerly
occupied by Woolworth reimbursed the Company for the cost to terminate the lease
with Woolworth.
The amount received from the new tenant was treated as deferred revenue
and is being amortized over the initial term of the lease on the straight-line
method.
8. 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, the
company 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 the Company. Those
shareholders holding notes payable to the company have agreed to use
12
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Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (Continued)
a portion of the proceeds from the sale of shares to the Company to repay their
indebtedness to the Company.
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 March 31, 1998 and 1997, fees paid to the law firm amounted to
approximately $19,649 and $54,664 respectively.
In November 1997, HELM purchased a vehicle for $23,000 for a major
shareholder who was also a long-time employee of the Company and a past member
of the Board of Directors.
9. 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 $83,130 was declared and paid for the first quarter of
1998.
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") owns, acquires,
operates, develops, and manages shopping centers, commercial parks, and other
commercial real estate, primarily on the islands of St. Thomas and St. Croix,
U.S. Virgin Islands. For the three months ended March 31, 1998, building space
rental generated 88% of total revenue and long-term ground lease payments
accounted for 12%.
The Company's two wholly-owned subsidiaries, H.E. Lockhart Management,
Inc. ("HELM") and Lockhart Realty, Inc. ("LRI") account for 100% of the revenue
generation. 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) are located in
historic downtown Charlotte Amalie, St. Thomas, and are tenanted by
tourist-oriented 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 the
commercial parks. For the three months ended March 31, 1998, HELM accounted for
90% of the Company's total revenue, and LRI accounted for 10%.
LRI is expected to account for a greater portion of total revenue in
the future as it develops the real property holdings of approximately 415 acres
zoned for residential use and located near and overlooking the town and harbor
of Charlotte Amalie, St. Thomas. HELM is expected to generate increased revenues
commencing in 1998 from new lease agreements negotiated with tenants at Drake's
Passage Mall, one of the Company's tourist-oriented shopping centers, and its
successful retenanting of the southern section of Lockhart Garden's Shopping
Center with a Kmart store and introduction of a mini-mall. In addition, HELMS's
planned
14
<PAGE>
renovation of the northern section of Lockhart Garden's 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. The Company has agreed to acquire Premium Finance Company of
the V.I., Inc. ("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, has also made inroads into certain other
Caribbean markets, such as Anguilla, Antigua, Grenada, St. Vincent and St.
Maarten.
On February 4, 1998, the Company's Initial Public Offering ("IPO") of
2,000,000 Class A Common Stock at an offering price of $6.50 was registered with
the U.S. Securities and Exchange Commission and certain state regulatory
agencies. The offering is being marketed primarily over the World Wide Web.
Results of Operations
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
Total revenue (rental income, tenant reimbursements, and other
operating income) was $1,207,323 for the three months ended March 31, 1998
representing a 3% increase over total revenue for the same period in 1997.
Increases in revenue from new leases negotiated with tenants at Drake's Passage
Mall were partially offset by vacancies at other properties. The Company has
already negotiated new leases for approximately two-thirds of these vacant
spaces.
For the three months ended March 31, 1998 and 1997, total operating
expenses were $1,023,040 and $1,054,551, respectively.
Exclusive of depreciation and amortization, other operating expenses
were $716,116 for the three months ended March 31, 1998 compared to $692,901 or
a 3% increase over the same period in the prior year. The increase is primarily
attributed to increases in utility expenses and employee compensation and
benefits.
Depreciation and amortization decreased by $54,726 for the three months
ended March 31, 1998 primarily as a result of no further amortization of the
capital lease associated with the acquisition of Drake's Passage that was fully
amortized by November 1997.
Interest expense increased by $24,506 to $546,592 for the three-month
period in 1998 due to additional amounts drawn on two lines of credit at two
separate financial institutions.
On March 31, 1998, LRI sold 3.64 acres of land in Sugar Estate
Commercial Park to the land lessee for $2.8 million. With a net book value of
approximately $300,000, the Company
15
<PAGE>
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
Commercial Park.
As a result of the foregoing, the Company showed a net income of
$1,291,571 for the three months ended March 31, 1998 compared to a net loss of
$272,103 for the three months ended March 31, 1997.
Cash Flow
Net cash flow from operating activities decreased by $812,100 for the
three month period ended March 31, 1998 primarily as a result of the payment of
real estate taxes.
Net cash flow provided by investing activities increased by $2.2
million for the three months ended March 31, 1998 due to the $2.8 million land
sale.
Net cash flow used by financing activities for the three months ending
March 31, 1998 did not change when compared to the same period of the prior
year. However, financing activities for 1998 show principal payments of
$816,145, including the retirement of the Sugar Estate Park debt, and an
offsetting amount of $776,500 in bank demand notes for financing construction at
Market Square East and Lockhart Gardens Shopping Center.
Liquidity and Capital Resources
The principal sources of funding for development, acquisitions,
expansion, and renovations of the properties have historically been construction
loans, and intermediate and permanent debt financing. Proceeds from insurance
companies have been utilized in the past two years to reconstruct operating
properties impacted by Hurricane Marilyn. The majority of the borrowings are
executed at the subsidiary level (HELM and LRI) with a parent company guarantee.
On October 21, 1996, HELM entered into a loan agreement (the
"Development Loan") with Banco Popular de Puerto Rico ("BPPR") to: (i)
consolidate certain pre-existing development loans; (ii) refinance certain
acquisition indebtedness; (iii) reduce the Company's interest costs; and (iv)
achieve level debt service payments. The parent company, Lockhart Caribbean
Corporation, and HELM's wholly owned subsidiaries (Fort Mylner Properties, Inc.,
Red Hook Plaza, Inc., and Golden Orange Centers, Inc.) have each fully and
unconditionally guaranteed the Development Loan. Approximately $19.1 million of
proceeds from the Development Loan was allotted to retire the mortgages on
certain operating properties, and such amount is secured by first-priority
mortgages on Drake's Passage Shopping Mall, the Fort Mylner properties, the
Grand Hotel Court, Lockhart Gardens Shopping Center, and Orange Grove Shopping
Center, and a second-priority mortgage on Red Hook Plaza. HELM is obligated to
make monthly principal and interest payments of approximately $163,500 with
respect to the $19.1 million and expects to fund such payments with the cash
flow from operations. The interest on the Development Loan is at 0.5% above the
prime lending rate of 9.0% as of March 31, 1998.
16
<PAGE>
The Development Loan provides for a $1.0 million line of credit with an
interest rate of 0.5% above the prime rate. As of March 31, 1998, the Company
had $254,000 available under the line of credit, and the interest rate was 9.0%.
In addition, the Development Loan will provide approximately $580,000 to fund
the build-out of Lockhart Mall at Lockhart Gardens Shopping Center. The entire
outstanding balance under the Development Loan is due and payable on April 1,
2000. BPPR has agreed, subject to certain conditions including the absence of
any material default by HELM and the Company under the Development Loan, to
convert the balance into a fifteen year loan with covenants similar to those of
the Development Loan.
In 1991, BPPR loaned LRI $1,135,000 to finance site and infrastructure
development of a commercial park at Sugar Estate ("Sugar Estate Park"). The loan
was secured by seven of the eleven acres of land comprising the commercial park.
The loan was fully repaid on March 31, 1998. In 1997, BPPR approved a loan
package to refinance the 1991 LRI loan and provide additional funds for two
development projects for an aggregate borrowing of $3.8 million. Subsequently,
LRI modified the request to $1.8 million, which BPPR will fund for the
construction of roads, parking lot and other infrastructure at Market Square
East. The loan will be secured by a first-priority mortgage on land.
In February 1995, HELM, through its wholly owned subsidiary Red Hook
Plaza, Inc., ("RHP") acquired Red Hook Plaza for an aggregate purchase price of
$5.8 million from an unaffiliated party. RHP financed this purchase with a $4.7
million first priority mortgage payable to the seller (the "Red Hook Loan") and
$1.1 million of bank financing. The Red Hook Loan bears interest at 8.75 % per
annum and matures in January 2004. The $1.1 million was refinanced in October
1996 with proceeds from the Development Loan.
In June 1996, HELM, through two wholly-owned subsidiaries, Fort Mylner
Properties, Inc. and Golden Orange Centers, Inc., acquired Fort Mylner
Commercial Center, Fort Mylner Shopping Center, and Orange Grove Shopping Center
for an aggregate purchase price of $10.1 million from an unaffiliated party.
HELM financed the acquisition with a short-term demand note which was refinanced
in October 1996 with proceeds from the Development Loan.
In August 1997, The National Capital Bank of Washington has extended
directly to the Company a line of credit for up to $400,000 to be used to fund
expenses associated with the Company's Initial Public Offering ("IPO"). On March
31, 1998, the National Capital Bank of Washington increased the credit line to
the Company for the funding of additional expenses related to the IPO by
$150,000 to $550,000. The line of credit matures in September 1998. Amounts
outstanding under the line of credit will be repaid from proceeds of the
offering. The line of credit is personally guaranteed by two of the Company's
major shareholders.
In August 1997, the Company loaned $75,000 to Premium Finance Company
of the Virgin Islands, Inc. ("PFC") and guaranteed a $200,000 bank line of
credit extended to PFC for expansion of its operations in certain Eastern
Caribbean islands.
With the completion of the IPO and the application of the net proceeds
therefrom, the Company expects improvements in its financial performance through
changes to its capital structure, principally a significant reduction in total
debt. The Company's total debt is expected to be reduced by $4.5 million and
$5.0 million assuming the Minimum offering of $7.5 million or the Maximum
offering of $13.0 million is sold, respectively. Total debt, excluding payables
and deferred expenses, is expected to be $21.4 million or $20.9 million assuming
the Minimum offering or the Maximum offering is sold, respectively compared to
$25.9 million as of March 31, 1998. The Company expects this change to result in
a reduction in mortgage interest expense and, therefore, the cash flow from
operations should increase by a corresponding amount.
17
<PAGE>
The Company expects to meet its short-term liquidity requirements from
funds 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
reconstruction 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 additional equity securities.
Recent Developments
The Company has withdrawn its offer to purchase a shopping center
located on Raphune Hill on St. Thomas as the Seller was unable to present clear
title to the operating property by the agreed upon closing date.
Quantitative and Qualitative Disclosure About Market Risk
None.
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 2 report on Form 8-K, dated March 31, 1998, filed to report the
sale of a parcel of land by the Registrant to the ground lessee of such parcel,
including pro forma financial statements reflecting the sale.
19
<PAGE>
Form 8-K/A, dated March 31, 1998, filed to amend the pro forma
financial statements reflecting the sale of a parcel of land by the Registrant
to the ground lessee of such parcel.
20
<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: May 13, 1998 By: /s/ John P. deJongh, Jr.
--------------------------------
John P. deJongh, Jr., President
(Principal Executive Officer)
Date: May 13, 1998 By: /s/ Cornel Williams
------------------------------------
Cornel Williams, Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
21
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Average Shares Outstanding .............. 8,670,697 8,618,275
Net (Loss) Income ....................... 1,291,571 (272,103)
Per Share Amount ........................ 0.15 (0.03)
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