UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition Period from _______ to _________
Commission file number: 333-35105
Lockhart Caribbean Corporation
(Exact Name of Registrant as Specified in its Charter)
U.S. Virgin Islands 66-0491618
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
No. 44 Estate Thomas
St. Thomas, U.S. Virgin Islands 00802
(address and Zip Code oif principal executive offices)
(340) 776-1900
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have 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) have been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Number of outstanding shares of Registrant's Common Stock as of March 15, 1999:
50,150 shares of Class A Common Stock and 8,663,867 shares of Class B Common
Stock.
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TABLE OF CONTENTS
FORM 10-K
PART I
Page
----
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 3
Item 3. Legal Proceedings ............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ............. 11
PART II
Item 5. Market of Registrant's Common Equity and
Related Stockholder Matters..................................... 11
Item 6. Selected Financial Data ......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 12
Item 8. Financial Statements and Supplementary Data ..................... 18
Item 9. Changes In and Disagreements with Accountants on
Accounting And Financial Disclosure ............................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant .............. 47
Item 11. Executive Compensation .......................................... 50
Item 12. Security Ownership of Certain Beneficial
Owners and Management .......................................... 51
Item 13. Certain Relationships and Related Transactions .................. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................................ 54
Signatures................................................................
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PART I
Item 1. Business
Lockhart Caribbean Corporation (the "Company" or "Lockhart") and its
predecessors have conducted business in the U.S. Virgin Islands since 1884,
which makes Lockhart one of the oldest continuous business operations in the
U.S. Virgin Islands. The enterprise, which started out as a general goods store,
has evolved over the years into the largest owner of shopping centers in the
U.S. Virgin Islands. In 1972, the Company solidified its position as a leader in
commercial real estate development through the construction of the first
shopping center on St. Thomas. This facility, the Lockhart Gardens Shopping
Center, was the first commercial property located on St. Thomas to host national
retailers. The Company is also one of the largest owners of undeveloped land on
the island of St. Thomas.
Since 1987 the Company has been under the direction of George H. T. Dudley
and Wesley S. Williams, Jr., two family members who function as Co-Chairmen of
the Board of Directors and Co-CEOs of the Company. Both are practicing
attorney's with specialties in banking, finance and real estate. Shortly after
assuming their roles, they recruited experienced professionals from outside the
family to manage the daily affairs of the Company. Under this management,
Lockhart has experienced a period of substantial growth through property
acquisitions, commercial property development, and expansion into financial
services and into other markets of the Caribbean. Since 1987 the Company has
acquired four shopping centers, developed two commercial parks, completed the
first phase of renovation of a historic building in the central business
district, completed the reconstruction of 85,000 square feet of retail space
damaged by Hurricane Marilyn, and completed an undated master-plan for the
development of the Company's commercial and residential undeveloped land
holdings. Also, through the acquisition of four additional companies, Lockhart
gained a dominant share of the automobile insurance market , and the premium
financing market for individuals and small businesses in the U.S. Virgin
Islands, and a presence in other Caribbean islands.
The Company owns, acquires, operates, renovates, develops, and manages
shopping centers and other commercial real estate, primarily on the islands of
St. Thomas and St. Croix. The Company, through a wholly owned subsidiary, H.E.
Lockhart Mangement , Inc. ("HELM"), currently owns and operates seven shopping
centers. Through another wholly owned subsidiary, Lockhart Realty, Inc. ("LRI"),
the Company also owns and operates commercial parks in which it builds the
infrastructure for commercial development (roads and utilities) and sells or
leases designated parcels under long-term ground leases. In addition, LRI owns
an aggregate of approximately 415 acres of undeveloped real estate zoned for
residential development of varying densities. The Company intends to selectively
develop this land with single-family and multi-family units. In some areas,
Lockhart will limit its activity to the development of the infrastructure (roads
and utilities) and subdivision of the property for sale as residential lots for
individual homeowners construction. In management's opinion, the Company's
properties are covered adequately by insurance.
In a move to achieve both business and geographic diversification, Lockhart
acquired four financial service companies in 1998. On June 22, 1998, the Company
acquired all the outstanding common stock of Premium Finance Company of the
V.I., Inc., renamed Premium Finance Company(Caribbean) Ltd., ("PFC") and its
wholly-owned subsidiary Premium Finance Company (E.C.) Ltd. ("PFC-EC") for
$582,000 including transaction costs. The transaction was accounted for under
the purchase method of accounting.
PFC and PFC-EC are engaged in the business of financing insurance premiums
incurred by individuals and small companies seeking to insure primarily
automobiles, personal residences, commercial buildings, boats and airplanes, as
well as builder's risk or liability. Business is generated through the referrals
from insurance agents and brokers that are the first point of contact for the
consumer in the procuring of insurance coverage. The insured will make an
initial down payment on the insurance premium (20-30%) with the balance financed
by PFC or PFC -EC over a nine-month period.
PFC is the largest independent premium financing company in the U.S. Virgin
Islands and has operations in the U.S. Virgin Islands, the British Virgin
Islands, Anguilla (West Indies), and St. Maarten, Netherland Antilles. Its
primary competitors are smaller premium finance companies and insurance agents
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and insurers that will finance premiums for select, primarily larger, clients.
Commercial banks also provide this service to select customers. In mid-1997, PFC
expanded its services to other Caribbean markets to increase volume and achieve
diversification. Through its wholly-owned subsidiary, PFC-EC, PFC is currently
doing business in Antigua and Barbuda, St. Lucia, Grenada and St. Vincent.
On December 31, 1998, Lockhart acquired Guardian Insurance Company, Inc.
("GIC") and Heritage Insurance Company (Caribbean) Ltd. ("HIC"). GIC and HIC
were acquired for a total purchase price of $2.8 million which consisted of
$125,000 in cash, a short-term note payable to the seller of $1,125,000, and
approximately 185,000 shares of Class A Common Stock valued at $6.50 per share,
but subject to mandatory redemption at $8.30 per share for a 180-day period
commencing three years from the close of the transaction. The transaction was
accounted for under the purchase method of accounting. For additional
information regarding the purchase, see Note 1 of the audited financial
statements.
GIC was founded in the United States Virgin Islands in July 1984. GIC is
currently the largest automobile insurance carrier in the U.S. Virgin Islands.
GIC's business is now primarily concentrated in the writing of automobile lines
of insurance in the U.S. Virgin Islands. Other lines of business include surety,
general liability and fire policies, excluding catastrophic exposures. Total
revenue by GIC were $4.9 million and $4.5 million in 1997 and 1998,
respectively. GIC discontinued the writing of property insurance in the U.S.
Virgin Islands in August 1996 following a Cease and Desist Order issued by the
Commissioner of Insurance after losses due to Hurricane Marilyn in September
1995 substantially reduced GIC's surplus. GIC incurred losses totaling $10.5
million, net of reinsurance as a result of Hurricane Marilyn.
In 1994, GIC received its first rating from A.M. Best Company: B (Fair)
Financial Size Category III. This was the first rating ever given by A.M. Best
Company to a company in the USVI. Subsequently in 1995, GIC rating was increased
to a B+ (Very Good). Guardian's hope for a higher rating was affected by the
overwhelming damage caused by Hurricane Marilyn. Due to the decrease in surplus
caused by that hurricane and a change in underwriting objectives, Guardian
decided to retire from the rating process.
Lockhart intends to inject additional capital in GIC to enable the
resumption of writing property insurance lines and re-application for an A.M.
Best rating.
HIC was formed as the first domestic insurance carrier in the British
Virgin Islands in March 1991. HIC was also granted licenses to operate in the
Turks and Caicos Islands and Anguilla. Currently, HIC writes mainly automobile
insurance and some property insurance in the British Virgin Islands and Turks
and Caicos. Total revenues of HIC were $617,000 and $400,000 in 1997 and 1998,
respectively.
Business and Growth Strategies
The Company's fundamental business and growth strategies are focused on
developing or acquiring shopping centers and office buildings that either serve
the local community or are located in select tourist destinations, monetizing
the imbedded value of its undeveloped land through select sales or commercial
development, and a carefully planned diversification into the consumer financial
services industry. The Caribbean market (with an aggregate population base of
over five million) represents one of the fastest growing economic regions in the
world, with tourism as the driving force behind that growth. The Company
believes that as the island economies of the region grow, there will be a
corresponding growth in the financial well-being of the resident population
matched by a growth in the number and size of the businesses catering to
increasing consumer demand for both goods and financial services. Based on this
operating paradigm, the Company's business objectives are to develop the
commercial locations out of which these businesses will operate and to offer
select consumer financial services to serve consumer demand presently not met by
the banks and other existing financial intermediaries of the region.
Lockhart believes that a number of economic factors will enhance its
ability to achieve its business objectives: (i) the continuing improvement in
the economies of the U.S. Virgin Islands and other Caribbean
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markets following Hurricane Marilyn and other recent hurricanes in the region;
(ii) the Company's focus on the growing consumer needs of the increasingly
affluent resident populations of the region; (iii) the limited availability of
undeveloped property zoned for commercial use and the continuing need for
housing at various price levels in the U.S. Virgin islands; and (iv) the limited
traditional offerings of commercial banks, and the general inadequacy of
consumer financial services offered throughout the Caribbean region.
The Company's primary business strategies are to: (i) actively manage its
property portfolio to improve cash flow; (ii) complete its planned projects and
develop its land holdings for their highest and best use; (iii) selectively
execute real property acquisitions in strategic submarkets; and (iv) selectively
expand its diversification into strategic segments of the financial services
industry.
The Company intends to grow externally by acquiring additional developed
commercial properties in the U.S. Virgin Islands and in other Caribbean markets
that meet the Company's investment criteria, and by diversifying into the
consumer financial services field through the acquisition or development of
businesses offering select consumer financial services. The strengthening of the
U.S. Virgin Islands economy and the continued growth in the various Caribbean
markets as a result primarily of tourism will continue to enhance the economic
well-being of the resident population. The Company's business strategy, which
has been successful in the U.S. Virgin Islands, is to focus primarily on the
region's resident population and provide commercial real estate locations that
allow businesses to reach the local consumer. The Company's initiative into
financial services follows the same premise--to serve the growing consumer
financial services needs of the resident population.
Lockhart is one of the oldest continuous operators of commercial properties
in the U.S. Virgin Islands. Through the years, the Company has assembled a
unique collection of commercial properties that cater to tourists and serve the
local community. Lockhart intends to expand and diversify its Virgin Islands
presence by acquiring properties within other submarkets on St. Thomas and St.
Croix. The Company's business strategy and economic model also will result in
consideration of expansion in select tourist and local community submarkets
throughout the eastern Caribbean. In addition, the Company may selectively
divest developed and undeveloped properties from time to time to balance its
portfolio or to retain desirable tenants and enhance adjacent property held by
the Company. The Company believes that its Caribbean base, its knowledge of the
region and its long-standing relationships with tenants, real estate
professionals, financial institutions and other sectors of the U.S. Virgin
Islands community offer significant competitive advantages in seeking investment
opportunities in the U.S. Virgin Islands and elsewhere in the Caribbean region.
The Company believes that diversification into the financial services
industry is a logical extension of its operations in light of Lockhart's
history, the backgrounds of the members of the Executive Committee, and the
Company's recognition of market opportunities. The founder of the Company,
Alfred H. Lockhart, also founded a bank in the Virgin Islands (then the Danish
West Indies), and he, his son and his grandson each served on the board of
directors of that bank and its successors until its merger into a federally
chartered U.S. bank. Separately, the Company has established relationships with
financial service providers in the U.S. Virgin Islands and throughout the
Caribbean that has resulted in the identification of business opportunities that
remain untapped by existing businesses offering financial services in the
targeted markets. In addition, the members of the Executive Committee (George
H.T. Dudley, Wesley S. Williams, Jr. and John P. deJongh, Jr.) and Richard E.W.
Grant, the president of PFC, each have extensive experience in the financial
services industry. These factors should allow the Company to capitalize on the
growth opportunities in the non-banking, consumer financial services field in
the Caribbean.
Item 2. Properties
Shopping Centers
The Company's shopping centers range in size from approximately 11,000 to
140,000 square feet, and most properties include both retail and office space.
The Company maintains an ongoing leasing and marketing program to enhance the
cash flow potential of each operating property and to respond to tenant
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needs. Lockhart also follows a schedule of regular physical maintenance,
renovation and refurbishment to preserve and increase the value of its
properties.
The following table sets forth certain information for each of the
Company's shopping centers as of December 31, 1998:
Year Built/ Net Rentable Percent
Acquired Square Feet Occupied
----------- ------------ --------
Drakes Passage Shopping Mall ............ 1920 33,000 81%
Fort Mylner Commercial Center ........... 1996 10,800 100%
Fort Mylner Shopping Center ............. 1996 26,200 86%
Grand Hotel Galleria .................... 1914 23,900(1) 58%
Lockhart Gardens Shopping Center ........ 1972 140,198 82%
Orange Grove Shopping Center ............ 1996 30,600 73%
Red Hook Plaza .......................... 1995 32,145 94%
- ----------
(1) Approximately 4,500 square feet are being held vacant in preparation for
renovation as part of Grand Galleria - Phase II.
Drakes Passage Shopping Mall ("Drakes Passage") is located in the main
tourist shopping and central business district of downtown Charlotte Amalie and
offers access to pedestrian traffic from both Main Street and the Waterfront.
Drakes Passage contains approximately 33,000 square feet of rentable space
spread over two stories and a mezzanine, and is the only air-conditioned
shopping mall in the downtown area. The first floor has 20,500 square feet of
primarily tourist-oriented retail space and was 87% occupied as of December 31,
1998; the second floor has 12,500 square feet of office space and was 80%
occupied as of December 31, 1998. Retail tenants include Boolchands,
Cosmopolitan, Perfume Palace and Diamond's International. The Company recently
completed renovation totaling $500,000 at this property.
Lease Expirations
- -----------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 1 3,900 1.6%
2000 ................... 4 6,300 5.0%
2001 ................... 2 1,409 4.2%
2002-7 ................. 18 21,637 65.0%
1998 1997 1996
------ ------ ------
Occupancy Rate(1) .................................. 81% 83% 85%
Average Net Effective Rent per Square Foot ......... $40.44 $38.13 $30.01
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- ----------
(1) The Fort Mylner Properties consist of the Fort Mylner Commercial Center
with approximately 10,800 square feet of rentable space on two floors and
the Fort Mylner Shopping Center with approximately 26,200 square feet of
rentable space. The total parking spaces available at both properties is
approximately 115. Both properties were acquired by the Company in June
1996 for an aggregate purchase price of $6.4 million. The Fort Mylner
properties are located in the business district of the Tutu area, one of
the most populous residential communities on St. Thomas.
The Fort Mylner Commercial Center provides office space to two primary
tenants: Banco Popular de Puerto Rico, a commercial bank, occupies approximately
2,700 square feet, with two drive-thru lanes and an automated teller machine;
and Globalvest Management Company, L.P., a mutual fund investment firm, leases
approximately 8,100 square feet. The Fort Mylner Shopping Center consists of
three one-story buildings with 21,600, 2,800 and 1,800 square feet of rentable
space. Material lessees at the shopping center operate a home furnishings store,
a convenience store and a furniture store. Other tenants include CommoLoco, Inc.
(a small loan finance company) and Kentucky Fried Chicken.
Combined Lease Expirations
--------------------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 3 3,900 10.5%
2000 ................... 3 6,300 17.0%
2001 ................... -- -- --
2002 ................... 3 9,900 26.7%
2003-7 ................. 2 5,400 14.6%
Fort Mylner Commercial Center
-----------------------------
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 100% 100% 100%
Average Net Effective Rent per Square Foot ......... $21.79 $21.48 $21.13
Fort Mylner Shopping Center
---------------------------
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 86% 79% 100%
Average Net Effective Rent per Square Foot ......... $23.30 $23.30 $23.47
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The Grand Galleria is located at the beginning of the main tourist shopping
district in downtown St. Thomas and one block from the municipal parking lot.
The Grand Galleria complex consists of four two-story stone and timber buildings
with an aggregate of approximately 24,000 net rentable square feet of retail and
office space, of which 4,500 square feet will be available upon completion of
Phase II. No tenant occupies 10% or more of the rental space.
The Grand Galleria complex was originally built in the early 1800s and is
located in the Charlotte Amalie historic district. Alfred H. Lockhart acquired
the property in 1914. The Company extensively renovated the interiors and
exteriors of three of the Grand Galleria's four buildings in 1994 for an
aggregate cost of $1.9 million. Lockhart intends to invest approximately $2.2
million to complete the second phase of renovations to the Grand Galleria.
Lease Expirations
- -----------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 7 6,763 20.7%
2000 ................... -- -- --
2001 ................... -- -- --
2002-7 ................. 1 855 2.6%
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 58% 64% 67%
Average Net Effective Rent per Square Foot ......... $35.80 $35.84 $35.62
Lockhart Gardens Shopping Center ("Lockhart Gardens") is located on the
eastern edge of Charlotte Amalie and within walking distance of the main cruise
ship dock. Lockhart Gardens consists of approximately 140,200 square feet of net
rentable square feet. Lockhart Gardens has approximately 245 parking spaces. The
Company's major tenant is a department store operated by Kmart Corporation
("Kmart"). Kmart has leased approximately 60,000 square feet at Lockhart
Gardens. Other key tenants currently include Banco Popular de Puerto Rico and
Footlocker.
A supermarket was operated pursuant to a ground lease of 30,000 square feet
of land until Hurricane Marilyn destroyed the entire shopping center, including
the supermarket, in September 1995. The supermarket continued to make its lease
payments but did not reconstruct the building, as required under its lease.
Lockhart and the ground lessee were in litigation regarding this matter. The
legal dispute was resolved (see Item 3. Legal Proceedings) with the Company
receiving $2.7 million from the insurance company holding the policy on the
supermarket and $35,000 from the ground lessee who also surrendered its interest
in the lease. Of the proceeds received from the insurance company, $2 million is
to be used solely for reconstruction of the building.
Lockhart Gardens Shopping Center-Lockhart Mall is a mini-mall area within
the existing shopping center with an aggregate of 10,000 square feet of rentable
space, consisting of eight retail stores ranging in size from 500 to 1,000
square feet. The area also includes, an elevator, public restrooms and an
emergency generator. Construction cost of the mini-mall was approximately
$500,000.
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Lease Expirations
- -----------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 2 35,120 25.0%
2000 ................... -- -- --
2001 ................... 1 3,500 2.5%
2002 ................... 3 63,384(1) 45.2%
2003-7 ................. 5 3,294 2.4%
- ----------
(1) Includes 60,000 square feet leased by K-Mart.
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 82% 72% 72%
Average Net Effective Rent per Square Foot ......... $6.95 $5.91 $5.91
Orange Grove Shopping Center ("Orange Grove") is located just outside of
Christiansted, the largest town on St. Croix, on the main traffic artery leading
westward out of town. The Company acquired Orange Grove in June 1996 for an
aggregate purchase price of $3.6 million. The approximately 30,600 square feet
of net rentable square feet at Orange Grove are used for retail and office
space. The major tenant is Banco Popular de Puerto Rico which leases
approximately 5,400 square feet and Kentucky Fried Chicken (2,700 square feet).
Lease Expirations
- -----------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 1 1,400 4.6%
2000 ................... 4 7,000 22.9%
2001 ................... 1 1,400 4.6%
2002 ................... -- -- --
2003-7 ................. -- -- --
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 73% 82% 86%
Average Net Effective Rent per Square Foot ......... $17.30 $16.82 $15.35
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Red Hook Plaza (the "Plaza") is located in the Red Hook area on the eastern
side of St. Thomas. The Company acquired the Plaza in February 1995 for an
aggregate purchase price of $5.5 million. The approximately 36,000 net rentable
square feet in the Plaza is spread over two buildings; the main two-story
building has both retail and office space and the one-story building is used as
a restaurant. Major tenants at the Plaza include a pharmacy with approximately
3,877 square feet, Banco Popular de Puerto Rico, an Ace Hardware franchise and
several eateries. The second floor office space consists primarily of medical
suites.
Lease Expirations
- -----------------
Number Total Net Rentable Percent of Net
Year of Tenants Square Feet Rentable Square Feet
- ---- ---------- ------------------ --------------------
1999 ................... 5 6,689 20.8%
2000 ................... 2 1,988 6.1%
2001-7 ................. 5 12,269 38.1%
1998 1997 1996
------ ------ ------
Occupancy Rate ..................................... 98% 92% 98%
Average Net Effective Rent per Square Foot ......... $24.50 $24.47 $24.25
Ground Leases
Sugar Estate Park (the "Park") is a commercial business park developed by
the Company on the eastern edge of Charlotte Amalie, mid-island on St. Thomas.
The Park consists of an aggregate of approximately 7.1 acres of land, which has
been subdivided for lease to tenants under long-term ground leases or
development by the Company.
Lockhart has leased 1.1 acres to a commercial tenant under a long-term
ground lease at the Park. In addition, there are two one-acre parcels available
for lease. The Company provides paved roads and underground utility access at
the Park, and tenants construct their own facilities. The current tenant
operates a building supply store. The lease expires in 2000. The lease is
subject to three ten-year renewal options. Upon expiration of the tenant's
lease, the Company will obtain ownership of all improvements on the land.
The Company has reserved approximately 2.5 acres at the Park to develop two
projects. See "--Development Projects--Sugar Estate Commercial Centre" and
"--Sugar Estate Plaza".
Market Square East is a commercial park development located on the main
highway that connects Charlotte Amalie to the eastern end of St. Thomas. To be
developed in multiple phases as tenant demand requires, Phase I, about 98%
completed, includes long-term ground leases with a retail and wholesale food
discount chain and a movie theater chain (for the construction of a multi-screen
cinema and restaurant complex). The Company built the required infrastructure,
consisting of parking facilities, utilities, drainage, power and access roads at
a cost of $1.8 million.
Phase II, currently in the preliminary development stage, will involve the
Company rezoning a portion of the property for commercial use, executing
long-term ground leases and constructing build-to-suit facilities for
high-quality tenants. The Company will continue to provide the infrastructure,
consisting of parking
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facilities, utilities, drainage, power and roads. The scheduled completion date
is dependent on the progress of the Company's leasing program.
Cinema One Building is located in a residential area near the eastern edge
of Charlotte Amalie and sits on approximately one acre of land owned by
Lockhart. The Company has leased the parcel under a triple-net, long-term ground
lease that expires in December 2009, and the tenant has constructed a two-story
building on the property. The property is commonly referred to as the Cinema One
Building because of the multi-screen theater located there. The building also
has office space. Upon expiration of the lease, Lockhart will obtain ownership
of the building and all improvements.
Development Projects
The following table sets forth certain information for each of the
Company's projects under development as of December 31, 1998:
Estimated Cost Estimated Completion Date
-------------- -------------------------
Sugar Estate Commercial Centre $0.9 million 2001
Longford Industrial Park $1.3 million 2001
Lockhart Gardens Shopping Center--
Phase II $5.5 million 2000
Grand Galleria -- Phase II $2.2 million 2000
Sugar Estate Plaza $5.3 million 2001
- ----------
Sugar Estate Commercial Centre will be located in Sugar Estate Park. The
Company will construct a multiple-use building suitable for tenants seeking
warehouse, retail and showroom space. The approximately 14,500 square feet of
rentable space in the planned building will be divided into eight bays ranging
in size from 1,300 square feet to 4,500 square feet. The scheduled completion
date is early 2001, and the estimated construction cost of $915,000.
Longford Industrial Park ("Longford") is located just off the main highway
that connects Charlotte Amalie to the eastern end of St. Thomas, where the
majority of the island's population resides. Longford will consist of 16
half-acre parcels available for long-term ground lease by light industry and
manufacturers, who will construct their own facilities. The Company has cleared
the site and public water and electrical power are available. Lockhart intends
to construct paved roads, a sewage treatment plant and appropriate drainage and
install electrical power and sewer connections to the subdivided parcels.
Construction of such improvements will begin once suitable tenants are
identified. The Company has invested $100,000 as of December 31, 1998, and
estimates that the total cost of Longford will be $1.3 million.
Lockhart Gardens Shopping Center-Phase II involves the construction of
approximately 47,000 square feet of rentable space in the northern half of the
shopping center, which includes 30,000 square feet currently subject to a ground
lease. As a part of that development, the Company has arranged with the Division
of Highway Planning of the Government of the U.S. Virgin Islands for the
installation of signalized access from the main east-west roadway into the
shopping center. The scheduled completion date is mid-2000 for an estimated cost
of $5.5 million.
Grand Galleria-Phase II involves the final phase of the renovation process
of the entire property that began in 1994 with the first phase renovations of
three of the four buildings surrounding the courtyard. This final phase of work
is targeted to the fourth (main) building, which has frontage on the main artery
of the tourist
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shopping district in downtown Charlotte Amalie, and will create a central atrium
space and ground level passage surrounded at both levels by high-end retail
shops and a theme restaurant at the second level. Approximately 4,500 square
feet of additional space will be available for lease by the Company upon
completion. The scheduled completion date is mid-2000, at which time the
property will be renamed the "Grand Galleria" and marketed as a high-end tourist
shopping destination. The Company estimates construction costs of $2.2 million.
Sugar Estate Plaza will also be located in Sugar Estate Park and will be
constructed in two phases. When completed, the two-building, three-story complex
will provide approximately 55,000 square feet of rentable retail and office
space. The Company has had preliminary discussions with certain primary tenants
for the first phase of development. The scheduled completion date for the entire
complex is early 2001, and the estimated construction cost is $5.3 million.
Item 3. Legal Proceedings
HELM, had an action brought against it by a land lessee at Lockhart Gardens
Shopping Center, who operated a supermarket (the "Tenant"), for tortious
interference with contract and declaratory judgement. HELM filed a counterclaim
against Tenant, alleging that it breached the lease by failing to keep the
premises insured and by failing to restore the premises promptly following
Hurricane Marilyn, which completely destroyed the supermarket operated by Tenant
at the shopping center. Soon after this action was filed, the Territorial Court
of the U.S. Virgin Islands denied Tenant's motion for preliminary injunction,
and Tenant later filed a motion for partial summary judgement. HELM responded
with an opposition and cross-motion for summary judgement, asserting that it
properly terminated the lease due to the aforementioned breaches.
After HELM filed several renewed motions for summary judgement, which were
countered by renewed oppositions to HELM's motions and requests to amend
Tenant's complaint to add, among other things, claims arising from HELM's
alleged breach of the exclusivity provisions of the Lease, the Territorial Court
on December 10, 1998 entered an order directing the parties to mediate the
matter by March 1, 1999. The parties entered into mediation on March 4, 1999
after the Territorial Court approved a request for extension of the March 1
deadline. On March 4, 1999, HELM and Tenant signed an agreement wherein Tenant
agreed to pay HELM $35,000 and surrender its interest in the lease. Both parties
also agreed to dismiss all pending claims, including HELM's claim against the
insurance company holding the policy on the supermarket, and to exchange full
and comprehensive releases in favor of and by all parties.
HELM had also filed an action for damages against the insurance company
which purportedly issued a retroactive insurance policy covering the supermarket
occupied by Tenant at Lockhart Gardens Shopping Center, and against the parent
company for Tenant, which arranged for the issuance of the policy after
initially advising HELM that the supermarket was insured under the parent
company's Self-Insured Retention (SIR) Program.
On November 23, 1998, the District Court of the U.S. Virgin Islands granted
the defendants' July 15, 1997 motion to dismiss on the grounds that Tenant,
whose presence in the case would eliminate the Court's subject matter
jurisdiction, should have been joined as a party. As a result, HELM commenced an
action in the Territorial Court on December 22, 1998 realleging its claims
against the insurance company and the parent company, and asserting similar
claims against Tenant.
On March 1, 1999, HELM signed an agreement with the insurance company which
provided for the deposit of $2,010,000 (estimated cost of replacing the
supermarket building) in an escrow account for the sole purpose of replacing the
destroyed building. In addition to the escrow deposit, the insurance company
paid HELM $690,000 representing interest on the policy proceeds as permitted by
the laws of the U.S. Virgin Islands. In consideration of the payments, HELM
fully and finally released and forever discharged the insurance company and its
affiliates from any and all liability of every kind in any way connected with
the insurance policy. HELM also assigned to the insurance company all the
rights, claims, etc. which it may have against Tenant and its parent company
relating to or arising out of entitlement to proceeds of the insurance policy,
reserving all other claims or causes of action against the Tenant and the parent
company.
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's securities are currently not listed or publicly traded on any
stock exchange or other quotation system. On February 4, 1999, the Company
officially terminated its initial public offering of Class A Common Stock. Sales
of Class A Common Stock prior to the termination of the offering did not reach
the minimum offering of $7.5 million and all subscriptions held in escrow will
be returned to investors.
The Company paid $332,764 in dividends on Class B Common Stock in 1998. No
dividends were paid on Class A Common Stock in 1998. There are currently 32
stockholders.
Item 6 Selected Financial Data
<TABLE>
<CAPTION>
(in thousands except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue(1) ........... $ 8,021 $ 5,107 $ 4,379 $ 9,890 $ 3,076
Total expenses ............. 8,518 7,251 5,664 5,799 3,169
Income tax (benefit) ....... 303 (774) (453) 1588 (42)
Net Income (loss) .......... (800) (1,369) (833) 2,504 (51)
Earnings per share
Class A .................... (0.13) (0.20) -- -- --
Class B .................... (0.17) (0.24) (0.17) 0.30 (0.01)
Dividend per share ......... 0.04 0.04 0.04 0.04 0.04
Weighted Average # of Shares
Class A .................... 26 1 -- -- --
Class B .................... 8,664 8,641 8,561 8,427 8,314
Total property and equipment 33,954 32,882 33,228 18,444 12,766
Total assets ............... 43,898 35,704 36,270 25,505 14,896
Total long-term debt ....... 26,054 24,711 24,650 12,655 6,370
</TABLE>
- ----------
(1) Includes gain on land sale of $2.4 million in 1998 and insurance proceeds
of $5 million in 1995.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion should be read in conjunction with Selected
Financial Data and the Company's consolidated financial statements appearing
elsewhere in this document.
The Company's revenue currently is derived from the rental of retail and
office space, long-term ground lease of real property, sale of real property,
and premium financing. In 1998, building space rental accounted for 61.0% of
total revenue, ground lease payments accounted for 6.0%, sale of real property
accounted for 30.6% and premium financing accounted for 2.4%. PFC was acquired
by the Company on June 22, 1998, and accordingly only premium financing revenue
subsequent to June 22, 1998 was included in the Company's consolidated financial
statements. In 1997, building space rental generated 89% of total revenue and
ground lease payments accounted for 11%.
The wholly-owned subsidiaries, HELM, LRI, and PFC account for 100% of the
Company's revenue. In 1998, HELM accounted for 61.7% of total revenue, LRI
accounted for 35.9%, and PFC accounted for 2.4%. In 1997, HELM accounted for 90%
of total revenue and LRI accounted for 10%.
LRI is expected to account for a greater portion of real estate revenue in
the future as it develops the approximately 415 acres of land zoned for
residential use owned by the Company. In addition, LRI is currently planning the
development of Market Square East Phase II and Longford Industrial Park. Both
projects involve just the creation of infrastructure (roads, parking lots,
utilities) to facilitate plot sales or long-term ground leases to commercial
tenants.
Revenues from HELM should increase following completion of Phase II
construction at Lockhart Gardens Shopping Center and at Grand Galleria in 2000.
Lockhart Gardens Shopping Center Phase II will make an additional 47,000 square
feet of building space available for rental, and Grand Galleria Phase II will
add 5,000 square feet in building space rental.
The Company also expects revenue growth from the recently acquired
companies. Guardian Insurance Company, Inc. and Heritage Insurance Company
(Caribbean) Ltd. which were acquired on December 31, 1998, reported combined net
revenues of $4.9 million in 1998. Since GIC and HIC were acquired on December
31, their assets and liabilities are reported on the Company's balance sheet,
but no information for GIC or HIC is included in the Company's statement of
operations for the year ended December 31, 1998. Revenues from PFC are expected
to grow as PFC further develops the markets in St.Lucia, St. Vincent, and
Grenada.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Total revenue for the years ended December 31, 1998 and 1997 was $8,021,048
and $5,106,780, respectively. The $2,914,628 or 57% increase in 1998 over 1997
resulted primarily from the gain on sale of land of approximately $2.4 million
and an increase in tenant reimbursements due to the fact that the Company is now
requiring such reimbursements in all new or renegotiated leases.
For the years ended December 31, 1998 and 1997, total expenses were
$8,518,241 and $7,250,697, respectively.
Exclusive of interest costs, depreciation and amortization, and other
non-recurring items, expenses were $4,122,230 and $3,354,270 for the years ended
December 31, 1998 and 1997, respectively. The increase in expenses in 1998 was
due primarily to increases in salaries and benefits ($451,910), property taxes
($177,283), other general and administrative expenses ($114,444), and bad debt
expense ($90,942).
12
<PAGE>
Interest expense increased by $96,911 for the year ended December 31, 1998
compared to the year ended December 31, 1997. The increase in interest expense
was due to an additional $722,854 drawn on three separate lines of credit with
financial institutions, and interest paid in the third and fourth quarters on
additional bank financing for completed construction projects at Market Square
East and Lockhart Mall.
Depreciation and amortization decreased by $193,059 for 1998 compared to
1997. The decrease was primarily attributed to a capital lease that was fully
amortized by November 1997.
There were non-recurring expenses of $795,732 in 1998 for costs incurred
with the initial public offering that was terminated on February 4, 1999, and
$200,000 in 1997 for a payment made to Woolworth for termination of its lease at
Lockhart Gardens Shopping Center at Lockhart Gardens Shopping Center. The
increases due to the above-mentioned factors were partially off-set by a
reduction in the prime rate of 75 basis points in 1998.
As result of the foregoing, the Company had a net loss of $800,042 for the
year ended December 31, 1998 compared to a net loss of $1,369,465 for the year
ended December 31, 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenue for the years ended December 31, 1997 and 1996 was $5,106,780
and $4,378,843, respectively. The $727,937 or 17% increase in 1997 over 1996 was
due to a full year of revenue recorded in 1997 from three properties (Fort
Mylner Shopping Center, Fort Mylner Commercial Center, and Orange Grove Shopping
Center) that were acquired in June 1996; accordingly only six months of revenue
from these properties were recorded in 1996.
For the years ended December 31, 1997 and 1996, total expenses were
$7,250,697 and $5,664,448, respectively.
Exclusive of interest costs, depreciation and amortization, and other
non-recurring items, expenses were $3,354,270 and $2,743,744, respectively. The
increase in expenses in 1997 was due to (I) a full year of expenses in 1997
compared to only six months of expenses in 1996 from the three properties
acquired in June 1996, and (ii) increases in the reserve for doubtful accounts,
contracted security guard services, 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 three properties
acquired 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% in 1997 compared to 1996 due
to (I) an $11.0 million increase in bank debt for the acquisition of the three
properties in 1996 and additional reconstruction costs at Lockhart Gardens
Shopping Center not covered by the insurance proceeds, (ii) increased borrowing
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.
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.
As a result of the foregoing, the Company reported a net loss of $1,369,465
in 1997 compared to a net loss of $832,710 in 1996.
13
<PAGE>
Cash Flow
Net cash flow used in operating activities increased by $381,816 in 1998
compared to 1997. Net cash flow used in investing activities declined by
$458,410 in 1998 primarily as a result of the proceeds from the sale of 3.6
acres of land to a land lessee in Sugar Estate Park. Net cash flows provided by
financing activities increased by $1.1 million as a result of additional bank
borrowing and cash transferred from the two insurance companies acquired on
December 31, 1998.
Net cash flow from operating activities declined by $4.9 million in 1997
compared to 1996. Cash flows from operating activities in 1996 were affected by
$5.3 million in insurance proceeds collected by the Company. Net cash flow used
in investing activities was $14.8 million more in 1996 as a result of the three
properties acquired in 1996 and the reconstruction of the southern section of
Lockhart Gardens Shopping Center. Net cash flow provided by financing activities
was $10.8 million more in 1996 compared to 1997 as a result of the additional
bank financing obtained to purchase three properties in 1996 and to fund
additional construction costs at Lockhart Gardens Shopping Center not covered by
insurance proceeds.
Liquidity and Capital Resources
The principle sources of funding for development, acquisitions, expansion,
and renovations have historically been construction loans, and intermediate and
permanent debt financing. Proceeds from insurance companies have been utilized
in the past three 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. The acquisition of GIC and
HIC was effected through a combination of cash, seller financing in the
short-term and shares of the Company's Class A Common Stock.
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
subsidiaries have each fully and unconditionally guaranteed the Development
Loan. Approximately $19.1 million of proceeds from the Development Loan were
drawn down, primarily to retire the mortgages on certain operating properties,
and such amount is secured by first-priority mortgages on Drakes Passage
Shopping Mall, the Fort Mylner properties, the Grand Galleria, Lockhart Gardens
Shopping Center and Orange Grove Shopping Center and a second-priority mortgage
on Red Hook Plaza. The Company 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 cash flow from operations. The interest
on the Development Loan is at 0.5% above the prime lending rate or 8.25% as of
December 31, 1998.
The Development Loan also provides for a $1.0 million line of credit with
an interest rate of 0.5% above the prime rate. As of December 31, 1998, the
Company had $30,000 available under the line of credit, and the interest rate
was 8.25%. The entire outstanding balance under the Development Loan is due and
payable on April 1, 2000. However, 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
installment loan with covenants similar to those of the Development Loan.
In February 1995, the Company acquired Red Hook Plaza for an aggregate
purchase price of $5.8 million from an unaffiliated party. HELM 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 acquired the Fort Mylner Commercial Center, the Fort
Mylner Shopping Center and the Orange Grove Shopping Center for an aggregate
purchase price of $10.1 million from an unaffiliated party. HELM financed the
acquisition with a short-tern demand note which was refinanced in October 1996
with proceeds from the Development Loan.
14
<PAGE>
On March 31, 1998, the Company sold 3.68 acres of land in Sugar Estate Park
to the ground lessee for $2.8 million. A portion of the proceeds was used to
retire the Sugar Estate Park Loan, which had an outstanding balance of $720,000.
The Company also used a portion of the proceeds to purchase all the outstanding
common stock of PFC for $550,000. The balance of the proceeds from the land sale
was used for renovations at the Drake's Passage Mall and working capital needs.
On May 22, 1998, the Company secured two construction loans from a
financial institution. One loan for $1.8 million is being used for the
construction of roads, a parking lot, underground utilities and other
infrastructure at Market Square East, a commercial park offering ground leases
for tenant-built commercial facilities. Market Square East is already home to a
36,000 square foot discount bulk-food retail store, and will soon have a
multi-screen cinema under construction. The second construction loan for
$577,000 was used for the conversion of 10,000 square feet on two floors in
Lockhart Gardens Shopping Center into a mini-mall with a total of eight rental
spaces. Both of these projects were under construction prior to the closing of
the construction loans and were financed during that period by demand notes from
the financial institution. The demand notes were retired from proceeds of the
construction loans. At December 31, 1998, the Market Square East project was
approximately 98% complete, and the mini-mall project was approximately 95%
complete and 100% of the space had been leased.
On December 31, 1998, the Company acquired two insurance companies, GIC and
HIC for approximately $2.8 million. The purchase price consisted of $125,000 in
cash, $1,125,000 in a short-term note payable to the seller, and approximately
185,000 shares of Class A Common Stock subject to mandatory redemption at $8.30
per share for a 180-day period commencing three years from the close of the
transaction. The seller note was repaid from the proceeds of a line of credit
negotiated with a financial institution.
The Company expects to meet its short-term liquidity requirements with cash
flow from operations. The Company expects cash flow to increase as a result of
(i) a reduction of net operating funds needed to service annual debt, (ii) the
acquisition of PFC, GIC and HIC, and (iii) increased net rentable space from the
reconstruction and renovation of Lockhart Gardens Shopping Center and Grand
Galleria and (iv) continued pass through of certain reimbursable expenses to
tenants. The Company also believes that the foregoing sources of liquidity will
be sufficient to fund its liquidity needs for the foreseeable future, including
capital maintenance expenditures.
The Company expects to meet certain long-term liquidity requirements, such
as acquisitions, scheduled debt maturities, renovations, expansions , commercial
and residential development ventures, and other non-recurring major capital
improvements, through long-term secured or unsecured debt and the issuance of
equity securities.
Recent Developments
On January 19, 1999, The Company repaid a $200,000 line of credit that was
extended by a financial institution for PFC-EC's expansion into the Eastern
Caribbean.
On February 4, 1999, Lockhart officially terminated its initial public
offering..
On February 12, 1999, Lockhart signed a stock purchase agreement to
purchase 91% of the outstanding shares of common stock of EPO Capital and
Keylink Transmedia, Inc. for $400,000 plus 25,000 shares of Class A Common
Stock. EPO Capital, a licensed broker/dealer and member of the National
Association of Securities Dealers, was established in 1996 to conduct electronic
public offerings. Keylink Transmedia, Inc. designs and develops customized
websites.
On March 1, 1999, the Company signed an agreement with an insurance company
against which the Company filed a claim in the Territorial Court of the Virgin
Islands as a third party beneficiary under the terms of a policy insuring a
building occupied by a tenant at Lockhart Gardens Shopping Center that was
destroyed by Hurricane Marilyn in September 1995. Under the terms of the
agreement, an amount of $2,010,000 was
15
<PAGE>
deposited into an escrow account for the sole purpose of replacing the building.
Also, the Company was paid $690,000 representing interest on the insurance
proceeds as permitted by the laws of the U.S.Virgin Islands. On March 4, 1999,
the Company also signed an agreement with the tenant of the building under which
the tenant agreed to pay the Company $35,000 and to surrender its interest in
the lease. (See Item 3)
On March 12, 1999 and March 30, 1999, the Company sold two parcels of land
to land lessees in Sugar Estate Park an aggregate sales price of $1,020,000.
On March 18, the Company signed a commitment letter for a loan of $6.5
million at 7.85% interest to be secured by Drake's Passage. The proceeds will be
used to retire approximately $4.3 million in bank debt currently being amortized
at 9.25% per annum and repay a bank line of credit for $1,350,000.
Forward Looking Statements
Management=s Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Prospectus contain forward-looking
statements which are subject to various risks and uncertainties. Actual results
could differ materially from those discussed herein.
YEAR 2000
The Company has made an assessment of its computer hardware and software
environment for the year 2000 ("Y2K") compliance.
REAL ESTATE
Most of the computers are new and, therefore, already Y2K compliant or
upgradeable to be Y2K compliant. Three computers could not be upgraded and were
replaced. Installation of the new machines as well as the final upgrade of
existing machines, was completed by January 1999.
The Company replaced its word processing software with a program that is
already Y2K compliant. With the exception of one module (property management),
the accounting software package was recently upgraded to Y2K versions. The
property management Y2K upgrade will be released by the vendor by the second
quarter of 1999. All machines have been upgraded from Windows 3.1 to Windows 98.
All other applications and operating system programs are Y2K compliant.
The total cost to the Company of implementing the above changes is
projected to be approximately $20,000.
PFC
All software and hardware of PFC have already been updated to Y2K
compliance.
GIC and HIC
GIC and HIC use a software for its underwriting and claims operations that
was customized for the companies. This software is a database that uses a
variety of source codes, mainly Clipper and Fox Pro. This software is not Year
2000 compliant. HIC and GIC embarked on a project during January 1998 to
completely update these applications. For this purpose a System Analyst was
employed full time to design, develop and integrate the new applications in a
time frame of 18 months. It was also decided to consider purchasing an
application for claims processing. The vendor selected is Orca Software
Solutions and the software is Claimen. The current plan is to acquire the
Claimen software and concentrate all developing efforts in the underwriting
application. The estimated cost of Claimen is approximately $33,000 including
testing and implementation. The underwriting application is about 50% completed
for the PAP (Personal Auto Policy) module. The cost incurred to date is
approximately $28,000
16
<PAGE>
(including the salary of the System Analyst). It is estimated that remaining
modules will be finished, tested and in production progressively during 1999.
The estimated cost to complete the underwriting application is $75,000
(basically the salaries of the Systems Analyst).
All hardware stations are relatively new, and there is no Y2K exposure.
The previous discussion notwithstanding, there can be no assurance that the
Comapny will not experience any difficulty or problems in the Year 2000.
17
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Page
----
Financial Statements:
Report of Independent Accountants........................................ 20
Consolidated Financial Statements........................................ 21
Consolidated Balance Sheet as of December 31, 1998 and 1997.............. 21
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997 and 1996....................................... 22
Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996........................... 23
Consolidated Statement of Cash Flows for the years ended
December 31,1998, 1997 and 1996........................................ 24
Notes to Consolidated Financial Statements............................... 25
Financial Statement Schedule:
Schedule I - Real Estate and Accumulated Depreciation as of
December 31, 1998 and 1997............................................... 43
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
18
<PAGE>
LOCKHART CARIBBEAN CORPORATION
Consolidated Financial Statements and
Report of Independent Accountants
For Inclusion in Form 10-K Annual Report
Filed with Securities and Exchange Commission
19
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Stockholders of
Lockhart Caribbean Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position Lockhart
Caribbean Corporation and its subsidiaries at December 31, 1998, and the results
of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
February 5, 1999, except as to Notes 17 and 18, which
are as of February 12 and March 4, 1999, respectively
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1537591 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
20
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1998 1997
----------- -----------
Assets
Operating property:
Land and improvements ............................ $11,250,875 $10,146,068
Buildings and improvements ....................... 25,275,799 25,155,646
Equipment ........................................ 1,215,515 468,369
Prepaid lease .................................... -- 1,460,657
Construction-in-progress ......................... 1,217,521 798,166
----------- -----------
Total operating property ........................... 38,959,710 38,028,906
Accumulated depreciation and amortization .......... (5,005,554) (5,146,943)
----------- -----------
33,954,156 32,881,963
----------- -----------
Cash and cash equivalents, including $682,725
restricted in 1998 ............................... 1,047,840 376,930
Short-term investments, including $415,892
restricted in 1998 ............................... 1,095,357 --
Securities available for sale, at market value ..... 571,546 --
Accounts receivable, net ........................... 1,999,821 771,992
Prepaid expenses ................................... 445,583 353,975
Deferred financing costs, net ...................... 220,743 354,507
Investment in real estate .......................... 2,250,000 --
Other assets ....................................... 1,810,829 964,213
Land held for sale ................................. 192,826 --
Goodwill ........................................... 309,609 --
----------- -----------
9,944,154 2,821,617
----------- -----------
Total assets ....................................... $43,898,310 $35,703,580
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Notes payable .................................... $28,247,695 $25,953,806
Loan payable to related parties .................. 1,488,768 --
Property taxes payable ........................... 521,501 844,460
Tenant security deposits ......................... 484,917 388,902
Unearned premiums ................................ 1,886,851 --
Unpaid losses and loss adjustment expenses ....... 1,544,116 --
Accounts payable and accrued expenses ............ 1,145,700 927,498
Deferred revenue ................................. 166,667 200,000
Deferred income taxes ............................ 986,614 648,892
----------- -----------
Total liabilities .................................. 36,472,829 28,963,558
----------- -----------
Mandatorily redeemable securities at
redemption value ................................. 1,534,930 --
----------- -----------
Commitments and contingencies (Note 14)
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; none issued
Class A common stock, $0.1 par value,
40,000,000 shares authorized; 50,150 shares
issued and outstanding (1997 - 6,560) .......... 502 66
Class B common stock, $.01 par value,
9,000,000 shares authorized ; 8,663,867
shares issued and outstanding (1997 - 8,663,867) 86,639 86,639
Additional paid-in capital ....................... 7,059,893 6,776,994
Deficit .......................................... (1,256,483) (123,677)
----------- -----------
Total stockholders' equity ......................... 5,890,551 6,740,022
----------- -----------
Total liabilities and stockholders' equity ......... $43,898,310 $35,703,580
=========== ===========
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
Rental income ................... $ 4,394,451 $ 4,465,945 $ 3,385,002
Tenant expense reimbursements ... 816,463 476,769 248,898
Other operating income .......... 169,891 164,066 582,833
Interest and service income ..... 188,772 -- --
Gain on disposal of property .... 2,451,831 -- 86,440
Insurance proceeds .............. -- -- 75,670
----------- ----------- -----------
8,021,408 5,106,780 4,378,843
----------- ----------- -----------
Expenses:
Operating and maintenance ....... 344,688 299,098 243,817
Salaries and employee benefits .. 1,668,336 1,216,426 1,021,097
Utilities ....................... 301,006 290,062 162,418
Insurance ....................... 450,421 538,194 454,670
Other taxes ..................... 754,708 577,425 475,836
Professional fees ............... 171,589 206,969 203,157
Other general and administrative 250,326 135,882 150,949
Depreciation and amortization ... 1,254,425 1,447,484 1,244,774
Bad debt expense ................ 181,156 90,214 31,800
Interest expense ................ 2,345,854 2,248,943 1,675,930
Lease termination costs ......... -- 200,000 --
IPO expenses .................... 795,732 -- --
----------- ----------- -----------
8,518,241 7,250,697 5,664,448
----------- ----------- -----------
Loss before income taxes .......... (496,833) (2,143,917) (1,285,605)
----------- ----------- -----------
Income taxes:
Current ......................... -- -- (1,295)
Deferred ........................ (303,209) 774,452 454,190
----------- ----------- -----------
(303,209) 774,452 452,895
----------- ----------- -----------
Net loss .......................... $ (800,042) $(1,369,465) $ (832,710)
=========== =========== ===========
Basic earnings per share:
Class A ......................... $ (.13) $ (.20) --
Class B ......................... (.17) (.24) $ (.17)
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Retained
Class A Class B Paid-In Earnings
# of shares Amount # of shares Amount Capital (Deficit) Total
------------ ------ ----------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .. -- -- 8,525,543 $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 ...... 6,560 66 41,712 417 107,615 -- 108,098
Net loss ...................... -- -- -- -- -- (1,369,465) (1,369,465)
Cash dividends ................ -- -- -- -- -- (332,581) (332,581)
------ ---- --------- ------- ---------- ----------- -----------
Balance at December 31, 1997 .. 6,560 $ 66 8,663,867 $86,639 $6,776,994 $ (123,677) $ 6,740,022
Issuance of common stock ...... 43,590 436 -- -- 282,899 -- 283,335
Net loss ...................... -- -- -- -- -- (800,042) (800,042)
Cash dividends ................ -- -- -- -- -- (332,764) (332,764)
------ ---- --------- ------- ---------- ----------- -----------
Balance at December 31, 1998 .. 50,150 $502 8,663,867 $86,639 $7,059,893 $(1,256,483) $ 5,890,551
====== ==== ========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (800,042) $(1,369,465) $ (832,710)
----------- ----------- ------------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization .................... 1,254,425 1,447,484 1,244,774
Amortization of deferred revenue ................. 33,333 -- --
Amortization of IPO expenses ..................... 687,732 -- --
Deferred income taxes (benefit) expense .......... 303,209 (774,452) (454,190)
Gain on disposal of operating property ........... (2,451,831) -- (86,440)
Bad debt expense ................................. 181,156 90,214 31,800
Changes in operating assets and liabilities,
net of effects of net assets acquired:
Accounts receivable .......................... (94,299) (108,433) 5,299,627
Prepaid expenses ............................. 60,939 (28,096) (75,781)
Other assets ................................. (125,909) (642,456) (1,179,207)
Tenant security deposits ..................... 96,015 74,867 88,398
Accounts payable and accrued expenses ........ (153,985) 516,938 242,007
Deferred revenue ............................. -- 200,000 --
Income tax payable ........................... 34,042 -- --
----------- ----------- ------------
Total adjustments ............................ (175,173) 776,066 5,110,988
----------- ----------- ------------
Net cash (used in) provided by operating activities .. (975,215) (593,399) 4,278,278
----------- ----------- ------------
Cash flows from investing activities:
Acquisition of operating property .................. (2,324,256) (745,666) (15,666,539)
Proceeds on sale of property ....................... 2,800,000 -- 80,405
Acquisition of subsidiaries ........................ (763,000) -- --
----------- ----------- ------------
Net cash used in investing activities .............. (287,256) (745,666) (15,586,134)
----------- ----------- ------------
Cash flows from financing activities:
Principal payments on notes payable ................ (1,820,418) (293,208) (18,030,008)
Proceeds from issuance of notes payable ............ 3,371,529 1,303,523 29,800,000
Proceeds from issuance of common stock ............. -- 126,134 256,513
Repurchase of common stock ......................... -- (18,036) (88,076)
Cash dividends ..................................... (332,764) (332,581) (330,613)
Cash transferred upon acquisition of subsidiaries .. 715,034 -- --
----------- ----------- ------------
Net cash provided by financing activities ............ 1,933,381 785,832 11,607,816
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents . 670,910 (553,233) 299,960
Cash and cash equivalents at beginning of year ....... 376,930 930,163 630,203
----------- ----------- ------------
Cash and cash equivalents at end of year ............. $ 1,047,840 $ 376,930 $ 930,163
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Reporting Entity
The consolidated financial statements include the accounts of Lockhart
Caribbean Corporation (LCC or the Company) and its wholly-owned
subsidiaries H.E. Lockhart Management, Inc. (HELM), Lockhart Realty, Inc.
(LRI), Premium Finance Company (Caribbean) Limited (PFC), Guardian
Insurance Company, Inc. (Guardian) and Heritage Insurance Company
(Caribbean) Limited (Heritage), Lockhart Caribbean Finance Corporation
(LCFC), Lockhart Housing Development, Inc. (LHD), Lockhart Caribbean
Insurance Corporation (LI) and Lockhart Internet Services Corp. (LIS). LCC
is organized as a United States Virgin Islands corporation engaged in
owning, developing and leasing commercial and residential real estate. LCC
leases developed land, and retail and office space to customers primarily
under long-term leases. Significant intercompany accounts and transactions
have been eliminated in consolidation. Since the acquisition of Guardian,
Heritage and PFC, the Company began to operate in the insurance industry.
Guardian is primarily engaged in the automobile and liability insurance in
the U.S. Virgin Islands; Heritage is a property and casualty insurer
authorized to issue insurance policies risks located in the British Virgin
Islands; PFC's primary activity is to acquire premium finance agreements
with insured parties in the U.S. Virgin Islands, British Virgin Islands,
Anguila, St. Maarten, Antigua, St. Vicent, Grenada and St. Lucia. LCFC,
LHD, LI and LIS are inactive and have no assets or liabilities.
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 (IPO) to be registered
with the U.S. Securities and Exchange Commission (SEC). In connection with
the restructuring and recapitalization, LCI changed its name to Lockhart
Caribbean Corporation on August 22, 1997. On the same date, the
shareholders of LCI exchanged each of their shares for 9.7 shares of Class
B common stock of LCC. The transaction was accounted for in a manner
similar to a pooling-of-interests and, accordingly, the financial
statements as of and for the year ended December 31, 1996 were restated to
give retroactive recognition to this transaction. On February 4, 1998,
LCC's registration statement was declared effective by the SEC and certain
state regulatory authorities. The Company started conducting its IPO
primarily over the World Wide Web. IPO expenses, consisting primarily of
legal fees, amounting to approximately $687,000 were capitalized at
December 31, 1997. On February 4, 1999, the Company officially terminated
its IPO. Approximately $795,000 of IPO expenses were charged to operations
during the year ended December 31, 1998.
On June 22, 1998, the Company purchased all of the outstanding common stock
of PFC and its wholly-owned subsidiary, Premium Finance Company (E.C.),
Ltd. (PFC-EC) for $582,000, including transaction costs. The transaction
was accounted for under the purchase method of accounting. As a result of
this transaction, goodwill of approximately $192,000 was recorded and the
statement of operations of the Company for the year ended December 31, 1998
includes the operations of PFC since June 22, 1998.
On December 31, 1998, the Company purchased all of the outstanding common
stock of Guardian and Heritage.
25
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The acquisition cost amounted to approximately $2,841,000 as follows:
Cash paid ................................................ $ 125,000
Note payable to seller, bearing interest at prime
and paid subsequent to December 31, 1998 ............... 1,125,000
Class A common stock issued (184,931 shares
valued at $6.50 per share but subject to mandatory
redemption at $8.30 per share for a 180-day period
commencing three years from December 31, 1998) ......... 1,535,000
Transaction costs ........................................ 56,000
----------
$2,841,000
==========
The transaction was accounted for under the purchase method of accounting.
The excess of the purchase price over the fair value of the assets and
liabilities acquired was allocated to goodwill for approximately $117,000.
The statement of operations of the Company for the year ended December 31,
1998 does not include the operations of Guardian and Heritage.
The purchase agreement of Guardian and Heritage provides for various
contingent considerations including the following:
o Seller will receive additional shares equal to 1.5 times the amount of
the tax benefit resulting from offsetting future Guardian's net income
against certain net loss carryforwards that Guardian has accumulated.
o Seller will receive additional shares equal to 1.5 times the
difference between the actual insurance payment made and the insurance
reserve amount established for certain insurance claims outstanding at
the date of the purchase transaction if such payments are less than
the amount of the reserve.
The additional shares will be issued by LCC on the same basis as the
original shares issued for the original purchase price (at $6.50 per share
with the $8.30 redemption clause). The aggregate maximum amount that the
seller will be entitled to under above contingency clauses is limited to
$1,839,927. The value of any additional shares issued will be treated as an
increase in the purchase price, added to goodwill and amortized over its
remaining life.
The purchase agreement also provides for certain contingent adjustments for
two legal actions outstanding at the date of the purchase.
26
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The following unaudited pro-forma summary presents the consolidated results
of operations of the Company as if the acquisition of Guardian and Heritage
had occurred as of January 1:
1998 1997
------- -------
Revenues ...................................... $12,889 $10,749
======= =======
Net loss ...................................... $ ( 890) $ (528)
======= =======
Basic EPS:
Class A ..................................... $ (.14) $ (.10)
Class B ..................................... $ (.18) $ (.14)
PFC amounts are not significant. The pro-forma results do not necessarily
represent results which could have occurred if the acquisition had taken
place at January 1, 1998.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. The following summarizes the more significant accounting
policies followed in the preparation of the accompanying consolidated
financial statements.
Operating Property
Operating property is stated at cost. Depreciation of operating property is
provided 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 capitalized. Interest is
capitalized as a component of the cost of operating property constructed.
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 depreciable operating
property when the projects are completed.
Investment in Real Estate
Represents a parcel of land acquired in the acquisition of Guardian.
Land Held for Sale
Land held for sale is stated at the lower of cost or fair value less
estimated cost to sell.
27
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Securities Available-for-Sale
Securities that are held neither for trading or to maturity are presented
as securities available-for-sale and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
taxes, in a separate component of stockholders' equity.
Short-term investments
Short-term investments represent certificate of deposits whose maturities,
at the time of acquisition are one year or less.
Allowance for Doubtful Accounts
Allowance for doubtful accounts provides for estimated losses on accounts
receivable. The allowance is established based upon a review of the
individual accounts, loss experience, economic conditions and other
pertinent factors. Account losses are charged and recoveries are credited
to the allowance for doubtful accounts.
Goodwill
Consists of the excess of the purchase price over the fair value of net
assets acquired from Guardian, Heritage and PFC. It will be amortized over
its estimated useful life of fifteen years commencing January 1, 1999.
Deferred Policy Acquisition Costs
Policy acquisition costs related to unearned premiums, which principally
consist of commissions, premium tax, underwriting salaries, and service
fees paid to agents, are deferred and amortized in proportion to premium
revenue recognized. Deferred acquisition costs are reviewed periodically to
assure their recoverability. The recoverability of the deferral is
calculated without considering investment income.
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. At December
31, 1998 accumulated amortization was $337,007 (1997 - $153,682).
Unearned Premiums
The portion of premiums written by Guardian and Heritage that apply to the
unexpired terms of insurance contracts in force are accounted for as
unearned premiums and amortized under the daily pro-rata method over the
period of insurance coverage.
Unpaid Losses and Loss Adjustment Expenses
Guardian's and Heritage's liabilities for unpaid losses and loss adjustment
expenses are estimates of future payments to be made on reported losses and
related loss adjustment expenses, and estimates of losses incurred but not
reported. No estimated amounts of salvage and subrogation on unpaid
reported losses are deducted from the liability for unpaid losses since
such amounts are not anticipated.
28
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The estimates for unpaid losses and loss adjustment expenses for reported
losses are based on case estimates, including an amount for claim
adjustment expenses. Such estimates require reliance on available data that
reflects past experience, current trends and other information, and the
exercise of informed judgment. The process by which such estimates are made
are subject to uncertainties that are normal, recurring and inherent in the
property and casualty business. As information develops which varies from
experience, provides additional data or, in some cases, augments data which
previously was not considered sufficient for use in determining reserves,
changes in the Company's ultimate liabilities may be required.
Reinsurance
Guardian and Heritage originate insurance policies and cede a portion of
originated risks to reinsurers. Reinsurance is ceded primarily to limit
losses from large exposures and to permit recovery of a portion of direct
losses, although ceded insurance does not relieve the originating insurer
of its contingent liability. Risks ceded are treated as risks for which the
Company is not liable; however, the Company would be liable for such risks
if a reinsurer fails to meet its obligation under existing contractual
agreements.
Contingent Commissions
Heritage primary insurance activity involves covering risks in the British
Virgin Islands through various insurance agents under various contracts.
Some of these contracts provide for contingent commissions based on premium
production and other provisions. The contingent commission payable is
recognized when determinable in accordance with the terms of the related
contracts. No such commission payable has been recognized at December 31,
1998.
Revenue Recognition
Rental income is recognized in equal monthly installments over the lives of
the leases.
Revenue from land sales is recognized at the time of closing. The related
profit is recognized in full when collectibility of the sales price is
reasonably assured and the earnings process is substantially complete.
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.
Foreign Currency
A subsidiary of PFC (PFC-EC) operates in the Eastern Caribbean where the
currency is not the U.S. dollar. The financial statements of PFC-EC were
converted from East Caribbean currency (EC$) to U.S. dollar using an
exchange rate of 2.69 to the U.S. dollar. Any fluctuation in this exchange
rate would result in an adjustment to the stockholders' equity. The EC$ is
a very stable currency that is pegged to the U.S. dollar and has been
trading at the above rate over the past ten years.
29
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Accounting for Impairment of Long-lived Assets
The Company continually evaluates its long-lived assets to determine
whether current events and circumstances warrant adjustment to the carrying
values or amortization periods. The Company measures impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In performing the review for recoverability,
an estimate of the future cash flows expected to result from the use of the
asset and its eventual disposition must be made. If the sum of the future
cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.
Income Taxes
In accounting for income taxes the Company uses an asset and liability
approach that requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. A
valuation allowance is recognized for any deferred tax asset for which,
based on management's evaluation, it is more likely than not (a likelihood
of more than 50%) that some portion or all the deferred tax asset will not
be realized.
Statement of Cash Flows
Cash and cash equivalents include cash, money market accounts and highly
liquid investments with an original maturity of three months or less.
Earnings per Share
Basic net income per share has been determined by using the two-class
method. The two-class method is an earning allocation formula that
determines earnings per share for each class of common stock according to
dividends declared and participation rights in undistributed earnings.
Under this method, net income is reduced by the amount of dividends
declared in the current period for each class of common stock. The
remaining earnings are allocated to each class of common stock to the
extent that each stock may share in earnings as if all earnings for the
period had been distributed. The total earnings allocated to each stock is
divided by the weighted average number of outstanding shares of the stock
to which the earnings are allocated.
The weighted-average number of shares of common stock used for computing
the basic earnings per share was as follows:
1998 1997 1996
--------- --------- ---------
Basic:
Class A common stock .......... 26,587 766 --
Class B common stock .......... 8,663,867 8,640,874 8,561,452
Fair Values of Financial Instruments
The Company uses the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: the carrying amounts are reasonable estimates of
fair value due to the short period to maturity.
30
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Securities available for sale: valued at quoted market prices obtained from
independent pricing services.
Accounts receivable, accrued expenses and accounts payable: the carrying
amounts are reasonable estimates of fair value due to payment terms and
current interest rates.
Notes and loans payable: the carrying amounts are reasonable estimates of
fair value due to the periodic repricing of the interest rates.
Unpaid losses and loss adjustment expense: the carrying amounts are
reasonable estimate of fair value due to recent acquisition.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts, and for hedging
activities. This statement is effective January 1, 2000. Management
believes the adoption of the statement will not have an impact on the
financial statements since the Company does not engage in derivative
activities.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
3. Regulatory Matters
Guardian and Heritage are subject to certain regulatory requirements.
Guardian
To comply with the regulations of the Insurance Commissioner, Guardian
maintains a depository agreement with the Insurance Commissioner whereby
$500,000 in certificates of deposit is held in lieu of a surety bond. At
December 31, 1998, Guardian had $582,725 deposited on behalf of the
Insurance Commissioner. These certificates of deposit are shown as
short-term investments in the accompanying financial statements.
The Virgin Islands Insurance Code requires property and casualty insurance
companies to maintain a minimum of $450,000 in capital, and stipulates
certain restrictions on the amount of dividends which can be paid. In
addition, the Insurance Commissioner customarily, in accordance with NAIC
rules, requires a maximum ratio of net written premiums to capital and
surplus of 3:1. At December 31, 1998, Guardian's ratio of net written
premiums to statutory surplus was 2.6:1. The current ratio may indicate
that future operations may be curtailed by the Insurance Commissioner
unless additional capital is obtained.
31
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
At December 31, 1998, Guardian is required to comply with the NAIC's
risk-based capital ("RBC") requirements. RBC is a method of measuring the
amount of capital appropriate for an insurance company to support its
overall business operations in light of its size and risk profile. NAIC's
RBC standards will be used by regulators to set in motion appropriate
regulatory actions relating to insurers which show signs of weak or
deteriorating condition. At December 31, 1998 Guardian was in compliance
with the RBC requirements.
Heritage
At December 31, 1998, Heritage maintains under custody with its investment
broker cash of $415,892. The use of this broker account is restricted by
the Commissioner of Insurance of the British Virgin Islands. The Act states
that a person who at the date the Act came into force was carrying on
insurance business of any kind in or from within the Territory, shall
within three months after the Act came into force comply with the
provisions of the Act. In order to control the quality and yield of its
investment portfolio, Heritage maintains its investment portfolio with a
U.S. Investment brokerage firm. Management believes no such brokerage firm
exists within the territory at the present time.
In addition, the Superintendent of Insurance of the Turks and Caicos
Islands requires Heritage to maintain a deposit of $100,000. Heritage
complied with this requirement by maintaining, under the custody of a
commercial bank, certificates of deposit of approximately $113,400.
The Insurance Commissioner of the British Virgin Islands has requested
Heritage to maintain a minimum capital of $250,000. As of December 31, 1998
the Company was in compliance with this requirement.
4. Securities Available-For-Sale
Securities available-for-sale were acquired as part of the acquisition of
Guardian and Heritage and, therefore, are stated at market. These consist
of:
Callable U.S. Municipal Bonds
(due after 10 years) .................................... $269,425
Federal National Mortgage
Association (due February 2003) ......................... 150,099
Federal National Mortgage
Association (due March 2008) ............................ 152,022
--------
$571,546
========
Expected maturities on debt securities available-for-sale may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
32
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
5. Accounts Receivable
At December 31, accounts receivable consist of:
1998 1997
---------- --------
Tenant accounts receivable ................... $ 756,920 $671,846
Finance receivables .......................... 867,474 --
Reinsurance recoverable on unpaid losses
and loss adjustment expense ................ 255,249 --
Note receivable - PFC ........................ -- 78,187
Shareholders ................................. 100,404 101,193
Other ........................................ 388,944 108,780
---------- --------
2,368,991 960,006
Less allowance for doubtful accounts ......... 369,170 188,014
---------- --------
$1,999,821 $771,992
========== ========
Finance receivables represent amounts due from customers whose insurance
premiums were financed by PFC and consist of the following:
Consumer ................................................... $704,517
Commercial ................................................. 214,205
--------
918,722
Less - Unearned interest ................................... (21,248)
Provision for recoveries from insurance
policies cancelled ....................................... (30,000)
--------
$867,474
========
Changes in the allowance for doubtful accounts were as follows:
1998 1997 1996
-------- -------- -------
Balance at beginning of year ........ $188,014 $ 97,800 $66,000
Bad debt expense .................... 181,156 90,214 31,800
-------- -------- -------
Balance at end of year .............. $369,170 $188,014 $97,800
======== ======== =======
33
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
6. Other Assets
At December 31, other assets consist of:
1998 1997
---------- --------
Income tax refund claim ...................... $ 925,970 --
Deferred IPO costs ........................... -- $687,733
Deferred policy acquisition costs ............ 492,153 --
Other ........................................ 392,706 276,480
---------- --------
$1,810,829 $964,213
========== ========
34
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
7. Notes Payable
At December 31, notes payable consist of:
December 31,
-------------------------
1998 1997
----------- -----------
First and second mortgage note payable to
a financial institution at prime plus .5%
(8.25% and 9.00% at December 31, 1998 and
1997, respectively). ........................... $14,254,777 $14,472,438
First mortgage note payable to a financial
institution at prime plus .5% (8.25% and 9.00%
at December 31, 1998 and 1997, respectively). .. 4,393,596 4,460,683
First mortgage note payable to a financial
institution at prime plus 1.5% (10.00% at
December 31, 1997). ............................ -- 737,723
First mortgage note payable to seller at 8.75%. 4,596,089 4,635,737
Promissory note payable to a financial
institution under a non-revolving line of
credit at prime plus .5% (8.25% and 9.00% at
December 31, 1998 and 1997, respectively). ..... 970,000 746,000
First mortgage note payable to a financial
institution at prime plus .5% (8.25% at
December 31, 1998). ............................ 1,767,499 --
First mortgage note payable to a financial
institution at prime plus .5% (8.25% at
December 31, 1998). ............................ 577,000 --
Amount due under a revolving line of credit
payable to a financial institution at prime
plus 1.5% (9.25% at December 31, 1998) ......... 155,131 --
Note payable to a financial institution at
8.75%, guaranteed by certain stockholders ...... 600,000 --
Demand note payable to a financial institution
at .5% over prime rate (8.25% at December 31,
1998) .......................................... 125,000 --
Amount payable to a bank under a line of credit
of $950,000 and a bank overdraft facility of
$50,000 at prime plus 2% (9.75% at December 31,
1998) .......................................... 518,177 --
Amount payable to a bank under a line of credit
of $200,000 at prime plus 1.5% (9.25% at
December 31, 1998) ............................. 200,000 --
Demand notes payable to a financial institution
at prime plus .5% (9.00% at December 31, 1997). -- 500,000
Other .......................................... 90,426 401,225
----------- -----------
$28,247,695 $25,953,806
=========== ===========
35
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The first and second mortgage note payable to a financial institution with
an outstanding balance of $14,254,777 at December 31, 1998, is payable in
monthly installments of principal and interest of $125,032. 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%.
The first mortgage note payable to a financial institution with an
outstanding balance of $4,393,596 at December 31, 1998, is payable in
monthly installments of principal and interest of $38,537. A final balloon
payment of approximately $4.3 million is payable when the note matures 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 prime plus .5%.
The first mortgage note payable with an outstanding balance of $4,596,086
at December 31, 1998 is payable in monthly installments of principal and
interest of $36,975. A final installment comprised of the principal amount
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 the Lockhart Caribbean
Corporation up to a maximum amount of $750,000.
The promissory note payable to a financial institution under a
non-revolving line of credit is due in April, 2000. However, if there are
no events of default, the financial institution has agreed to convert the
balance outstanding on such date to a term loan payable in 15 years and
bearing interest at prime plus .5%.
The mortgage note payable to a financial institution with an outstanding
balance of $1,767,499 at December 31, 1999, has principal payments due in
1999 of $33,911 and of $1,733,588 in 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 mortgage note payable to a financial institution with an outstanding
balance of $577,000 at December 31, 1998, is payable in monthly
installments of principal and interest of $5,142 commencing in January
1999. A final installment comprised of the principal amount then
outstanding together with any unpaid interest is payable when the loan
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 amount of $155,131 is due under a $336,000 revolving line of credit
payable in monthly installments of $37,333.
Under the various loan agreements, the Company must comply with several
covenants and restrictions which include, among others, limitation on the
dividends declared or paid by certain subsidiaries to a maximum of $860,000
per year, limitation on capital expenditures and other conditions. At
December 31, 1998, the Company was in compliance with these covenants and
restrictions.
36
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Aggregate principal payments of notes payable for the five years subsequent
to December 31, 1998, are as follows:
1999 .......................................... $ 2,193,625
2000 .......................................... 21,534,611
2001 .......................................... 65,063
2002 .......................................... 56,407
2003 .......................................... 61,295
Thereafter .................................... 4,336,694
-----------
$28,247,695
===========
On January 29, 1999, the Company issued two first mortgage notes payable to
a financial institution of $100,000 and $1,250,000, respectively, bearing
interest at 1.0% over prime. The notes are payable in monthly interest only
payments commencing February 1, 1999 through July 1, 1999. A final balloon
is due when the notes mature on July 30, 1999. The notes are collateralized
by a first priority mortgage on operating properties plus an assignment of
Sale Proceeds of a Purchase and Sale Agreement of properties in the amount
of $1,200,000.
8. Income Taxes
The Company files a consolidated income tax return. At December 31, the net
deferred income tax asset (liability) consist of:
1998 1997
----------- -----------
Deferred tax assets resulting from:
Net operating loss carry-forward ............ $ 1,959,746 $ 1,248,803
Depreciation ................................ 203,176 701,882
Provision for doubtful accounts receivable .. 115,413 82,601
Contributions carry-forward ................. 45,483 31,307
Deferred revenue ............................ -- 74,800
Unearned premium ............................ 127,064 --
AMT Credit .................................. 45,536 --
Valuation allowance ......................... (529,162) --
----------- -----------
1,967,256 2,139,393
----------- -----------
Deferred tax liabilities resulting from:
Basis of operating property ................. (2,788,285) (2,788,285)
Deferred policy acquisition costs ........... (165,585) --
----------- -----------
(2,953,870) (2,788,285)
----------- -----------
Net deferred tax liability .................... $ (986,614) $ (648,892)
=========== ===========
37
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
At December 31, 1998, the Company has operating loss carryforwards
available to offset future taxable income expiring as follows:
Year Amount
---- ----------
2010 .......................................... $ 668,000
2011 .......................................... 1,145,000
2017 .......................................... 1,937,000
2018 .......................................... 76,000
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 $489,024, $27,372 and $27,921 for the years ended December 3,
1998, 1997 and 1996, respectively, and are due to nondeductible expenses
and miscellaneous items.
Guardian is subject to income taxes in the U.S. Virgin Islands. Guardian
has approximately $1,414,000 of loss carryforwards expiring in 2011. Since
Guardian must file a separate income tax return for insurance companies,
these losses cannot be used by LCC.
9. Leases
As Lessor
The Company receives 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 for 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 and 1996 are $52,000
and $77,000, respectively, of rent attributable to a percentage of tenants'
gross sales.
At December 31, 1998, the approximate future minimum rental income payments
due during the next five years under non-cancelable terms of existing
leases are as follows:
1999 .......................................... $ 4,887,500
2000 .......................................... 5,063,400
2001 .......................................... 5,168,400
2002 .......................................... 5,272,200
2003 .......................................... 5,372,800
-----------
$25,764,300
===========
As Lessee
As lessee, Guardian leases office space, parking and other property from
Unlimited Holdings, Inc., Guardian's former parent. The operating lease for
the office space is for a five year term commencing January 1, 1998 with
annual rental payments plus common area charges of $149,520.
38
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The Company leases other property from Unlimited Holdings, Inc. on a
monthly basis to provide housing to certain employees, as agreed in the
purchase agreement for a three-year period commencing January 1, 1999.
In addition, Guardian leases its U.S. Virgin Islands claims office in St.
Croix under an operating lease agreement, which is renewed every month.
Future minimum rental commitments are as follows:
1999 ............................................. $173,520
2000 ............................................. 173,520
2001 ............................................. 173,520
2002 ............................................. 149,520
--------
$670,080
========
10. Lease Termination and Deferred Revenue
In July 1997, one of the Company's tenant 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. The tenant's lease did not expire until 2001, and
it was obligated to make base rental payments and tenant reimbursements
until lease expiration. The Company negotiated a lease termination
agreement and payment. The new tenant that took possession of the space
occupied by the previous tenant reimbursed the Company for the payment
made.
The amount received from the new tenant has been deferred and is being
amortized over the initial term of the lease on the straight-line method.
11. Transactions with Related Parties
Loans payable to related parties consist of:
Loan payable to seller of Guardian and Heritage,
bearing interest at prime (7.75% at December 31,
1998) due March 31, 1999. .............................. $1,125,000
Loan payable to Guardian's former parent, bearing
interest at 2% above the bank base rate of lending
(7.73% at December 31, 1998), collaterized by a
mortgage as security agreement in investment in real
estate. Principal payable in 1998 amounts to $27,132. .. 363,768
----------
$1,488,768
==========
The amounts due from shareholders were to be paid with the proceeds of the
IPO, however, as the IPO has been terminated, these amounts have no
specific repayment terms and bear interest at 9%.
39
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
A shareholder of the Company and member of the Board of Directors is also a
partner of a law firm which renders legal services to the Company. During
the years ended December 31, 1998, 1997 and 1996 legal fees paid to this
law firm amounted to approximately $99,000, $147,000 and $201,000,
respectively.
12. 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 years ended December 31, 1998 and 1997 were
approximately, $30,000 and $17,000, respectively. No contributions were
made in 1996.
13. Capital Stock
Common Stock Description
Except as otherwise set forth below or as otherwise required by law, the
rights and privileges of each class of the common stock are substantially
identical in all material respects, including the right of the members of a
class of common stock to participate ratably in offers by the Company to
repurchase shares of common stock that are directed to all of the holders
of any other class of the common stock. No class of common stock has
preemptive rights.
Voting Rights
Each holder of Class B Common Stock is entitled to ten votes for each
share. If the aggregate number of shares of Class B Common Stock no longer
represent at least 75% of the combined voting power, each holder of Class B
Common Stock is entitled to one vote.
Distributions
The Board of Directors of the Company may cause distributions to be paid to
holders of shares of Common Stock out of funds legally available for the
payment of distributions, provided, however, that the Board of Directors
may declare the payment of cash distributions of up to $.425 per annum per
share of Class B Common Stock to the holders of Class B Common Stock
without declaring or paying any distributions on Class A Common Stock. The
right of the Board of Directors to declare a separate distribution payable
only on the Class B Common Stock shall cease once the Board of Directors
declares a distribution payable to both classes of Common Stock.
Thereafter, any distribution on the Common Stock shall be payable on shares
of Class A Common Stock and Class B Common Stock share alike.
Liquidation Rights
In the event of any dissolution, liquidation or winding up of the affairs
of the Company, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Company,
the remaining assets and funds of the Company, if any, shall be divided
among and paid ratable to the holders of Class A Common Stock and the
holders of Class B Common Stock provided, however, that so long as
distributions are not being paid on Class A Common Stock, the holders of
Class A Common Stock shall be entitled to preferential rights in the event
of liquidation, dissolution or winding up of the Company with each holder
of Class A Common Stock entitled to receive $6.50 per share before any sum
shall be paid to or any assets distributed among the holders of Class B
Common Stock.
40
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Conversion Rights
Each and every share of Class B Common Stock is convertible into Class A
Common Stock at any time at the option of the holder. Such conversion shall
be on a share-for-share basis. Shares of Class A Common Stock are not
convertible.
Mandatorily Redeemable Securities
Mandatorily redeemable securities consist of 184,931 shares of Class A
Common Stock and are recorded at the redemption value of $8.30 per share.
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.
14. Contingencies
The Company is a defendant in certain legal proceedings in the normal
course of business that have not been finally adjudicated. Management
believes, based on the opinion of legal counsel, that the final disposition
of these legal actions will not have a material adverse effect on the
Company's financial position or results of operations.
15. Financial Instruments with Off-Balance Risk
Guardian and Heritage are participants in catastrophic cover agreements
made with reinsurers that provide insurance protection coverage up to a
certain level for losses exceeding Guardian's and Heritage's risk
retention. Even though these agreements are legally binding, Guardian and
Heritage will be liable for such risks only if the reinsurer fails to meet
its obligations under existing agreements.
16. Supplemental Disclosure of Cash Flows Information
Interest paid for the years ended December 31, 1998, 1997 and 1996 amounted
to $2,350,000, $2,140,000 and $1,627,000, respectively.
The Company capitalized interest amounting to $47,000 and $6,200 during the
years ended December 31, 1998 and 1997, respectively.
Non-cash transactions during the year ended December 31, 1998 include the
following:
-- Acquisition of Guardian and Heritage by issuing Class A common stock.
-- Capitalization of a note receivable from PFC outstanding at December
31, 1997.
41
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
17. Subsequent Event
On February 12, 1999, LCC signed a stock purchase agreement underwhich it
agreed to purchase at a future date 91% of the outstanding shares of common
stock of EPO Capital Corporation (EPO) and Keylink Transmedia, Inc.
(Keylink Transmedia) for $400,000 plus 25,000 shares of LCC's Class A
Common Stock. EPO, a licensed broker/dealer and member of the National
Association of Securities Dealers, was established in 1996 to conduct
electronic public offerings. Keylink Transmedia designs and develops
customized websites.
18. Agreement with Insurance Company and Tenant
One of the Company's tenants operated a supermarket on leased land. The
tenant constructed a building on the land leased from HELM. On September
15, 1995, Hurricane Marilyn destroyed the building. The land lease provided
that the tenant had to keep the building insured against loss or damages
for the mutual benefit of the tenant and HELM. On March 1, 1999, HELM
signed an agreement with the insurance company that issued the policy on
the aforementioned building in which the insurance company recognized HELM
as a third party beneficiary under the terms of the insurance policy.
The agreement also provided for the deposit of $2,010,000 (estimated cost
of replacing the building) in an escrow account for the sole purpose of
replacing the destroyed building. In addition to the deposit made, the
insurance company paid HELM $690,000 representing interest on the policy
proceeds as permitted by the laws of the U.S. Virgin Islands. In
consideration of the aforesaid payments, HELM fully and finally released
and forever discharged the insurance company and its affiliates from any
and all liability of every kind in any way connected with the insurance
policy. HELM also assigned to the insurance company all the rights, claims,
etc. which it may have against the tenant relating to or arising out of
entitlement to proceeds of the insurance policy reserving all other claims
or causes of action against the tenant.
On March 4, 1999, HELM signed an agreement with the tenant in which the
tenant agreed to pay HELM $35,000 and to surrender its interest in the
lease. Both parties also agreed to dismiss all pending claims, including
HELM's claim against the insurance company, and to exchange full and
comprehensive releases in favor of and by all parties.
No amount related to these agreements have been recognized in the
accompanying financial statements.
42
<PAGE>
SCHEDULE I
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Schedule I - Real Estate and Accumulated Depreciation
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost Capitalized
subsequent to Gross amount at
Initial Cost to Company acquisition December 31, 1998
---------------------------- ---------------------- ---------------------------
Land and Land Buildings and Carrying Land Buildings and
Description Encumbrances Improvements Improvements Improvements Costs Improvements Improvements
- ----------- ------------ ------------- ------------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Drakes Passage
Charlote Amalie
St. Thomas
Retail/office complex Mortgage lien $ 5,000 $ 40,000 $ 696,286 $ -- $ 5,000 $ 736,286
Grand Hotel
Charlote Amalie
St. Thomas
Retail/office complex Mortgage lien 264,743 65,000 4,480,117 -- 264,743 4,516,973
Lockhart Gardens Shopping
Center, Estate Tomas,
St. Thomas
Shopping Center Mortgage lien 34,987 497,380 10,045,504 -- 34,987 7,452,203
Sugar Estate Park
Estate Thomas,
St. Thomas
Business Park Mortgage lien 277,172 -- 1,102,348 -- 714,352 --
Market Square East
Estate Donoa,
St. Thomas
Land Mortgage lien -- -- 1,769,975 -- 1,769,975 --
Cinema One Building
Estate Thomas,
St. Thomas 5,000 -- -- -- 5,000 --
Red Hook Shopping Center
Red Hook, St. Tomas
Shopping Center Mortgage lien 1,013,862 4,971,608 239,943 -- 1,013,862 5,211,551
Fort Mylner Commercial
Center
Estate Tutu, St. Thomas
Office Building Mortgage lien 646,910 1,218,220 53,018 -- 646,910 1,271,238
</TABLE>
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Schedule I - Real Estate and Accumulated Depreciation (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Date of Date Useful
Description Total Depreciation Construction Acquired Life
- ----------- ----------- ------------ ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Drakes Passage
Charlote Amalie
St. Thomas
Retail/office complex $ 741,286 $ 98,589 1920 31.5
Grand Hotel
Charlote Amalie
St. Thomas
Retail/office complex 4,781,716 1,151,756 1914 31.5
Lockhart Gardens Shopping
Center, Estate Tomas,
St. Thomas
Shopping Center 7,487,190 1,461,241 1972 31.5
Sugar Estate Park
Estate Thomas,
St. Thomas
Business Park 714,352 134,534 1991 31.5
Market Square East
Estate Donoa,
St. Thomas
Land 1,769,975 -- 1997 31.5
Cinema One Building
Estate Thomas,
St. Thomas 5,000 --
Red Hook Shopping Center
Red Hook, St. Tomas
Shopping Center 6,225,413 646,055 1995 31.5
Fort Mylner Commercial
Center
Estate Tutu, St. Thomas
Office Building 1,918,148 99,663 1996 31.5
</TABLE>
43
<PAGE>
SCHEDULE I
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Schedule I - Real Estate and Accumulated Depreciation (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost Capitalized
subsequent to Gross amount at
Initial Cost to Company acquisition December 31, 1998
---------------------------- ---------------------- ---------------------------
Land and Land Buildings and Carrying Land Buildings and
Description Encumbrances Improvements Improvements Improvements Costs Improvements Improvements
- ----------- ------------ ------------- ------------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fort Mylner Shopping
Center
Estate Tutu, St. Thomas
Shopping Center Mortgage lien $ 1,825,144 $ 2,743,426 $ -- $ -- $ 1,825,144 $ 2,743,426
Orange Grove Shopping
Center
Orange Grove, St. Croix
Shopping Center Mortgage lien 501,997 3,082,428 24,827 -- 501,997 3,107,255
Corporate Office Building
Estate Thomas,
St. Thomas
Office Building Mortgage lien -- 202,295 34,573 -- -- 236,867
Undeveloped Land 4,335,771 -- 133,134 -- 4,468,905 --
----------- ----------- ----------- ----- ----------- -----------
8,910,586 12,820,357 18,579,725 -- 11,250,875 25,275,799
Investment in real estate 2,250,000 2,250,000
Land held for sale 192,826 192,826
----------- ----------- ----------- ----- ----------- -----------
$11,353,412 $12,820,357 $18,579,725 $ -- $13,693,701 $25,275,799
=========== =========== =========== ===== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Date of Date Useful
Description Total Depreciation Construction Acquired Life
- ----------- ----------- ------------ ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Fort Mylner Shopping
Center
Estate Tutu, St. Thomas
Shopping Center $ 4,568,570 $ 216,947 1996 31.5
Orange Grove Shopping
Center
Orange Grove, St. Croix
Shopping Center 3,609,252 246,082 1996 31.5
Corporate Office Building
Estate Thomas,
St. Thomas
Office Building 236,867 56,989 1990 31.5
Undeveloped Land 4,468,905 --
----------- ----------
36,526,674 4,111,856
Investment in real estate
Land held for sale
----------- ----------
$36,526,674 $4,111,856
=========== ==========
</TABLE>
44
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Schedule I - Real Estate and Accumulated Depreciation (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
Reconciliation - Land and Land improvements
Year ended December 31
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Balance at beginning of year ......... $10,146,068 $10,009,236 $ 7,030,326
Additions during the year:
Acquisitions ....................... -- -- 2,974,051
Improvements ....................... 1,769,975 136,832 12,366
----------- ----------- -----------
Total additions ...................... 1,769,975 136,832 2,986,417
Deductions during the year:
Cost of real estate sold ........... (424,649) -- (7,507)
Cost of real estate held for sale .. (240,519) -- --
----------- ----------- -----------
Total deductions ..................... (665,168) -- (7,507)
----------- ----------- -----------
Balance at end of year ............... $11,250,875 $10,146,068 $10,009,236
=========== =========== ===========
Reconciliation - Building and Improvements
Year ended December 31
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Balance at beginning of year ......... $25,155,646 $25,068,409 $11,548,709
Additions during the year:
Acquisitions ....................... -- -- 7,044,074
Improvements ....................... 120,153 87,237 6,475,626
----------- ----------- -----------
Total additions ...................... 120,153 87,237 13,519,700
----------- ----------- -----------
Balance at end of year ............... $25,275,799 $25,155,646 $25,068,409
=========== =========== ===========
The basis of all depreciable assets is $26,546,255.
45
<PAGE>
LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Schedule I - Real Estate and Accumulated Depreciation (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
Reconciliation - Accumulated Depreciation
Year ended December 31
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Balance at beginning of year ......... $ 3,369,010 $ 2,457,293 $ 1,815,062
Additions during the year:
Depreciation expense ............... 867,019 911,717 642,231
Deductions during the year:
Land improvements sold ............. (76,480) -- --
Reclassification ................... (47,693) -- --
----------- ----------- -----------
Total deductions ..................... (124,173) 136,832 --
----------- ----------- -----------
Balance at end of year ............... $ 4,111,856 $ 3,369,010 $ 2,457,293
=========== =========== ===========
46
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Name Age Position
---- --- --------
George H.T. Dudley....... 49 Co-Chairman of the Board of Directors and Co-CEO
Wesley S. Williams, Jr... 56 Co-Chairman of the Board of Directors and Co-CEO
John P. deJongh, Jr...... 41 President, Chief Operating Officer and a Director
Cornel Williams ......... 41 Treasurer and Chief Financial Officer
Christine A. O'Keefe..... 49 Secretary, and Vice-President - Property Managment
Etienne R. Bertrand...... 48 Senior Vice President-Development
Alton L. Adams........... 41 Director
Steve Begleiter.......... 37 Director
Lisa S. Curreri.......... 58 Director
Raymond L .Fournier...... 30 Director
Kathleen P. Goldberg..... 54 Director
William H. Hastie........ 51 Director
Herbert E. Lockhart, III. 48 Director
John E. Oxendine......... 55 Director
George H.T. Dudley is Co-Chairman of the Board of Directors and Co-CEO of
the Company and has been a member of the Company's Executive Committee since
1987. A member of the Virgin Islands and Pennsylvania Bars, and the founder in
1978 and managing partner of the firm of Dudley, Topper and Feuerzeig (the
largest law firm in the Virgin Islands), Mr. Dudley specializes in financial
services, real estate, finance, and corporate management, and general commercial
law. Mr. Dudley is a member of the Board of Trustees of the University of the
Virgin Islands (where he serves on its Executive Committee and as chairman of
the Board's Committee on Finance), a member of the American Law Institute
(serving on the Institute's governing Council and its Executive Committee), and
a current member and past Chairman of the Villanova Law School Board of
Consultors. Mr. Dudley received his undergraduate degree from George Washington
University and his J.D. from Villanova University. In 1994, Mr. Dudley received
the honorary title of Chevalier (Knight) from the King of Belgium for his years
of service as Honorary Consul of Belgium. Mr. Dudley served as an Adviser to the
Restatement of the Law, Third, Property (Mortgages), published by the American
Law Institute, and currently serves as an Adviser to the Institute's Restatement
of the Law, Third, Property (Joint Ownership), presently in development.
Wesley S. Williams, Jr. is Co-Chairman of the Board of Directors and Co-CEO
of the Company and has been a member of the Company's Executive Committee since
1987. A member of the District of Columbia and New York Bars, and a partner
since 1975 in the firm of Covington & Burling -- which has law offices in
Washington, D.C., London and Brussels, and a correspondent office in Paris --
Mr. W. Williams specializes in financial services, real estate, finance, and
corporate and securities law. Mr. W. Williams is a member of the Board of
Trustees (and of its Executive Committee) of Penn Mutual Life Insurance Company
47
<PAGE>
(sole parent of, inter alia, Janney Montgomery Scott), of the Board of Directors
(and of its Executive Committee) of CarrAmerica Realty Corporation, of the Board
of Managers of Blackstar L.L.C., and of the Boards of Directors of Blackstar
Communications, Inc. and of the Federal Reserve Bank of Richmond. Mr. W.
Williams was formerly Chairman of the Boards of Directors of Broadcast Capital,
Inc. and Broadcast Capital Fund, Inc., and a member of the Board of Directors of
Salomon Inc. (sole parent of Salomon Brothers Inc, Phibro Inc. and Phibro Energy
Production, Inc.). A member of the American Law Institute, Mr. W. Williams at
one time held a faculty appointment at Columbia University Law School, and later
served as an Adjunct Professor of real estate finance and financial services law
at Georgetown University Law Center. Mr. W. Williams holds B.A. and J.D. degrees
from Harvard University, an M.A. degree from Tufts University's Fletcher School
(earned as a Woodrow Wilson Fellow), and an LL.M. degree from Columbia
University Law School. Confirmed by the U.S. Senate and House of Representatives
as a member of the Board of Regents of the Smithsonian Institution, Mr. W.
Williams formerly served as a member of the Board of Overseers (and of its
Executive Committee) of Harvard University.
John P. deJongh, Jr. has served as President and Chief Operating Officer of
the Company and as a member of its Board of Directors since 1996. Prior to
joining Lockhart, Mr. deJongh was a Senior Managing Consultant with Public
Financial Management, Inc. (co-managing the firm's strategic municipal
consulting practice), from 1993 to 1996; and earlier served as Executive
Assistant to the Governor of the U.S. Virgin Islands, from 1990 to 1992, and as
the U.S. Virgin Islands' Commissioner of Finance, from 1987 to 1990. While
holding these government positions, Mr. deJongh also served as Chairman of the
U.S. Virgin Islands Water and Power Authority (1987 to 1992), as Executive
Director of the U.S. Virgin Islands Public Finance Authority (1988 to 1990), and
as Chairman of the U.S. Virgin Islands Tax Review Board, Secretary of the U.S.
Virgin Islands Banking Board, and a member of the U.S. Virgin Islands Small
Business Development Agency (in each instance, 1987 to 1990). Mr. deJongh has
been a Vice President-Country Consumer Manager (responsible for consumer credit
in the U.S. and British Virgin Islands, and on St. Maarten, Netherlands
Antilles), having earlier served as a Second Vice President-Corporate Lending,
in each instance with Chase Manhattan Bank, N.A., on St. Thomas, U.S. Virgin
Islands (1984 to 1987). Mr. deJongh is a graduate of Antioch College and of
Chase Manhattan Bank's Corporate Credit Development Program. Mr. deJongh serves
as President of the Karen Ingeborg Lockhart Foundation, and is a member of the
Boards of Directors of the Community Foundation of the U.S. Virgin Islands, and
of the St. Thomas/St. John Chamber of Commerce.
Cornel Williams, who is not related to Mr. W. Williams, has served as the
Company's Corporate Secretary and Treasurer (Chief Financial Officer) since
1996. Prior to joining Lockhart, Mr. C. Williams served as Accounting Manager of
the U.S. Virgin Islands Port Authority from 1992 to 1996, as Finance Manager,
Virgin Islands Telephone Corporation, and Assistant Controller, Guyana Telephone
and Telegraph Company Ltd. from 1990 to 1992, as Controller, Cowpet Beach Resort
Development on St. Thomas from 1989 to 1990, as a financial analyst for Ford
Motor Company in Detroit, from 1986 to 1988, and as Financial Manager, Virgin
Islands Maritime Services from 1982 to 1984. Mr. C. Williams received his M.B.A.
(with a concentration in finance) from the University of Illinois, having
earlier received a baccalaureate degree from the University of the Virgin
Islands.
Christine O'Keefe joined the Company as Vice-President-Investor Relations
in February, 1998. Prior to joining Lockhart, Ms. O'Keefe served as Comptroller
to the Leather Shop, Inc., a group of retail stores featuring high-end designer
leather goods, luggage and clothing on St. Thomas, from 1996 to 1998, as
Regional Manager for Ambient Technologies, Inc. on St. Thomas (a wholly-owned
subsidiary of Israel Desalination Engineering, Ltd.) from 1983 to 1996, as
Assistant Project Manager for Armour Enterprises, a real property management
firm, on St. Thomas from 1987-1988, as host of "Conversation" talk show on WVWI
Radio, St. Thomas (CBS affiliate) from 1980 to 1983, as Comptroller of Dudley,
Martin & Dudley law firm on St. Thomas from 1979 to 1980, and as General Manager
of Ohio Water Treatment of Ohio from 1974 to 1978. Ms. O'Keefe received her B.A.
from Akron University in 1973.
Etienne R. Bertrand has served as the Company's Senior Vice President -
Development since 1990 and as Secretary of the Company from 1991 to 1996. Prior
to joining Lockhart, Mr. Bertrand served as Senior Project ManagerCEastern
Region with the Barker Partrinely Group in Houston and southern Florida from
1986
48
<PAGE>
to 1990, as a Construction Manager with Gerald D. Hines Interests in Miami and
Houston from 1981 to 1986, Project Architect with 3D/International in Houston
from 1979 to 1981, Tenant Construction Manager with Gerald D. Hines CPS Division
in Houston from 1978 to 1979, Project Job Captain with John S. Chase, FAIA in
Houston from 1977 to 1978, and as Technical Production Coordinator with A.M.
Kinney-Wm. J. Rabon & Associates in Cincinnati from 1975 to 1977. A licensed
architect in the U.S. Virgin Islands and Texas, Mr. Bertrand received his
bachelor of architecture degree from the University of Cincinnati.
Alton L. Adams was elected to the Company's Board of Directors in 1997. Mr.
Adams is the President of Standard & Poor's DRI. Previously, he was the Chief
Operating Officer of The Faneuil Group in Boston (a marketing services
organization providing database telemarketing and analytical services in the
U.S., Canada and Australia), Mr. Adams, who received his bachelor's degree from
Georgetown University and his M.B.A. from the University of Pennsylvania's
Wharton School, has been a guest lecturer in the field of marketing at the
Anderson Graduate School of Business of the University of California at Los
Angeles, and also at Germany's University of Mainz.
Steven L. Begleiter is a Senior Managing Director in the Corporate Finance
Division of Bear, Stearns & Co., Inc., where he heads the Specialty Finance
Group. He joined Bear Stearns in 1984 and since then has worked extensively with
commercial and savings banks and their holding companies, non-bank commercial
and mortgage lenders, and a variety of specialty finance companies. Mr.
Begleiter has completed a broad range of assignments, including restructurings,
financings, mergers and acquisitions, and asset-backed securitizations . He has
also participated in debt and equity transactions for Latin American financial
institutions. Mr Begleiter received his undergraduate degree in economics from
Haverford College.
Lisa S. Curreri was elected to the Company's Board of Directors in 1997.
Since 1996, Ms. Curreri has been a name principal in the St. Thomas firm of
McLaughlin Arguin Curreri Realtors, the Virgin Islands real estate brokerage
firm where she has worked as a broker since 1989. Ms. Curreri served as a real
estate sales associate with McLaughlin Realtors from 1979 to 1988, and was
earlier employed by St. Thomas' WBNB, Channel 10. A graduate of Foxcroft School
(Middleburg, VA), Ms. Curreri is a member of the National Association of
Realtors. She holds the Certified Residential Specialist and Graduate Realtor
Institute designations.
Raymond L. Fournier has been President of Guardian since 1996, and has been
President and Chairman of the Board of Directors of Heritage since 1993, and has
served as a member of the Board of Directors of Unlimited Holdings, Inc. since
1994. Mr. Fournier, who is a native of Puerto Rico, received a BA degree in
economics and finance from Clark University, and trained in reinsurance at
Cologne Reinsurance Company, Cologne, Germany, and D.G. Durham Ltd., at Lloyd's
of London.
Kathleen P. Goldberg was elected to the Company's Board of Directors in
1981. A Vice President of Beverly Hills Manuscript and Rare Coins, Inc., and a
Trustee of its Profit and Pension Plan since 1981, Ms. Goldberg is active in
community charities in the Los Angeles area, and previously chaired the 14th
annual Vista Del Mar Child Care Service Fishing and Golfing Invitational. Ms.
Goldberg studied at Cazanovia College and Howard University.
William H. Hastie was elected to the Company's Board of Directors in 1997.
Since 1994, Mr. Hastie has been a partner, Vice Chairman and an Executive
Committee member with the law firm of Arnelle Hastie McGee Willis & Greene, Los
Angeles, California. Previously, Mr. Hastie served as co-founder and managing
partner of the law firm of Arnelle & Hastie, San Francisco, California, from
1985 to 1994, and as Undersecretary and General Counsel of California's State
and Consumer Services Agency, from 1979 to 1983. Mr. Hastie received his
bachelor's degree from Amherst College, a certificate from the University of
Strasbourg, and his J.D. from Boalt Hall School of Law of the University of
California at Berkeley. Mr. Hastie has been a member of the Board of Directors
of the California HealthCare Foundation since 1996, having previously served as
a member of the Board of Directors of Blue Cross of California from 1992 to
1996. He has also served as an Adjunct Professor of Law at the Graduate School
of Public Policy of the University of California at Berkeley.
49
<PAGE>
Herbert E. Lockhart, III was elected to the Company's Board of Directors in
1985. Sole proprietor of a salvage business, Herbie's Big Tow, and a resource
recovery consultant since 1990, Mr. Lockhart previously served as reconstruction
project supervisor for St. Thomas' Mountaintop Condominium Association from 1991
to 1992. Mr. Lockhart was the Company's President from 1986 to 1990, and a Vice
President of the Company from 1981 to 1986. Earlier, Mr. Lockhart served as the
Manager of Operations and Water Technician for St. Thomas' Donoe Water Company
from 1977 to 1980, and as a management trainee with the Hechinger Company in the
Washington, D.C. suburbs. A graduate of Milton College, with further study at
the Computer Institute of Boston, George Mason University, and the University of
the Virgin Islands, Mr. Lockhart is the past President of the Rotary Club of St.
Thomas, and of the Humane Society of the Virgin Islands, and also served as Vice
President of the Boy Scouts of America/Virgin Islands Council, and as Treasurer
of St. Thomas' Masonic Lodge No. 356. Mr. Lockhart has also been active with the
Navy League of the United States' St. Thomas/ St. John Council, and as a charter
member of the Toastmasters Club of the Virgin Islands.
John E. Oxendine was elected to the Company's Board of Directors in 1997.
Since 1987, Mr. Oxendine has served as the founding Chairman and CEO of
Blackstar Communications, Inc., a television broadcast holding company with
stations in Florida, Michigan and Oregon. Since 1994, he has also served as
founding Chairman and CEO of Blackstar L.L.C., also a television broadcast
holding company, with additional stations in South Dakota and now sole parent of
Blackstar Communications, Inc. Mr. Oxendine was recently appointed President and
CEO of Broadcast Capital, Inc. and Broadcast Capital Fund, Inc., a venture
capital firm and supporting foundation, where he had served as President and CEO
from 1981 to 1995. Previously, Mr. Oxendine served as Assistant Chief in the
Financial Assistance Division of the Federal Savings & Loan Insurance
Corporation from 1979 to 1981, as Assistant Manager with the Chicago, London,
Mexico City, and New York offices of First National Bank of Chicago from 1974 to
1979, as a Senior Associate with Korn\Ferry Associates in Los Angeles from 1972
to 1974, as a Management Consultant with Fry Consultants in San Francisco from
1971 to 1972, and as a Management Advisor with the Bedford-Stuyvesant
Restoration Corporation from 1968 to 1969. Mr. Oxendine received his bachelor's
degree from Hunter College, and an M.B.A. from Harvard University's Graduate
School of Business Administration, where he was a John Hay Whitney Fellow. Mr.
Oxendine serves on the Boards of Directors of HSN, Inc., and of Medlantic Health
Care Group.
Item 11. Executive Compensation
Director Compensation
Directors are reimbursed for reasonable expenses incurred in connection
with attendance at meetings of the Company's Board of Directors or committees
thereof. Additionally, each non-employee director currently receives $500 for
attending each meeting of the Board, a subscription to The Virgin Islands Daily
News, and options each year to purchase up to 1,000 shares of Class A Common
Stock at the fair market value at the date of grant. No options have been issued
or exercised by any director. Directors who are employees of the Company receive
no compensation for their service as directors of the Company.
Executive Compensation
The following table shows compensation paid to, deferred or accrued for the
benefit of each of the Company's executive officers whose salary and bonus for
the year ended December 31, 1998 totaled at least $100,000 in the aggregate (the
"Named Executive Officers") for all services rendered to Lockhart during the
fiscal year ended December 31, 1998.
50
<PAGE>
1998 Summary Compensation Table
Annual Compensation
Name and Principal Position Salary Bonus(1) Other Annual (2)
- --------------------------- ------ -------- ----------------
George H.T. Dudley
Co-Chairman and Co-CEO $33,750 $174,900 ----
Wesley S. Williams, Jr.
Co-Chairman and Co-CEO $51,750 $163,650 ----
John P. deJongh, Jr.
President and Chief $101,153 $ 170,250 $21,900
Operating Officer
Etienne R. Bertrand
Senior Vice President,
Development $93,941 $ 35,750 $20,400
- ------------
(1) The amount reported as Bonus for each Named Executive Officer consists of
two components: (i) a 1998 general performance bonus and (ii) a
transaction-based bonus for the same period. Bonuses were paid both in cash
and in shares of Class A Common Stock as follows:
Dudley Williams deJongh Bertrand
------ -------- ------- --------
Performance-Cash $ 22,500 $ 11,250 $ 11,250 $ 26,250
Performance-Stock 126,100 126,100 126,100 6,500
Transaction-Cash 26,300 26,300 32,900 3,000
-------- -------- -------- --------
$174,900 $163,650 $170,250 $ 35,750
The value of the shares paid as bonuses is based on the fair market value
of the Class B Common Stock on the date of grant, as determined by the
Board of Directors of the Company.
(2) The amount reported for Mr. deJongh and Mr. Bertrand include $13,200 and
$14,400 for a housing allowance, respectively. The Company has not included
in the Summary Compensation Table the value of incidental personal
perquisites furnished by the Company to the other Named Executive Officers,
since such value did not exceed the lesser of $50,000 or 10% of the total
of annual salary and bonus reported for such Named Executive Officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of December 31, 1998 by
(i) each person known by Lockhart to be the beneficial owner of more than 5% of
any class of the Company's voting Common Stock, (ii) the Named Executive
Officers, and (iii) all of the Company's directors and executive officers as a
group. Except as otherwise indicated, the address of each holder is the same as
the Company. Unless otherwise noted, each holder has sole voting and investment
power with respect to all shares of stock listed as owned by such person.
51
<PAGE>
<TABLE>
<CAPTION>
Class B Class A Percent of Vote
Common Stock Common Stock of all Classes of
Name of Beneficial Owner Number % Number % Common Stock
- ------------------------ ------ --- ------ --- ------------
<S> <C> <C> <C> <C> <C>
George H.T. Dudley (1) ........ 284,560 3.3% 11,390 22.7% 3.3%
Wesley S. Williams, Jr. (2) ... 1,520,454 17.5% 22,970 45.8% 17.6%
John P. deJongh, Jr ........... 7,275 * 9,760 19.5% *
Etienne R. Bertrand ........... 30,943 * 1,280 2.6% *
Kathleen P. Goldberg (3) ...... 1,248,146 14.4% 1,630 3.3% 14.4%
William H. Hastie ............. 595,401 6.9% 6.9%
Herbert E. Lockhart, III ...... 70,325 * *
Cassandra M. Flipper(4) ....... 446,384 5.2% 5.1%
Irma Corinne Lockhart ......... 1,937,139 22.4% 22.3%
Gertrude L. Melchior .......... 1,963,445 22.7% 780 1.6% 22.7%
John E. Oxendine .............. 5,385 * * *
All Directors and executive
officers as a group .......... 3,763,459 43.4% 48,810 97.3% 43.5%
</TABLE>
- ---------------
* Represents less than 1% of the class or vote, as the case may be.
(1) Includes 94,973 shares of Class B Common Stock held in trust. Shares not
held in trust are owned jointly by Mr. Dudley and his wife.
(2) Includes 469,761 shares of Class B Common Stock held in trust. Shares not
held in trust are owned jointly by Mr. Williams and his wife.
(3) Includes 233,084 shares of Class B Common Stock held in trust.
(4) Includes 379,299 shares of Class B Common Stock held in trust.
Item 13. Certain Relationships and Related Transactions
George H.T. Dudley, who serves as Co-Chairman of the Board of Directors and
Co-CEO of the Company, is a partner in the law firm Dudley, Topper and
Feuerzeig. Dudley, Topper and Feuerzeig renders legal services to the Company
and was paid fees of approximately $99,000, $147,000, and $201,000 for such
services by the Company during the fiscal years ended December 31, 1998 ,1997
and 1996, respectively.
The Company has entered into an agreement to lease No. 10 Estate Thomas,
which is adjacent to Sugar Estate Park. No. 10 Estate Thomas consists of
approximately 2.64 acres zoned for business development and includes a Victorian
style residence, which sustained damage in Hurricane Marilyn. The Company
intends to repair the residence, converting it into office space, and to move
its principal executive offices into the new space. The lease agreement requires
the Company to pay monthly rent equal to the greater of $2,100 or one-half the
rent received by the Company from No. 44 Estate Thomas, which the Company
currently uses as its principal executive offices. No. 10 Estate Thomas is owned
by Gertrude L. Melchior, one of the Company's principal stockholders. George
H.T. Dudley is the son of Mrs. Melchior.
Lisa S. Curreri is a member of the Board of Directors of the Company and a
principal of McLaughlin Arguin Curreri Realtors. McLaughlin Arguin Curreri
Realtors has provided real estate brokerage services to the Company from time to
time, and the Company expects to use such services in the future. All past and
any future brokerage services rendered by McLaughlin Arguin Curreri Realtors to
the Company have been
52
<PAGE>
and will be on terms consistent with the industry and commensurate with those
available from unaffiliated parties.
Richard E.W. Grant, President of PFC, is the beneficial owner of
approximately 29,250 shares of the Company's Class B Common Stock, which
represents less than one percent of such shares outstanding. Approximately
20,500 of such shares are held jointly by Mr. Grant and his wife, and the
remaining shares are held by Mrs. Grant. The Company acquired PFC and retained
Mr. Grant as an employee of the Company following the acquisition. As a
shareholder of PFC, Mr. Grant and a trust established by Mr. Grant received an
aggregate of approximately $187,500 from the Company for their PFC shares.
George H.T. Dudley is Mr. Grant's brother-in-law.
53
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A. The Financial statements required by Item 8 are incorporated by reference
herein (See Item 8)
B. Reports on Form 8-K
Form 8-K dated December 31, 1998. Filed to report the closing of the
acquisition of Guardian Insurance Company and Heritage Insurance
Company (Caribbean) Ltd.
Form 8-K/A dated December 31, 1998. Filed to report historical and
proforma financial statements for the acquisition of Guardian
Insurance Company and Heritage Insurance Company (Caribbean) Ltd.
Form 8-K dated February 3, 1999. Filed to announce the termination of
the Company's public offering.
C. Exhibits
Exhibit 27 -- Financial Data Schedules
D. The financial statements schedules required are included in Item 8.
54
<PAGE>
Pursuant to the Requirements of Section 13 or 15(d) of the Securities 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: April 15, 1999 By: /s/ John P. deJongh, Jr
---------------------------------------------
John P. deJongh, Jr., President
(Principal Executive Officer)
Date: April 15, 1999 By: /s/ Cornel Williams
---------------------------------------------
Cornel Williams, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE>
Pursuant to the Requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
Date: April 15, 1999 /s/ John P. deJongh, Jr. President and a Director
--------------------------- (Principal Executive Officer)
John P. deJongh, Jr.
Date: April 15, 1999 /s/ Cornel Williams Chief Financial Officer (Principal
--------------------------- Financial Officerand Principal
Cornel Williams Accounting Officer)
Date: April 15, 1999 /s/ George H.T. Dudley Co-Chairperson of the Board of
--------------------------- Directors
George H.T. Dudley
Date: April 15, 1999 /s/ Wesley S. Williams, Jr Co-Chairperson of the Board of
--------------------------- Directors
Wesley S. Williams, Jr.
Date: April 15, 1999 /s/ Alton L. Adams Director
---------------------------
Alton L. Adams
Date: April 15, 1999 /s/ Steven L. Begleiter Director
---------------------------
Steven L. Begleiter
Date: April 15, 1999 /s/ Lisa S. Curreri Director
---------------------------
Lisa S. Curreri
Date: April 15, 1999 /s/ Raymond L. Fournier Director
---------------------------
Raymond L. Fournier
Date: April 15, 1999 /s/ Kathleen P. Goldberg Director
---------------------------
Kathleen P. Goldberg
Date: April 15, 1999 /s/ William H. Hastie Director
---------------------------
William H. Hastie
Date: April 15, 1999 /s/ Herbert E. Lockhart Director
---------------------------
Herbert E. Lockhart
Date: April 15, 1999 /s/ John E. Oxendine Director
---------------------------
John E. Oxendine
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,048 377
<SECURITIES> 1,667 0
<RECEIVABLES> 2,369 960
<ALLOWANCES> (369) (188)
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,160 1,503
<PP&E> 38,960 38,029
<DEPRECIATION> (5,006) (5,147)
<TOTAL-ASSETS> 43,898 35,704
<CURRENT-LIABILITIES> 2,152 2,161
<BONDS> 29,736 25,954
0 0
0 0
<COMMON> 7,147 6,864
<OTHER-SE> (1,256) (124)
<TOTAL-LIABILITY-AND-EQUITY> 43,898 35,704
<SALES> 0 0
<TOTAL-REVENUES> 8,021 5,107
<CGS> 0 0
<TOTAL-COSTS> 8,518 7,251
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,346 2,249
<INCOME-PRETAX> (497) (2,144)
<INCOME-TAX> (303) 744
<INCOME-CONTINUING> (800) (1,369)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (800) (1,369)
<EPS-PRIMARY> (0.17) (0.24)
<EPS-DILUTED> (0.17) (0.24)
</TABLE>
