Lockhart Caribbean Corporation
Supplement No. 1
to
Prospectus dated February 4, 1998
JULY 1, 1998
<PAGE>
INTRODUCTION
This Supplement No. 1 (this "Supplement") to the Prospectus dated February
4, 1998 (the "Prospectus") updates certain financial information, provides
management's analysis of the updated financial information and includes certain
pro forma financial statements for Lockhart Caribbean Corporation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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 Section27A of
the Securities Act of 1933, 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. In 1997 and 1996, building space rental generated 89% of total revenue
and ground lease payments accounted for 11%, and for the three months ended
March 31, 1998, building space rental generated 88% of total revenue and 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. In 1997 and 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 acreage currently zoned for residential
use. 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 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 acquired 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 has also made
inroads into certain other Caribbean markets, such as Anguilla, Antigua,
Grenada, St. Vincent and St. Maarten. See "Recent Developments."
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.
1
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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 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.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Total revenue (rental income, tenant expense reimbursements, and other
operating income) for 1997 increased by $890,047 or 21% over 1996. Of this
increase, $757,550 was due to a full year of revenue from the Acquisition
Properties.
For the years ended December 31, 1997 and 1996, total operating expenses
were $4,680,172 and $3,884,743, respectively.
Exclusive of depreciation and amortization, other operating expenses of
$3,232,688 accounted for 63% of total revenue for the year ended December 31,
1997. The $792,719 increase in such expenses from 1996 was due to (i) a full
year of operating expenses in 1997 compared to only six months of operating
expenses in 1996 at the Acquisition Properties, and (ii) increases in the
reserve for doubtful accounts, contracted security guard services at the
properties, and pension and retirement benefits.
Depreciation and amortization increased by $202,710 or 16% for the year
ended December 31, 1997. The increase was due primarily to the Acquisition
Properties and the $6.0 million investment in the reconstruction of Lockhart
Gardens Shopping Center as a consequence of damage caused by Hurricane Marilyn
in September, 1995.
Interest expense increased by $573,013 or 34% for the year due to (i) an
$11.0 million increase in bank debt to purchase the Acquisition Properties and
pay for additional costs incurred in the reconstruction of Lockhart Gardens
Shopping Center, (ii) increased borrowings under the Company's line of credit,
and (iii) a 50 basis point increase in the prime rate in April, 1997, which
resulted in a corresponding increase in the interest rate payable under the
Company's bank debt and line of credit.
For the year ended December 31, 1997, the Company made a one-time payment
to Woolworth Corp. of $200,000 to terminate their lease at Lockhart Gardens
Shopping Center. The Company collected $200,000 from Kmart as reimbursement of
the lease termination payment to Woolworth Corp., and such amount will be
amortized over the initial term of Kmart's lease in accordance with FASB 13.
As a result of the foregoing, the Company showed a net loss (including
depreciation and amortization) of $1,369,465 for 1997 compared to a net loss of
$832,710 for 1996.
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Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Total revenue for the years ended December 31, 1996 and 1995 was $4,216,733
and $3,971,800, respectively. The $244,933, or 6%, increase resulted principally
from six months of revenue from the Acquisition Properties. Gross revenue from
the Acquisition Properties of $721,902 was partially offset by a decrease of
$476,969 in revenue generation from other properties as a result of damage
caused by Hurricane Marilyn. With the receipt of $453,355 in insurance
reimbursements for business interruption losses, revenue loss at the affected
properties was principally due to vacancies resulting from tenants who were
unable to resume business even after reconstruction was completed at the
affected properties, as well as the continued vacancy at the damaged northern
end of Lockhart Gardens Shopping Center. The Company expects to commence
reconstruction at the northern end of Lockhart Gardens Shopping Center once a
dispute with the ground lessee over reconstruction of their supermarket facility
is resolved.
For the years ended December 31, 1996 and 1995, total operating expenses
were $3,884,743 and $3,663,547 respectively.
Exclusive of depreciation and amortization, other operating expenses
decreased by $117,315 or 4.3% despite the addition of the Acquisition
Properties. Lower expenses resulted from a reduction in overhead costs and the
elimination of certain professional fees incurred in 1995 to facilitate
settlement of insurance claims resulting from Hurricane Marilyn. Adjusting for
expenses of the Acquisition Properties, operating expenses exclusive of
depreciation and amortization, decreased by $342,411 or 12% in 1996.
Depreciation and amortization increased by $338,511 or 37% for the year
ended December 31, 1996 compared to the year ended December 31, 1995. The
increase was due primarily to the Acquisition Properties and the full
amortization of certain capitalized loan costs related to banks notes that were
liquidated in October, 1996.
Interest expense increased by $591,726 or 55% for the year ended December
31, 1996 compared to the year ended December 31, 1995. The increase in interest
expense was due to an $11.0 million increase in bank debt to purchase the
Acquisition Properties and pay for additional costs incurred in the
reconstruction of the southern section of Lockhart Gardens Shopping Center.
Insurance proceeds of $75,670 and $5,916,981 for the years ended December
31, 1996 and 1995, respectively, represent amounts collected or receivable from
insurance companies for repairs to properties damaged by Hurricane Marilyn.
For the year ended December 31, 1996, there was a gain on the sale of
residentially zoned real property as a result of the disposition of
approximately 1.7 acres. For the year ended December 31, 1995, there was a loss
of $850,972 due to a write-off of the net book value of certain properties
damaged by Hurricane Marilyn.
As a result of the foregoing, the Company had a net loss of $832,710 for
the year ended December 31, 1996 compared to net income of $2,503,875 for the
year ended December 31, 1995.
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.
3
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Net cash flow from operating activities declined by $4.9 million in the
year ended December 31, 1997 compared to the year ended December 31, 1996 as
insurance proceeds of $5.3 million were collected and spent in 1996. Net cash
flow used in investing activities was $14.8 million more in 1996 as a result of
the Acquisition Properties and the reconstruction of the southern section of
Lockhart Gardens Shopping Center through a combination of bank debt and
insurance proceeds. Net cash flow provided by financing activities was $10.8
million more in the year ended December 31, 1996 compared to the year ended
December 31, 1997 as a result of the additional bank financing obtained to
purchase the Acquisition Properties and to fund the additional costs in the
reconstruction of the southern section of Lockhart Gardens Shopping Center.
Net cash flow from operating activities increased by $3.1 million for the
year ended December 31, 1996 compared to 1995 as a result of insurance proceeds
collected in 1996 for the reconstruction of operating properties damaged by
Hurricane Marilyn. Net cash flow used in investing activities increased by $8.2
million for the year ended December 31, 1996 compared to 1995 due principally to
the purchase of the Acquisition Properties compared to the acquisition of only
one operating property, Red Hook Plaza, in 1995. Net cash flow provided by
financing activities increased by $5.9 million as a result of increased bank
debt to fund the purchase of the Acquisition Properties in 1996 compared to the
financing of only one operating property acquisition in 1995.
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.
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.
4
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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 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.
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.
The Company is currently conducting an offering of Units, consisting of one
share of Class A Common Stock and one warrant to purchase one-tenth of a share
of Class A Common Stock, on a "best efforts" basis. The offering is being made
pursuant to a registration statement declared effective by the Securities and
Exchange Commission on February 4, 1998. The Company has not yet received
subscriptions for the minimum number of Units offered and, therefore, has not
sold any Units. This is not an offer to sell nor a solicitation to buy; such
offers and solicitations can only be made by means of a prospectus. Copies of
the Company's prospectus can be obtained on the World Wide Web at
http://www.lockhart.com.
In August 1997, The National Capital Bank of Washington extended a line of
credit to the Company for up to $400,000 to be used to fund expenses associated
with the Company's initial public offering. 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. On March 1,
1998 the National Capital Bank of Washington increased the credit line by
$150,000 to $550,000 in order to fund additional expenses related to the
offering. The line of credit matures in September 1998.
On March 31, 1998, LRI sold approximately 3.6 acres of land at Sugar Estate
Park (the "Sugar Estate Sale") to the ground lessee for $2.8 million, an amount
that is 20% over the last certified appraisal and 500% above book value. A
portion of the proceeds from the Sugar Estate Sale were used to repay the 1991
LRI loan, which had a balance of $737,723 on December 31, 1997.
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 property by the agreed upon closing date.
5
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RECENT DEVELOPMENTS
In October 1997, the Company agreed to purchase all of the outstanding
shares of stock from all of the shareholders of PFC for an aggregate
renegotiated purchase price of $550,000. The Company completed the stock
acquisition on June 22, 1998, obtaining ownership and management control of PFC
and its wholly-owned subsidiary Premium Finance Company (E.C.) Limited
("PFC-EC"). The Company financed the acquisition with a portion of the proceeds
from the Sugar Estate Sale, and the Company intends to use the proceeds from the
IPO originally earmarked to be used for the acquisition of PFC to fund PFC's
expansion into other Caribbean markets. In this regard, PFC-EC was recently
approved to do business in St. Lucia and Dominica.
The Company is currently seeking approval to rezone certain of its
residential acreage to commercial use. The acreage subject to the rezoning
application is located adjacent to Market Square East and will be a later phase
of the overall Market Square East development. If the Company's rezoning request
is approved (which approval is not assured), the Company's residential real
property holdings will consist of 392 acres located near and overlooking the
town and harbor of Charlotte Amalie on St. Thomas.
The Board of Directors has recommended that Price Waterhouse be engaged as
the Company's independent auditors. During the Company's two most recent fiscal
years and the interim period preceding this Supplement, there have been no
disagreements with the Company's prior auditors, Ernst & Young ("E&Y"), on any
matter of accounting principles and practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of E&Y would have caused them to make reference thereto in their
report. The appointment of Price Waterhouse as the Company's independent
auditors is subject to ratification by the Company's shareholders at its annual
meeting on July 4, 1998.
6
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INDEX TO FINANCIAL STATEMENTS
Page
----
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Balance Sheets as of March 31, 1998
and 1997 (Unaudited) .................................................... F-2
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited) ............................... F-4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited) .................. F-5
Notes to Consolidated Financial Statements, March 31, 1998 ................ F-6
Lockhart Caribbean Corporation and Subsidiaries
Audited Financial Statements, Years Ended
December 31, 1997, 1996 and 1995
Report of Independent Auditors ............................................ F-12
Consolidated Balance Sheets, December 31, 1997 and 1996 ................... F-13
Consolidated Statements of Operations, Year Ended
December 31, 1997, 1996 and 1995 ........................................ F-15
Consolidated Statements of Shareholders' Equity ........................... F-16
Consolidated Statements of Cash Flows, Year Ended
December 31, 1997, 1996 and 1995 ........................................ F-17
Notes to Consolidated Financial Statements, December 31, 1997 ............. F-18
Lockhart Caribbean Corporation and Subsidiaries
Pro Forma Financial Statements
Disposition of Assets (Unaudited) ......................................... F-26
Pro Forma Condensed Balance Sheet (Unaudited)
As of December 31, 1997 ................................................. F-27
Pro Forma Condensed Statement of Operations (Unaudited)
As of December 31, 1997 ................................................. F-29
Non-recurring Charges or Credits .......................................... F-31
F-1
<PAGE>
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
=========== ===========
F-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 stock, 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
F-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
F-4
<PAGE>
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 liabilities:
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
========== ==========
F-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 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.
F-6
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (continued)
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.
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
F-7
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (continued)
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.
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.
F-8
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (continued)
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
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
----------- -----------
Firstand 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
F-9
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (continued)
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.
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).
F-10
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998 (continued)
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 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 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.
F-11
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Report of Independent Auditors
The Board of Directors and Shareholders
Lockhart Caribbean Corporation
We have audited the accompanying consolidated balance sheets of Lockhart
Caribbean Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lockhart Caribbean
Corporation and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
San Juan, Puerto Rico
February 13, 1998, except for
the first and second paragraphs of Note 12,
as to which the dates are March 1
and March 31, 1998, respectively.
F-12
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Balance Sheets
December 31
-----------------------------
1997 1996
------------ ------------
Assets
Operating property:
Land and improvements ......................... $10,146,068 $10,009,236
Buildings and improvement ..................... 25,155,646 25,068,409
Equipment ..................................... 468,369 426,660
Prepaid lease ................................. 1,460,657 1,460,657
Construction-in-progress ...................... 798,166 265,706
----------- -----------
Total operating property ........................ 38,028,906 37,230,668
Accumulated depreciation and amortization ....... (5,146,943) (4,002,257)
----------- -----------
32,881,963 33,228,411
Cash and cash equivalents ....................... 376,930 930,163
Accounts and note receivable, net ............... 771,992 753,773
Prepaid expenses ................................ 353,975 325,879
Deferred financing costs, net ................... 354,507 508,189
Other assets .................................... 964,213 523,446
----------- -----------
Total assets .................................... $35,703,580 $36,269,861
=========== ===========
F-13
<PAGE>
December 31
-----------------------------
1997 1996
------------ ------------
Liabilities and shareholders' equity Liabilities:
Notes payable
Mortgage notes .............................. $25,552,581 $24,885,459
Other notes ................................. 401,225 58,033
----------- -----------
Total notes payable ........................... 25,953,806 24,943,492
Property taxes payable ........................ 844,460 778,137
Tenant security deposits ...................... 388,902 314,035
Accounts payable .............................. 473,771 127,431
Accrued expenses and other liabilities ........ 453,727 350,746
Deferred revenue .............................. 200,000 --
Deferred income taxes ......................... 648,892 1,422,050
----------- -----------
Total liabilities ............................... 28,963,558 27,935,891
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--6,560 in 1997 ...... 656
Class B common stock, par value $0.01:
Authorized shares--9,000,000
Issued and outstanding--8,663,867 in 1997
and 8,622,155 in 1996 ..................... 86,639 86,222
Additional paid-in-capital .................. 6,776,404 6,669,379
Retained earnings (deficit) ................. (123,677) 1,578,369
----------- -----------
Total shareholders' equity ...................... 6,740,022 8,333,970
----------- -----------
Total liabilities and shareholders' equity ...... $35,703,580 $36,269,861
=========== ===========
See accompanying notes.
F-14
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31
-----------------------------------------
1997 1996 1995
----------- ------------ ------------
Income:
Rental income ..................... $ 4,465,945 $ 3,385,002 $ 3,028,074
Tenant expense reimbursements ..... 476,769 248,898 332,159
Other operating income ............ 164,066 582,833 611,567
----------- ----------- -----------
Total income ........................ 5,106,780 4,216,733 3,971,800
Operating expenses:
Operating and maintenance ......... 299,098 243,817 189,112
Salaries and employee benefits .... 1,216,426 1,021,097 1,224,344
Utilities ......................... 290,062 162,418 94,293
Insurance ......................... 538,194 454,670 338,879
Other taxes ....................... 577,425 475,836 499,863
Professional fees ................. 206,969 203,157 355,427
Other general and administrative .. 104,514 78,974 55,366
Depreciation and amortization ..... 1,447,484 1,244,774 906,263
----------- ----------- -----------
Total operating expenses ............ 4,680,172 3,884,743 3,663,547
----------- ----------- -----------
Operating income .................... 426,608 331,990 308,253
Other income (expense):
Interest expense .................. (2,248,943) (1,675,930) (1,084,204)
Lease termination costs ........... (200,000) -- --
Other expenses .................... (124,087) (105,415) (199,863)
Gain (loss) on disposal of
operating property .............. -- 86,440 (850,972)
Other income ...................... 2,505 1,640 1,535
Insurance proceeds ................ -- 75,670 5,916,981
----------- ----------- -----------
Total other income (expense) ........ (2,570,525) (1,617,595) 3,783,477
----------- ----------- -----------
(Loss) income before income taxes ... (2,143,917) (1,285,605) 4,091,730
(Benefit) provision for income taxes:
Current ........................... -- 1,295 (218,558)
Deferred .......................... (774,452) (454,190) 1,806,413
----------- ----------- -----------
(774,452) (452,895) 1,587,855
----------- ----------- -----------
Net (loss) income ................... $(1,369,465) $ (832,710) $ 2,503,875
=========== =========== ===========
See accompanying notes.
F-15
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Class A Class B Additional Retained
Number of Common Common Paid-In Earnings
Shares Stock Stock Capital (Deficit) Total
--------- ------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .... 8,334,647 $ -- $83,346 $6,217,719 $ 562,304 $ 6,863,369
Issuance of common stock ...... 190,896 -- 1,909 284,190 -- 286,099
Net income .................... -- -- -- -- 2,503,875 2,503,875
Cash dividends ................ -- -- -- -- (324,487) (324,487)
--------- ---- ------- ---------- ---------- -----------
Balance at December 31, 1995 .. 8,523,543 -- 85,255 6,501,909 2,741,692 9,328,856
Issuance of common stock ...... 96,612 -- 967 167,470 -- 168,437
Net loss ...................... -- -- -- -- (832,710) (832,710)
Cash dividends ................ -- -- -- -- (330,613) (330,613)
--------- ---- ------- ---------- ---------- -----------
Balance at December 31, 1996 .. 8,622,155 -- 86,222 6,669,379 1,578,369 8,333,970
Issuance of common stock ...... 48,272 656 417 107,025 -- 108,098
Net loss ...................... -- -- -- -- (1,369,465) (1,369,465)
Cash dividends ................ -- -- -- -- (332,581) (332,581)
--------- ---- ------- ---------- ---------- -----------
Balance at December 31, 1997 .. 8,670,427 $656 $86,639 $6,776,404 $ (123,677) $ 6,740,022
========= ==== ======= ========== ========== ===========
</TABLE>
See accompanying notes.
F-16
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net (loss) income ....................................... $(1,369,465) $ (832,710) $2,503,875
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization ....................... 1,447,484 1,244,774 906,263
Deferred income taxes ............................... (774,452) (454,190) 1,806,413
(Gain) loss on disposal of operating property ....... -- (86,440) 850,972
Changes in operating assets and liabilities:
Accounts and notes receivable ..................... (18,219) 5,331,427 (5,296,594)
Prepaid expenses .................................. (28,096) (75,781) (31,582)
Other assets ...................................... (642,456) (1,179,207) (47,354)
Tenant security deposits .......................... 74,867 88,398 67,016
Accounts payable and accrued expenses ............. 516,938 242,007 443,956
Deferred revenue .................................. 200,000 -- --
----------- ----------- ----------
Net cash (used in) provided by operating activities ..... (593,399) 4,278,278 1,202,965
Investing activities:
Acquisition of land and land improvements ............... (136,832) (2,986,417) (1,013,862)
Sale of land ............................................ -- 80,405 --
Acquisition of buildings and improvements ............... (87,237) (12,547,702) (6,275,945)
Acquisition of other operating property ................. (521,597) (73,728) (22,110)
Acquisition of equipment ................................ -- (58,692) (48,483)
----------- ----------- ----------
Net cash used in investing activities ................... (745,666) (15,586,134) (7,360,400)
Financing activities:
Principal payments on mortgage and other notes payable .. (278,878) (17,555,996) (290,840)
Proceeds from issuance of mortgage and other notes
payable ............................................... 1,289,723 29,800,000 6,334,260
Proceeds from issuance of common stock .................. 126,134 256,513 286,099
Repurchase of common stock .............................. (18,036) (88,076) --
Principal payments on installment note payable .......... (14,330) (391,642) (279,996)
Principal payments on lease payable ..................... 13,800 (28,226) (11,956)
Loan issuance costs ..................................... -- (54,144) --
Cash dividends .......................................... (332,581) (330,613) (324,487)
----------- ----------- ----------
Net cash provided by financing activities ............... 785,832 11,607,816 5,713,080
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents .... (553,233) 299,960 (444,355)
Cash and cash equivalents at beginning of year .......... 930,163 630,203 1,074,558
----------- ----------- ----------
Cash and cash equivalents at end of year ................ $ 376,930 $ 930,163 $ 630,203
=========== =========== ==========
Supplemental cash flow information:
Interest paid, net of interest capitalized ............ $ 2,134,021 $1,626,963 $ 823,863
=========== ========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Organization
Lockhart Caribbean Corporation (LCC) is organized as a United States Virgin
Islands corporation engaged in owning, developing and leasing commercial real
estate. LCC leases developed land, and retail and office space to customers
primarily under long-term leases. 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 years ended December 31,
1996 and 1995 have been restated to give retroactive recognition to this
transaction. Initial public offering expenses, consisting primarily of legal
fees, amounting to approximately $463,000 were capitalized at December 31, 1997.
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.
Use of Estimates
The consolidated financial statements have been prepared 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. Cash equivalents amounted to
$74,500 and $313,400 at December 31, 1997 and 1996, respectively, and consisted
primarily of money market instruments.
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.
F-18
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Operating Property
Operating property is stated on the basis of cost. LCC provides for
depreciation of operating property 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 classified as additions to operating
property.
Capitalized Interest
Interest is capitalized as a component of the cost of operating property
constructed. In 1997 and 1995 interest amounting to $6,200 and $97,600,
respectively, was capitalized. No interest was capitalized in 1996.
Deferred Revenue
Amounts received from lessees for lease acquisitions are deferred and
amortized over the term of the lease on the straight-line method.
Lease Termination Costs
Lease termination costs are charged to operations as incurred.
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 December 31, 1997 and December 31, 1996 are summarized as follows:
1997 1996
---- ----
Deferred financing costs .................. $508,189 $534,250
Less accumulated amortization ............. 153,682 26,061
======= ======
Deferred financing costs, net ............. $354,507 $508,189
======== ========
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.
F-19
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
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 note receivable
In 1989, HELM sold a parcel of land and received a promissory note for
$101,000 secured by a first priority mortgage on the property. No interest was
accrued for the years ended December 31, 1997, 1996 and 1995. Accrued interest
as of December 31, 1996 amounted to $73,300. The note was settled on March 14,
1997 for $169,000.
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) for $687,500. PFC and PFC-EC finance insurance premiums for
individuals and businesses in the U.S. Virgin Islands, the British Virgin
Islands and Anguilla, St. Maarten/St. Martin (Netherlands Antilles); Antigua,
St. Vincent and Grenada. In addition, the Company has agreed to guarantee a bank
loan to PFC-EC amounting to $200,000.
The Company also loaned $75,000 to PFC-EC 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 (8.50% at December 31, 1997). The note is personally secured and
pledged by 50,000 shares in the stock of PFC.
F-20
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Accounts and note receivable are summarized as follows:
1997 1996
---- ----
Tenant accounts receivable .............. $671,846 $406,066
Note receivable
PFC ..................................... 78,187 --
Shareholders ............................ 101,193 97,568
Other ................................... 108,780 347,939
-------- --------
960,006 851,573
Less allowance for doubtful accounts .... 188,014 97,800
-------- --------
$771,992 $753,773
======== ========
4. Mortgage and Other Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consisted of the following:
December 31
--------------------------
1997 1996
---- ----
Firstand second mortgage note payable to
a financial institution at prime plus .5%
(9.00% and 8.75% at December 31, 1997 and
1996, respectively) ............................. $14,472,438 $14,600,000
First mortgage note payable to a financial
institution at prime plus .5% (9.00% and
8.75% at December 31, 1997 and 1996,
respectively) ................................... 4,460,683 4,500,000
First mortgage note payable to a financial
institution at prime plus 1.5% (10.00%
and 9.75% at December 31, 1997 and 1996,
respectively) ................................... 737,723 813,394
First mortgage note payable to seller at 8.75% .... 4,635,737 4,672,065
Non-revolving line of credit promissory note
to a financial institution at prime plus .5%
(9.00% and 8.75% at December 31, 1997 and
1996, respectively) ............................. 746,000 300,000
Demand notes payable to a financial institution
at prime plus .5% (9.00% at December 31, 1997) .. 500,000 --
----------- -----------
$25,552,581 $24,885,459
=========== ===========
F-21
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 .5%. Proceeds
of the note were used to retire mortgage and installment notes issued for the
renovation of the Grand Hotel, the acquisition of Red Hook Plaza Shopping
Center, and a term loan secured by Drakes Passage properties, and to retire an
interim loan of $10.4 million, used to acquire the Orange Grove Shopping Center
and Fort Mylner properties, obtained during 1996.
The mortgage note with an outstanding balance of $4.46 million on December
31, 1997 is payable in monthly installments of $38,537 commencing in May, 1997
after an initial interest-only payment period. A final balloon payment of
approximately $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 .5%. The proceeds of the note were used
to liquidate the mortgage note issued for the renovation of Lockhart Gardens
Shopping Center. HELM is the borrower on this note.
The mortgage note to LRI with an outstanding balance of $737,723 at
December 31, 1997 is payable in monthly installments of $6,306 plus interest
through May, 1999 and a final payment of $630,520 due in June, 1999.
Proceeds of the mortgage note with a balance of $4,635,737 at December 31,
1997 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. The
note is secured by a first priority mortgage on properties at the Red Hook Plaza
Shopping Center, a conditional assignment of leases and rents, and a guarantee
of LCC up to a maximum amount of $750,000. 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. $746,000 and $300,000 was drawn on the line of credit as of
December 31, 1997 and 1996, respectively. The balance outstanding under the line
of credit is due and payable 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 .5%. Interest is accrued on the unpaid balance at .5% above the
institution's prime rate and is payable monthly.
The proceeds from the $500,000 demand notes to HELM and LRI were used for
the development of Lockhart Mall at Lockhart Gardens Shopping Center and the
Market Square East development project. The demand notes are payable on demand
and interest is paid in variable monthly installments. Interest is computed
based on the institution's prime rate (8.50% at December 31, 1997) plus .5%. The
demand notes 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 projects) already committed by a financial institution.
The financial institution granted a moratorium on principal payments of the
three mortgage notes due to the effects of Hurricane Marilyn. The moratorium
period was from November 1995 to July 1996 for the $3.7 million mortgage to
HELM, and from November 1995 to January 1996 for the $1.9 million mortgage to
HELM and the $883,000 mortgage to LRI. The principal payments during the
moratorium period were added to the balloon payments due when the notes were
scheduled to mature.
F-22
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Installment Notes
In 1990, HELM purchased a lease on its Drake's Passage property through an
installment note payable. The note was scheduled to mature in 1997. The
acquisition of the lease was recorded as a capitalized asset at the present
value of the acquisition cost. The capitalized asset and discount are being
amortized over the seven year term of the installment note. The note was
liquidated in 1996 with the proceeds of the $14.6 mortgage note. As of December
31, 1997, the lease was fully amortized.
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 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 interest at 1.25% over prime rate (9.75% at
December 31, 1997).
Line of Credit
On August 1, 1997, LCC obtained an additional line of credit amounting to
$400,000 from a financial institution. $343,723 has been drawn on the line of
credit as of December 31, 1997. The line of credit expires on July 31, 1998.
Advances under the line of credit will bear interest at the institution's prime
rate (8.5% at December 31, 1997).
Principal payments of notes payable for the five years subsequent to
December 31, 1997, and in the aggregate, are as follows:
1998 ............... $ 1,243,419
1999 ............... 1,014,963
2000 ............... 19,175,966
2001 ............... 65,063
2002 ............... 56,407
Thereafter ............ 4,397,988
-----------
$25,953,806
===========
5. Income Taxes
At December 31, 1997, the Company has 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.
F-23
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
At December 31, 1997 and 1996 net deferred income taxes (liabilities)
consisted of the following:
1997 1996
----------- ------------
Depreciation .................................. $ 638,014 $ 632,004
Provision for doubtful accounts receivable .... 82,601 38,676
Basis of operating property ................... (2,788,285) (2,788,285)
Contributions carry-forward ................... 95,175 25,295
Deferred revenue .............................. 74,800 --
Operating loss carry-forward .................. 1,248,803 670,260
----------- -----------
$ (648,892) $(1,422,050)
=========== ===========
The differences between income taxes at the statutory rate of 37.4% and the
income tax provision (benefit) in the accompanying statements of operations
amount to $27,025, $28,021 and $20,148 for the years ended December 3, 1997,
1996 and 1995, respectively, and are due to nondeductible expenses and
miscellaneous items.
6. Leases
The Companies receive rental income from leases for retail and office
building space and ground leases to tenants under noncancelable lease agreements
which expire at various dates. Five year renewal options are available with most
leases. The leases provide for minimum annual rental payments plus adjustments,
if applicable, for certain additional costs incurred by the lessor and/or a
percentage of gross sales. Included in rental income for the years ended
December 31, 1997, 1996 and 1995 are $52,000, $77,000 and $100,000,
respectively, of rent attributable to a percentage of tenants' gross sales.
At December 31, 1997, the approximate future minimum rental income over the
next five years under the lease agreements were as follows:
1998 ................................................... $ 4,649,000
1999 ................................................... 5,106,000
2000 ................................................... 5,279,000
2001 ................................................... 5,260,000
2002 ................................................... 5,469,000
-----------
Aggregate future minimum rental income ................. $25,763,000
===========
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 base rental payments and tenant reimbursements until lease
expiration. The Company, through H.E. Lockhart Management, Inc., negotiated a
lease termination agreement. The new tenant that took possession of the space
occupied by Woolworth reimbursed the Company for the payment made to Woolworth.
F-24
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The amount received from the Tenant for lease acquisition has been deferred
and will be 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 Stockholders including those holding notes payable to the Company. Those
shareholders holding notes payable to the Company have agreed to use 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 member of the Board of Directors is also a partner
of a law firm which renders legal services to LCC. During the years ended
December 31, 1997, 1996 and 1995 fees paid to the law firm amounted to
approximately $147,000, $201,000 and $100,000, respectively.
In November 1997, HELM purchased a vehicle for $23,000 for one of the major
shareholders of the Company.
9. Employee Benefit Plan
The Company, through HELM, sponsors a defined-contribution retirement
benefit plan, subject to ERISA, that covers substantially all employees. The
plan provides that the Company will match the employee-directed contributions up
to a maximum of $500. The Company's contributions pursuant to the plan for the
year ended December 31, 1997 were approximately $16,600.
10. Dividends
Dividends payment dates are scheduled for the last day of each month, with
the per share amount paid per dividends determined by the Board of Directors at
its quarterly meetings. A dividend of $332,581 was declared and paid to Class B
shareholders for the entire 1997 fiscal year.
11. Impact of Year 2000 - Unaudited
The Company is assessing the modifications or replacements of its software
that may be necessary for its computer systems to function properly with respect
to the dates in the year 2000 and thereafter. The Company does not believe that
the cost of either modifying existing software or converting to new software
will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
12. Subsequent Events
On March 1, 1998, the Company increased its revolving line of credit from a
financial institution from $400,000 to $550,000. Advances under the line of
credit will bear interest at the institution's prime rate. The line of credit
expires on September 30, 1998.
On March 31, 1998, LRI sold 3.7 acres of land at Sugar Estate Park for $2.8
million. The Company used a portion of the proceeds from the sale to repay an
existing mortgage note payable with an outstanding balance of $737,723 as of
December 31, 1997.
F-25
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Pro Forma Condensed Financial Statements
Disposition of Assets
(Unaudited)
The following unaudited pro forma condensed financial statements of
Lockhart Caribbean Corporation (the "Company") reflect the following
transactions: (i) the sale of a portion of the Company's Sugar Estate Park
development (3.684 acres of land) to the land lessee, Fortress Self Storage,
Inc., for $2.8 million, and (ii) repayment of all outstanding debt on the Sugar
Estate business park with a portion of the proceeds from the sale. The unaudited
pro forma balance sheet as of December 31, 1997 shows the effects of these
transactions as if they had occurred at the date of the balance sheet. The
unaudited condensed statement of operations for the year ended December 31, 1997
shows the effects of these transactions as if they had occurred on January 1,
1997. Only items with a continuing impact and of a nonrecurring nature are
presented as adjustments in the preparation of the pro forma statement of
operations. However, there are certain nonrecurring items resulting directly
from the transactions that are material and, therefore, separately disclosed.
These nonrecurring items are presented as adjustments on the pro forma balance
sheet. The pro forma condensed financial statements were prepared by the
management of the Company. These pro forma condensed financial statements may
not be indicative of the results that actually would have occurred if the
transactions had been effected on the dates indicated or which may be obtained
in the future.
F-26
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Pro Forma Condensed Balance Sheet (Unaudited)
As of December 31, 1997
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Assets:
Operating property, net of accumulated
depreciation ............................. $32,881,963 $ (350,841)(1) $32,531,122
Cash and cash equivalents .................. 376,930 2,077,642 (2) 2,454,572
Accounts and note receivable ............... 771,992 (30,365)(3) 741,627
Prepaid expenses ........................... 353,975 -- 353,975
Other assets ............................... 1,318,720 -- 1,318,720
----------- ---------- -----------
Total assets ............................... 35,703,580 1,696,436 37,400,016
=========== ========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Notes payable ............................ 25,953,806 (737,723)(4) $25,216,083
Property taxes ........................... 844,460 -- 844,460
Tenant security deposits ................. 388,902 (15,000)(5) 373,902
Deferred income taxes .................... 648,892 918,435 (6) 1,567,327
Accounts payable and other
accrued expenses ....................... 1,127,498 -- 1,127,498
----------- ---------- -----------
Total liabilities .......................... 28,963,558 165,712 29,129,270
=========== ========== ===========
Stockholders' 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 6,560 ........... 656 656
Class B common stock, par value $0.01:
Authorized shares 9,000,000
Issued and outstanding 8,663,867 ....... 86,639 86,639
Additional paid-in capital ............... 6,776,404 6,776,404
Retained earnings ........................ (123,677) 1,530,724(7) 1,407,047
----------- ---------- -----------
Total stockholders' equity ................. 6,740,022 1,530,724 8,270,746
Total Liabilities and stockholders' equity . $35,703,580 $1,696,436 $37,400,016
=========== ========== ===========
</TABLE>
F-27
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Pro Forma Condensed Balance Sheet
(Unaudited)
For purposes of determining the effect of the transactions on the Company's
Condensed Balance Sheet as of December 31, 1997, the following pro forma
adjustments have been made.
As of
December 31, 1997
-----------------
(1) Book value of disposed property .......................... $ (350,841)
(2) Net cash proceeds from sale of property ($2,800,000
plus receivable of $30,365, and less tenant security
deposit of $15,000 and debt retirement of $737,723) ...... 2,077,642
(3) Settlement of accounts receivable from buyer ............. (30,365)
(4) Debt retirement from proceeds of sale of property ........ (737,723)
(5) Return of security deposit to buyer ...................... (15,000)
(6) Tax impact of nonrecurring gain on sale of property ...... 918,435
(7) Nonrecurring gain on sale of property ($2,800,000
less book value of $350,841 and income taxes at 37.5%) ... 1,530,724
F-28
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Pro Forma Condensed Statement of Operations (Unaudited)
For the Year Ended December 31, 1997
Historical Adjustments Pro Forma
---------- ----------- ---------
Revenues:
Rental ......................... $ 4,465,945 $(242,414)(1) $ 4,223,531
Tenant reimbursements .......... 476,769 (26,684)(1) 450,085
Other operating income ......... 164,066 -- 164,066
----------- --------- -----------
Total revenue .................... 5,106,780 (269,098) 4,837,682
Depreciation and amortization .... 1,447,484 (10,700)(2) 1,436,784
Other operating expenses ......... 3,232,688 (24,198)(3) 3,208,490
----------- --------- -----------
Total operating expenses ......... 4,680,172 (34,898) 4,645,274
Operating income ................. 426,608 (234,200) 192,408
Interest expense ................. (2,248,943) 77,835(4) (2,171,108)
Other income and expense ......... (321,582) -- (321,582)
----------- --------- -----------
Income (loss) before taxes ....... (2,143,917) (156,365) (2,300,282)
Income taxes (benefit) ........... (774,452) (58,637)(5) (833,089)
Net income (loss) ................ $(1,369,465) $ (97,728) $(1,467,193)
=========== ========= ===========
F-29
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Notes to Pro Forma Condensed Statement of Operations
(Unaudited)
For purposes of determining the effect of the transactions on the Company's
Condensed Statement of Operations for the year ended December 31, 1997, the
following pro forma adjustments have been made.
Year Ended
December 31, 1997
-----------------
(1) Loss of revenue from property sold:
Rental ................................................ $(242,414)
Tenant reimbursements ................................. (26,684)
(2) Depreciation on land improvements allocated to
disposed property ....................................... (10,700)
(3) Property taxes and other general maintenance
expenses on disposed property ........................... (24,198)
(4) Interest expense reduction from repayment of debt
on Sugar Estate Park development out of proceeds
of land sale ............................................ 77,835
(5) Income tax benefit on cumulative effect of
adjustments (37.5%) ..................................... (58,637)
F-30
<PAGE>
Lockhart Caribbean Corporation and Subsidiaries
Non-recurring Charges or Credits
Sale price of operating property ......................... $2,800,000
Book value of operating property sold .................... 350,841
----------
Gain on sale of operating property ....................... 2,449,159
Income taxes -- 37.5% (1) ................................ 918,435
----------
Income from sale of operating property ................... $1,530,724
==========
Notes:
- ------
(1) With a tax loss carry-forward of approximately $3.4 million as of December
31, 1997, the income tax provision is charged against deferred taxes rather
than income tax payable and is, therefore, not a payable to the government.
F-31
