SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K
(Mark One)

[X]               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934
               For the fiscal year ended December 31, 1997*

                                      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                                 65-0491618
(State or other Jurisdiction                (I.R.S. Employer Identification No.)
of Incorporation or Organization)

     NO. 44 ESTATE THOMAS
ST. THOMAS, U.S. VIRGIN ISLANDS                            00802
(Address of Principal Executive Offices)                 (Zip Code)

        Registrant's telephone number, including area code:(340) 776-1900

        SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                   Name of Each Exchange
         Title of Each Class                       on Which Registered

                  None                                      None

        SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None

                                (Title of Class)

* This report  contains only  Management's  Discussion and Analysis of Financial
Conditions and Results of Operations and the consolidated  financial  statements
of the Registrant in accordance  with Rule 15d-2 under the  Securities  Exchange
Act of 1934.

Indicate by check mark whether the Registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes___ No X

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  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. [X]

There is currently no public market for the registrant's voting stock.

Shares of Common  Stock  outstanding  at March 31, 1998 were  8,672,617  shares,
consisting of 8,750 shares of Class A Common Stock and 8,663,867 shares of Class
B Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITIONS AND RESULTS OF OPERATIONS


         The following discussion should be read in conjunction with the audited
consolidated   financial  statements  of  Lockhart  Caribbean   Corporation  and
subsidiaries  and the notes  thereto  appearing  elsewhere in this report.  This
report contains  "forward-looking  statements" within the meaning of Section 21E
of the Securities  Exchange Act of 1934, as amended.  These statements are based
on  management's  beliefs  and  assumptions,   based  on  information  currently
available   to   management   and  are  subject  to  risks  and   uncertainties.
Forward-looking  statements  include  the  information  concerning  possible  or
assumed future results of operations as well as statements preceded by, followed
by, or that include, the words "believes," "expects,"  "anticipates," "intends,"
"plans," "estimates" or similar expressions.  Forward-looking statements are not
guarantees of performance,  and future results may differ  materially from those
expressed in these forward-looking statements.  Readers are cautioned not to put
undue reliance on any forward-looking statements.

Overview

         Lockhart   Caribbean   Corporation  (the  "Company")  owns,   acquires,
operates,  develops,  and manages shopping centers,  commercial parks, and other
commercial  real estate,  primarily on the islands of St.  Thomas and St. Croix.
The Company's  revenue is currently derived from the rental of retail and office
space and long-term ground leases of real property.  In 1997 and 1996,  building
space rental generated 89% of total revenue and ground lease payments  accounted
for 11%.  Revenue  growth  from 1995 to 1997 (an  increase  of $1.1  million) is
primarily attributable to the acquisition of Fort Mylner Commercial Center, Fort
Mylner  Shopping  Center and Orange Grove  Shopping  Center  (collectively,  the
"Acquisition Properties") in June 1996.

         The Company's two wholly-owned subsidiaries,  H.E. Lockhart Management,
Inc.  ("HELM")  and  Lockhart  Realty,  Inc.  ("LRI")  account  for  100% of the
Company's  revenue.  HELM owns and manages seven shopping centers,  serving both
the tourist and local sectors,  with a mix of office and retail space. HELM also
owns two parcels which it leases to tenants under long-term  ground leases.  LRI
retains  ownership of undeveloped real estate and operates the commercial parks.
In  1997,  HELM  accounted  for  90% of the  Company's  total  revenue,  and LRI
accounted for 10%.

         LRI is expected to account  for a greater  portion of total  revenue in
the future as it develops the real property  holdings of approximately 415 acres
zoned for  residential  use.  HELM is expected to  generate  increased  revenues
commencing in 1998 from new lease  agreements  negotiated with tenants at one of
the Company's  tourist-oriented  shopping  centers.  In addition,  the Company's
planned  renovation of Lockhart  Gardens  Shopping Center and of the Grand Hotel
Court,  each scheduled to start in 1999, will add an aggregate of  approximately
30,000 square feet of retail space.


<PAGE>



         The Company is currently  pursuing a strategy to enhance revenue growth
and  achieve  geographic  and  line-of-business  diversification.  The  strategy
involves an entry into the consumer  financial  services  industry and expanding
into other Caribbean markets.  The Company has agreed to acquire Premium Finance
Company of the V.I., Inc.  ("PFC"),  an insurance premium financing company that
has an  established  and  growing  business in the U.S.  Virgin  Islands and the
British  Virgin  Islands.  PFC has also made inroads into certain  other Eastern
Caribbean  markets,  such as Anguilla,  Antigua,  Grenada,  St.  Vincent and St.
Maarten.

Results of Operations

Year Ended December 31, 1997 Compared With Year Ended December 31, 1996

         Total revenue (rental income, tenant expense reimbursements,  and other
operating  income) for 1997  increased  by  $890,047  or 21% over 1996.  Of this
increase,  $757,550  was due to a full  year of  revenue  from  the  Acquisition
Properties.

         For the  years  ended  December  31,  1997 and  1996,  total  operating
expenses were $4,680,172 and $3,884,743, respectively.

         Exclusive of depreciation and amortization, other operating expenses of
$3,232,688  accounted for 63% of total  revenue for the year ended  December 31,
1997.  The $792,719  increase in such  expenses  from 1996 was due to (i) a full
year of  operating  expenses in 1997  compared  to only six months of  operating
expenses  in 1996 at the  Acquisition  Properties,  and  (ii)  increases  in the
reserve  for  doubtful  accounts,  contracted  security  guard  services  at the
properties, and pension and retirement benefits.

         Depreciation and amortization increased by $202,710 or 16% for the year
ended  December 31, 1997.  The  increase  was due  primarily to the  Acquisition
Properties  and the $6.0 million  investment in the  reconstruction  of Lockhart
Gardens  Shopping Center as a consequence of damage caused by Hurricane  Marilyn
in September, 1995.

         Interest  expense  increased by $573,013 or 34% for the year due to (i)
an $11.0 million  increase in bank debt to purchase the  Acquisition  Properties
and pay for additional costs incurred in the  reconstruction of Lockhart Gardens
Shopping Center,  (ii) increased  borrowings under the Company's line of credit,
and (iii) a 50 basis  point  increase  in the prime rate in April,  1997,  which
resulted in a  corresponding  increase in the interest  rate  payable  under the
Company's bank debt and line of credit.

         For the year ended  December  31,  1997,  the  Company  made a one-time
payment to  Woolworth  Corp.  of $200,000 to  terminate  their lease at Lockhart
Gardens  Shopping  Center.   The  Company  collected   $200,000  from  Kmart  as
reimbursement  of the lease  termination  payment to Woolworth  Corp.,  and such
amount will be amortized  over the initial term of Kmart's  lease in  accordance
with FASB 13.

         As a result of the foregoing,  the Company showed a net loss (including
depreciation and  amortization) of $1,369,465 for 1997 compared to a net loss of
$832,710 for 1996.



<PAGE>



Year Ended December 31, 1996 Compared With Year Ended December 31, 1995

         Total  revenue  for the  years  ended  December  31,  1996 and 1995 was
$4,216,733 and $3,971,800,  respectively. The $244,933, or 6%, increase resulted
principally  from six months of revenue from the Acquisition  Properties.  Gross
revenue from the  Acquisition  Properties of $721,902 was partially  offset by a
decrease of $476,969 in revenue  generation from other properties as a result of
damage  caused by Hurricane  Marilyn.  With the receipt of $453,355 in insurance
reimbursements for business  interruption  losses,  revenue loss at the affected
properties  was  principally  due to vacancies  resulting  from tenants who were
unable to  resume  business  even  after  reconstruction  was  completed  at the
affected  properties,  as well as the continued  vacancy at the damaged northern
end of  Lockhart  Gardens  Shopping  Center.  The  Company  expects to  commence
reconstruction  at the northern end of Lockhart  Gardens  Shopping Center once a
dispute with the ground lessee over reconstruction of their supermarket facility
is resolved.

         For the  years  ended  December  31,  1996 and  1995,  total  operating
expenses were $3,884,743 and $3,663,547 respectively.

         Exclusive of depreciation and  amortization,  other operating  expenses
decreased  by  $117,315  or  4.3%  despite  the  addition  of  the   Acquisition
Properties.  Lower expenses  resulted from a reduction in overhead costs and the
elimination  of  certain  professional  fees  incurred  in  1995  to  facilitate
settlement of insurance claims resulting from Hurricane  Marilyn.  Adjusting for
expenses  of  the  Acquisition  Properties,   operating  expenses  exclusive  of
depreciation and amortization, decreased by $342,411 or 12% in 1996.

         Depreciation and amortization increased by $338,511 or 37% for the year
ended  December  31, 1996  compared to the year ended  December  31,  1995.  The
increase  was  due  primarily  to  the  Acquisition   Properties  and  the  full
amortization of certain  capitalized loan costs related to banks notes that were
liquidated in October, 1996.

         Interest  expense  increased  by  $591,726  or 55% for the  year  ended
December 31, 1996 compared to the year ended  December 31, 1995. The increase in
interest  expense was due to an $11.0 million  increase in bank debt to purchase
the  Acquisition  Properties  and  pay  for  additional  costs  incurred  in the
reconstruction of the southern section of Lockhart Gardens Shopping Center.

         Insurance  proceeds  of  $75,670  and  $5,916,981  for the years  ended
December  31,  1996 and  1995,  respectively,  represent  amounts  collected  or
receivable  from  insurance  companies  for  repairs  to  properties  damaged by
Hurricane Marilyn.

         For the year ended  December 31, 1996,  there was a gain on the sale of
residentially   zoned  real  property  as  a  result  of  the   disposition   of
approximately  1.7 acres. For the year ended December 31, 1995, there was a loss
of  $850,972  due to a  write-off  of the net book value of  certain  properties
damaged by Hurricane Marilyn.

<PAGE>

         As a result of the  foregoing,  the  Company had a net loss of $832,710
for the year ended  December 31, 1996 compared to net income of  $2,503,875  for
the year ended December 31, 1995.

Cash Flow

         Net cash flow from operating activities declined by $4.9 million in the
year ended  December  31, 1997  compared to the year ended  December 31, 1996 as
insurance  proceeds of $5.3 million were  collected and spent in 1996.  Net cash
flow used in investing  activities was $14.8 million more in 1996 as a result of
the Acquisition  Properties and the  reconstruction  of the southern  section of
Lockhart  Gardens  Shopping  Center  through  a  combination  of bank  debt  and
insurance  proceeds.  Net cash flow provided by financing  activities  was $10.8
million  more in the year ended  December  31,  1996  compared to the year ended
December  31,  1997 as a result of the  additional  bank  financing  obtained to
purchase the  Acquisition  Properties  and to fund the  additional  costs in the
reconstruction of the southern section of Lockhart Gardens Shopping Center.

         Net cash flow from operating  activities  increased by $3.1 million for
the year ended  December  31,  1996  compared  to 1995 as a result of  insurance
proceeds  collected  in 1996  for the  reconstruction  of  operating  properties
damaged  by  Hurricane  Marilyn.  Net cash  flow  used in  investing  activities
increased by $8.2 million for the year ended  December 31, 1996 compared to 1995
due  principally to the purchase of the Acquisition  Properties  compared to the
acquisition of only one operating  property,  Red Hook Plaza,  in 1995. Net cash
flow provided by financing  activities  increased by $5.9 million as a result of
increased bank debt to fund the purchase of the  Acquisition  Properties in 1996
compared to the financing of only one operating property acquisition in 1995.

Liquidity and Capital Resources

         The  principal  sources  of  funding  for  development,   acquisitions,
expansion,  and renovations of the Company's  properties have  historically been
construction loans, and intermediate and permanent debt financing. Proceeds from
insurance  companies  have been  utilized  in the past two years to  reconstruct
operating  properties  impacted  by  Hurricane  Marilyn.  The  majority  of  the
borrowings  are  executed at the  subsidiary  level (HELM and LRI) with a parent
company guarantee.

         On  October  21,  1996,  HELM,  entered  into  a  loan  agreement  (the
"Development   Loan")  with  Banco  Popular  de  Puerto  Rico  ("BPPR")  to  (i)
consolidate  certain  pre-existing  development  loans,  (ii) refinance  certain
acquisition  indebtedness,  (iii) reduce the Company's  interest costs, and (iv)
achieve level debt service  payments.  The parent  company,  Lockhart  Caribbean
Corporation, and HELM's wholly owned subsidiaries (Fort Mylner Properties, Inc.,
Red Hook  Plaza,  Inc.,  and Golden  Orange  Centers,  Inc.) have each fully and
unconditionally guaranteed the


<PAGE>



Development Loan.  Approximately  $19.1 million of proceeds from the Development
Loan was used to retire the mortgages on certain operating properties,  and such
amount is secured by first-priority  mortgages on Drake's Passage Shopping Mall,
the Grand Hotel Court,  Lockhart  Gardens  Shopping  Center and the  Acquisition
Properties,  and a second-priority mortgage on Red Hook Plaza. HELM is obligated
to make monthly principal and interest  payments of approximately  $163,500 with
respect  to the $19.1  million  outstanding  balance  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 9.0% as of December 31, 1997.

         The Development Loan provides for a $1.0 million line of credit with an
interest rate of 0.5% above the prime rate. As of December 31, 1997, the Company
had $254,000 available under the line of credit, and the interest rate was 9.0%.
In addition,  the Development Loan will provide  approximately  $580,000 to fund
the build-out of Lockhart Mall at Lockhart Gardens  Shopping Center.  The entire
outstanding  balance under the  Development  Loan is due and payable on April 1,
2000. BPPR has agreed,  subject to certain  conditions  including the absence of
any material  default by HELM and the Company  under the  Development  Loan,  to
convert such balance into a fifteen year loan with covenants similar to those of
the Development Loan.

         In 1991, BPPR loaned LRI $1,135,000 to finance site and  infrastructure
development of a commercial park at Sugar Estate ("Sugar Estate Park"). The loan
was secured by seven of the eleven acres of land  comprising  Sugar Estate Park.
In 1997, BPPR approved a loan package to refinance the 1991 LRI loan and provide
additional funds for two development projects for an aggregate borrowing of $3.8
million. Subsequently, LRI modified the request to $1.8 million, which BPPR will
fund for the  construction  of roads,  parking lot and other  infrastructure  at
Market Square East, the Company's second commercial park  development.  The loan
will be secured by a first-priority mortgage on land.

         In  February  1995,  HELM  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 Fort Mylner Commercial Center,  Fort Mylner
Shopping Center and Orange Grove Shopping Center for an aggregate purchase price
of $10.1 million from an unaffiliated  party. HELM financed the acquisition with
a short-term demand note which was refinanced in October 1996 with proceeds from
the Development Loan.

         In August  1997,  the Company  loaned  $75,000 to PFC and  guaranteed a
$200,000 bank line of credit  extended to PFC for expansion of its operations in
certain Eastern Caribbean islands.


<PAGE>



         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,  and  (iii)  increased  net  rentable  space  from the
reconstruction  and  renovation of Lockhart  Gardens  Shopping  Center and Grand
Hotel Court.  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.

         The  Company  is  assessing  the  modification  or  replacement  of its
software  that may be necessary  for its computer  systems to function  properly
with  respect to dates in the year 2000 and  thereafter.  The  Company  does not
believe that the cost of either modifying existing software or converting to new
software will be significant  or that the year 2000 issue will pose  significant
operational problems for its computer systems.

Recent Developments

         The Company is currently conducting an offering of Units, consisting of
one share of Class A Common  Stock and one  warrant to purchase  one-tenth  of a
share of Class A Common Stock, on a "best efforts" basis.  The offering is being
made pursuant to a registration  statement  declared effective by the Securities
and Exchange  Commission  on February 4, 1998.  The Company has not yet received
subscriptions  for the minimum number of Units offered and,  therefore,  has not
sold any Units.  This is not an offer to sell nor a  solicitation  to buy;  such
offers and  solicitations  can only be made by means of a prospectus.  Copies of
the   Company's   prospectus   can  be   obtained  on  the  World  Wide  Web  at
http://www.lockhart.com.

         In August 1997, The National Capital Bank of Washington extended a line
of  credit  to the  Company  for up to  $400,000  to be used  to  fund  expenses
associated with the Company's initial public offering. Amounts outstanding under
the line of credit will be repaid from  proceeds  of the  offering.  The line of
credit is personally  guaranteed by two of the Company's major shareholders.  On
March 1, 1998 the National Capital Bank of Washington  increased the credit line
by  $150,000 to $550,000  in order to fund  additional  expenses  related to the
offering. The line of credit matures in September 1998.

         On March 31, 1998,  LRI sold  approximately  3.6 acres of land at Sugar
Estate Park to the ground  lessee for $2.8  million,  an amount that is 20% over
the last  certified  appraisal  and 500%  above  book  value.  A portion  of the
proceeds from the sale were used to repay the 1991 LRI loan, which had a balance
of $737,723 on December 31, 1997.


<PAGE>



         The  Company  has  withdrawn  its offer to  purchase a shopping  center
located on Raphune Hill on St. Thomas, as the seller was unable to present clear
title to the property by the agreed upon closing date.



<PAGE>


                 Lockhart Caribbean Corporation and Subsidiaries

                    Audited Consolidated Financial Statements

                  Years ended December 31, 1997, 1996 and 1995






                                      Index


Report of Independent Auditors.............................................F-1
Consolidated Balance Sheets................................................F-2
Consolidated Statements of Operations......................................F-4
Consolidated Statements of Shareholders' Equity............................F-5
Consolidated Statements of Cash Flows......................................F-6
Notes to Consolidated Financial Statements.................................F-7



<PAGE>





                         Report of Independent Auditors



The Board of Directors and Shareholders
Lockhart Caribbean Corporation


We have  audited  the  accompanying  consolidated  balance  sheets  of  Lockhart
Caribbean Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Lockhart Caribbean
Corporation and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.


San Juan, Puerto Rico
February 13, 1998, except for
   the first and second paragraphs of Note 12, 
   as to which the dates are March 1
   and March 31, 1998, respectively.

                                      F-1



<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

                           Consolidated Balance Sheets




                                                        December 31
                                                    1997             1996
                                            ------------------ ---------------

Assets
Operating property:
   Land and improvements                       $10,146,068      $10,009,236
   Buildings and improvements                   25,155,646       25,068,409
   Equipment                                       468,369          426,660
   Prepaid lease                                 1,460,657        1,460,657
   Construction-in-progress                        798,166          265,706
                                            ------------------ ---------------
Total operating property                        38,028,906       37,230,668
Accumulated depreciation and amortization       (5,146,943)      (4,002,257)
                                            ------------------ ---------------
                                                32,881,963       33,228,411

Cash and cash equivalents                          376,930          930,163

Accounts and note receivable, net                  771,992          753,773

Prepaid expenses                                   353,975          325,879

Deferred financing costs, net                      354,507          508,189

Other assets                                       964,213          523,446


                                            ------------------ ---------------
Total assets                                   $35,703,580      $36,269,861
                                            ================== ===============

                                      F-2

<PAGE>

                                                          December 31
                                                      1997           1996
                                                 ------------- ----------------

Liabilities and shareholders' equity
Liabilities:
   Notes payable:
     Mortgage notes                               $25,552,581    $24,885,459
     Other                                            401,225         58,033
                                                 ------------- ----------------
   Total notes payable                             25,953,806     24,943,492
   Property taxes                                     844,460        778,137
   Tenant security deposits                           388,902        314,035
   Accounts payable                                   473,771        127,431
   Accrued expenses and other liabilities             453,727        350,746
   Deferred revenue                                   200,000              -
   Deferred income taxes                              648,892      1,422,050
                                                 ------------- ----------------
Total liabilities                                  28,963,558     27,935,891

Shareholders' equity:
   Preferred stock, par value $.01:
     Authorized shares -- 1,000,000, none issued 
   Class A common  stock, par value $.01:
     Authorized shares--40,000,000
     Issued and outstanding shares--6,560 in 1997         656              -
   Class B common stock, par value $.01
     Authorized shares--9,000,000
     Issued and outstanding shares--8,663,867
       in 1997 and 8,622,155 in 1996                   86,639         86,222
   Additional paid-in capital                       6,776,404      6,669,379
   Retained earnings (deficit)                       (123,677)     1,578,369
                                                 ------------- ----------------
Total shareholders' equity                          6,740,022      8,333,970
                                                 ------------- ----------------

Total liabilities and shareholders' equity        $35,703,580    $36,269,861
                                                 ============= ================



See accompanying notes.

                                      F-3
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>

                                                     Year ended December 31
                                               1997            1996           1995
                                        --------------- --------------- ----------------
                                                                        
Income:                                                                 
<S>                                       <C>             <C>             <C>         
   Rental income                          $ 4,465,945     $  3,385,002    $  3,028,074
   Tenant expense reimbursements              476,769          248,898         332,159
   Other operating income                     164,066          582,833         611,567
                                        --------------- --------------- -----------------
Total income                                5,106,780        4,216,733       3,971,800
                                                                        
Operating expenses:                                                     
   Operating and maintenance                  299,098          243,817         189,112
   Salaries and employee benefits           1,216,426        1,021,097       1,224,344
   Utilities                                  290,062          162,418          94,293
   Insurance                                  538,194          454,670         338,879
   Other taxes                                577,425          475,836         499,863
   Professional fees                          206,969          203,157         355,427
   Other general and administrative           104,514           78,974          55,366
   Depreciation and amortization            1,447,484        1,244,774         906,263
                                        --------------- --------------- -----------------
Total operating expenses                    4,680,172        3,884,743       3,663,547
                                        --------------- --------------- -----------------
Operating income                              426,608          331,990         308,253
                                                                        
Other income (expense):                                                 
   Interest expense                        (2,248,943)      (1,675,930)     (1,084,204)
   Lease termination costs                   (200,000)               -               -
   Other expenses                            (124,087)        (105,415)       (199,863)
   Gain (loss) on disposal of                                           
    operating property                              -           86,440        (850,972)
   Other income                                 2,505            1,640           1,535
   Insurance proceeds                               -           75,670       5,916,981
                                        --------------- --------------- -----------------
Total other income (expense)               (2,570,525)      (1,617,595)      3,783,477
                                        --------------- --------------- -----------------
(Loss) income before income taxes          (2,143,917)      (1,285,605)      4,091,730
                                                                        
(Benefit) provision for income taxes:                                   
   Current                                          -            1,295        (218,558)
   Deferred                                  (774,452)        (454,190)      1,806,413
                                        --------------- --------------- -----------------
                                             (774,452)        (452,895)      1,587,855
                                        --------------- --------------- -----------------
                                                                        
Net (loss) income                         $(1,369,465)    $   (832,710)   $  2,503,875
                                        =============== =============== =================
                                                                         
</TABLE>


See accompanying notes.

                                      F-4
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

                 Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>

                                                 Class A          Class B       Additional     Retained   
                                  Number of      Common           Common         Paid-In       Earnings   
                                   Shares         Stock            Stock         Capital       (Deficit)       Total
                              -------------- -------------- -------------- -------------- --------------- ---------------
<S>                               <C>               <C>           <C>         <C>           <C>             <C>        
Balance at January 1, 1995        8,334,647         $    -        $83,346     $6,217,719    $    562,304    $ 6,863,369
                                                                                                          
Issuance of common stock            190,896              -          1,909        284,190                        286,099
                                                                                                          
Net income                                                                                    2,503,875       2,503,875
                                                                                                          
Cash dividends                                                                                 (324,487)       (324,487)
                              -------------- -------------- -------------- -------------- --------------- ---------------
                                                                                                          
Balance at December 31, 1995      8,523,543              -         85,255      6,501,909      2,741,692       9,328,856
                                                                                                          
Issuance of common stock             96,612              -            967        167,470                        168,437
                                                                                                          
Net loss                                                                                       (832,710)       (832,710)
                                                                                                          
Cash dividends                            -                                                    (330,613)       (330,613)
                              -------------- -------------- -------------- -------------- --------------- ---------------
                                                                                                          
Balance at December 31, 1996      8,622,155              -         86,222      6,669,379      1,578,369       8,333,970
                                                                                                          
Issuance of common stock             48,272            656            417        107,025                        108,098
                                                                                                          
Net loss                                                                                     (1,369,465)    (1,369,465)
                                                                                                          
Cash dividends                                                                                 (332,581)       (332,581)
                              -------------- -------------- -------------- -------------- --------------- ---------------
Balance at December 31, 1997      8,670,427           $656        $86,639     $6,776,404    $   (123,677)   $ 6,740,022
                              ============== ============== ============== ============== =============== ===============
                                                                                                         
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                Year ended December 31
                                                                        1997                1996               1995
                                                                 ----------------  -------------------  ------------------
Operating activities                                                                                    
<S>                                                                  <C>               <C>                   <C>        
Net (loss) income                                                    $(1,369,465)      $     (832,710)       $ 2,503,875
Adjustments to reconcile net (loss) income to net                                                       
   cash (used in) provided by operating activities:                                                     
     Depreciation and amortization                                     1,447,484            1,244,774            906,263
     Deferred income taxes                                              (774,452)            (454,190)         1,806,413
     (Gain) loss on disposal of operating property                             -              (86,440)           850,972
     Changes in operating assets and liabilities:                                                       
       Accounts and notes receivable                                     (18,219)           5,331,427         (5,296,594)
       Prepaid expenses                                                  (28,096)             (75,781)           (31,582)
       Other assets                                                     (642,456)          (1,179,207)           (47,354)
       Tenant security deposits                                           74,867               88,398             67,016
       Accounts payable and accrued expenses                             516,938              242,007            443,956
       Deferred revenue                                                  200,000                    -                  -
                                                                 ----------------  -------------------  ------------------
Net cash (used in) provided by operating activities                     (593,399)           4,278,278          1,202,965
                                                                                                        
Investing activities                                                                                    
Acquisition of land and land improvements                               (136,832)          (2,986,417)        (1,013,862)
Sale of land                                                                   -               80,405                  -
Acquisition of buildings and improvements                                (87,237)         (12,547,702)        (6,275,945)
Acquisition of other operating property                                 (521,597)             (73,728)           (22,110)
Acquisition of equipment                                                       -              (58,692)           (48,483)
                                                                 ----------------  -------------------  ------------------
Net cash used in investing activities                                   (745,666)         (15,586,134)        (7,360,400)
                                                                                                        
Financing activities                                                                                    
Principal payments on mortgage and other notes payable                  (278,878)         (17,555,996)          (290,840)
Proceeds from issuance of mortgage and other notes payable             1,289,723           29,800,000          6,334,260
Proceeds from issuance of common stock                                   126,134              256,513            286,099
Repurchase of common stock                                               (18,036)             (88,076)                 -
Principal payments on installment note payable                           (14,330)            (391,642)          (279,996)
Principal payments on lease payable                                       13,800              (28,226)           (11,956)
Loan issuance costs                                                            -              (54,144)                 -
Cash dividends                                                          (332,581)            (330,613)          (324,487)
                                                                 ----------------  -------------------  ------------------
Net cash provided by financing activities                                785,832           11,607,816          5,713,080
                                                                 ----------------  -------------------  ------------------
Net (decrease) increase in cash and cash equivalents                    (553,233)             299,960           (444,355)
Cash and cash equivalents at beginning of year                           930,163              630,203          1,074,558
                                                                 ----------------  -------------------  ------------------
                                                                                                        
Cash and cash equivalents at end of year                            $    376,930       $      930,163       $    630,203
                                                                 ================  ===================  ==================
Supplemental cash flow information:                                                                     
   Interest paid, net of interest capitalized                        $ 2,134,021        $   1,626,963       $    823,863
                                                                 ================  ===================  ==================
                                                                            
</TABLE>

See accompanying notes.                                                     
                                                                            

                                      F-6
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

                   Notes to Consolidated Financial Statements

                                December 31, 1997



1.   Summary of Significant Accounting Policies

Organization

Lockhart  Caribbean  Corporation  (LCC) is organized as a United  States  Virgin
Islands  corporation  engaged in owning,  developing and leasing commercial real
estate.  LCC leases  developed  land,  and retail and office  space to customers
primarily  under  long-term  leases.  The  accompanying  consolidated  financial
statements  include the accounts of LCC and its wholly-owned  subsidiaries  H.E.
Lockhart  Management,  Inc. (HELM) and Lockhart Realty, Inc. (LRI).  Significant
intercompany balances and transactions have been eliminated in consolidation.

On July 5, 1997, the shareholders of The Lockhart  Companies  Incorporated (LCI)
voted to restructure and  recapitalize  the Company and to offer common stock to
the public in an initial  public  offering to be registered  with the Securities
and   Exchange   Commission.   In   connection   with  the   restructuring   and
recapitalization,  LCI  changed its name to Lockhart  Caribbean  Corporation  on
August 22, 1997. On the same date,  the  shareholders  of LCI exchanged  each of
their shares for 9.7 shares of Class B common stock of LCC. The  transaction has
been  accounted  for  in  a  manner  similar  to  a  pooling-of-interests   and,
accordingly, the financial statements as of and for the years ended December 31,
1996 and  1995  have  been  restated  to give  retroactive  recognition  to this
transaction.  Initial public offering  expenses,  consisting  primarily of legal
fees, amounting to approximately $463,000 were capitalized at December 31, 1997.

On February 4, 1998, LCC's registration  statement was declared effective by the
U.S.   Securities  and  Exchange   Commission   and  certain  state   regulatory
authorities.  The Company started  conducting its public offering primarily over
the World Wide Web.

Use of Estimates

The  consolidated  financial  statements  have been prepared in conformity  with
generally  accepted  accounting  principles  which  requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

Cash  equivalents  consist  of  short-term,  highly  liquid  investments  with a
maturity of three months or less when purchased.  Cash  equivalents  amounted to
$74,500 and $313,400 at December 31, 1997 and 1996, respectively,  and consisted
primarily of money market instruments.

                                      F-7

<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




1.   Summary of Significant Accounting Policies (continued)


Construction-in-Progress

Construction-in-progress  consists  primarily  of  costs  (including  applicable
property  taxes and  interest)  incurred  relating  to  certain  renovation  and
rebuilding  projects.  These costs are included in operating  property  when the
projects are completed.

Operating Property

Operating property is stated on the basis of cost. LCC provides for depreciation
of operating  property using the  straight-line  method for financial  reporting
purposes  and the  modified  accelerated  cost  recovery  system  for income tax
purposes over their  estimated  useful lives,  which range from 5 to 31.5 years.
Expenditures  for  maintenance  and  general  repairs  are charged to expense as
incurred,  whereas major  improvements  are classified as additions to operating
property.

Capitalized Interest

Interest  is  capitalized  as a  component  of the  cost of  operating  property
constructed.  In 1997  and  1995  interest  amounting  to  $6,200  and  $97,600,
respectively, was capitalized. No interest was capitalized in 1996.

Deferred Revenue

Amounts received from lessees for lease  acquisitions are deferred and amortized
over the term of the lease on the straight-line method.

Lease Termination Costs

Lease termination costs are charged to operations as incurred.

Deferred Financing Costs

Deferred  financing costs  represent  costs incurred  related to the issuance of
debt and are  amortized  over the term of the related debt.  Deferred  financing
costs at December 31, 1997 and December 31, 1996 are summarized as follows:

                                         1997           1996
                                   --------------- ---------------

Deferred financing costs               $508,189       $534,250
Less accumulated amortization           153,682         26,061
                                   =============== ===============
Deferred financing costs, net          $354,507       $508,189
                                   =============== ===============

                                      F-8
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




1.   Summary of Significant Accounting Policies (continued)


Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash  equivalents:  The carrying  amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.

Note receivable:  The carrying amount reported in the balance sheet approximates
fair value due to the underlying collateral on the note.

Mortgage and other notes payable:  The carrying  amounts of the mortgage  notes,
which bear interest based on the financial institution's prime rate, approximate
fair value due to the periodic  repricing of the  interest  rates.  The carrying
amounts of the fixed rate mortgage note, the  installment  note, and other notes
payable approximate fair value based on discounted cash flow analyses.


2.    Recent Accounting Pronouncements

Comprehensive Income

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
SFAS No. 130 requires  that all items that are required to be  recognized  under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December  15,  1997.  The  Company  will adopt SFAS No. 130 for the year  ending
December 31, 1998.

Segment Disclosures

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." SFAS No. 131 establishes standards for the
way that the public  business  enterprises  report  information  about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
SFAS No. 131 is effective for financial  statements for periods  beginning after
December  15,  1997.  The  Company  will adopt SFAS No. 131 for the year  ending
December 31, 1998.

                                      F-9


<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



3.   Accounts and note receivable

In 1989,  HELM sold a parcel of land and received a promissory note for $101,000
secured by a first  priority  mortgage on the property.  No interest was accrued
for the years ended  December 31, 1997,  1996 and 1995.  Accrued  interest as of
December  31, 1996  amounted to $73,300.  The note was settled on March 14, 1997
for $169,000.

On October 3, 1997 the Company  executed a Stock Purchase  Agreement to purchase
all the  outstanding  common stock of Premium  Finance Company of the V.I., Inc.
(PFC) and its  wholly-owned  subsidiary  Premium  Finance  Company  (E.C.)  Ltd.
(PFC-EC) for $687,500. PFC and PFC-EC finance insurance premiums for individuals
and  businesses  in the U. S. Virgin  Islands,  the British  Virgin  Islands and
Anguilla, St. Maarten/St.  Martin (Netherlands  Antilles);  Antigua, St. Vincent
and  Grenada.  In  addition,  the Company has agreed to guarantee a bank loan to
PFC-EC amounting to $200,000.

The Company also loaned $75,000 to PFC-EC which will be converted into a capital
contribution  upon  consummation  of the  acquisition  of PFC.  The  outstanding
principal  is payable on demand and  interest  income is accrued  based on prime
rate (8.50% at December 31, 1997). The note is personally secured and pledged by
50,000 shares in the stock of PFC.

Accounts and note receivable are summarized as follows:

                                                 1997           1996
                                         ---------------- ---------------

Tenant accounts receivable                     $671,846       $406,066
Note receivable - PFC                            78,187              -
Shareholders                                    101,193         97,568
Other                                           108,780        347,939
                                         ---------------- ---------------
                                                960,006        851,573
Less allowance for doubtful accounts            188,014         97,800
                                         ---------------- ---------------

                                               $771,992       $753,773
                                         ================ ===============

                                      F-10


<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. Mortgage and Other Notes Payable

Mortgage notes payable at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
                                                                       December 31
                                                                  1997              1996
                                                           ----------------- -----------------
<S>                                                            <C>                <C>        
First and second mortgage note payable to 
  a financial  institution at prime plus
  .5% (9.00% and 8.75% at December 31, 1997 
  and 1996, respectively)                                      $14,472,438        $14,600,000

First mortgage note payable to a financial  
  institution at prime plus .5% (9.00%
  and 8.75% at December 31, 1997 and 1996,
  respectively)                                                  4,460,683          4,500,000

First mortgage note payable to a financial
  institution at prime plus 1.5% (10.00% and 9.75%
  at December 31, 1997 and 1996, respectively)                     737,723            813,394

First mortgage note payable to seller at 8.75%                   4,635,737          4,672,065

Non-revolving line of credit promissory note to a
  financial institution at prime plus .5% (9.00% and
  8.75% at December 31, 1997 and 1996, respectively)               746,000            300,000

Demand notes payable to a financial institution
  at prime plus .5% (9.00% at December 31, 1997)                   500,000                  -
                                                           ----------------- -----------------

                                                               $25,552,581        $24,885,459
                                                           ================= =================
</TABLE>

The $14.6 million  mortgage note to HELM is payable in monthly  installments  of
$125,032 commencing in May 1997 after a six month interest-only  payment period.
A final  balloon  payment of $14.1 million is due when the note matures in April
2000. However, if there are no events of default, the financial  institution has
agreed  to  convert  the  balance  outstanding  on April 1,  2000 to a term loan
payable in 15 years and bearing interest at prime plus .5%. Proceeds of the note
were used to retire mortgage and installment  notes issued for the renovation of
the Grand Hotel, the acquisition of Red Hook Plaza Shopping  Center,  and a term
loan  secured by Drakes  Passage  properties,  and to retire an interim  loan of
$10.4 million, used

                                      F-11
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4.   Notes Payable (continued)

to acquire the Orange Grove Shopping Center and Fort Mylner properties, obtained
during 1996.

The mortgage note with an  outstanding  balance of $4.46 million on December 31,
1997 is payable in monthly installments of $38,537 commencing in May, 1997 after
an  initial   interest-only   payment   period.   A  final  balloon  payment  of
approximately  $4.3  million is  payable  when the note  matures in April  2000.
However, if there are no events of default, the financial institution has agreed
to convert the balance outstanding on April 1, 2000 to a term loan payable in 15
years and bearing interest at prime plus .5%. The proceeds of the note were used
to liquidate  the mortgage note issued for the  renovation  of Lockhart  Gardens
Shopping Center.  HELM is the borrower on this note.

The mortgage note to LRI with an outstanding balance of $737,723 at December 31,
1997 is payable in monthly  installments  of $6,306 plus  interest  through May,
1999 and a final payment of $630,520 due in June, 1999.

Proceeds of the mortgage  note with a balance of $4,635,737 at December 31, 1997
were used to finance the acquisition of Red Hook Plaza Shopping Center. The note
is payable in monthly  installments  of $36,975  commencing in February  1996. A
final installment  comprised of the principal sum then outstanding together with
any unpaid  interest is payable when the note matures in January 2004.  The note
is secured by a first  priority  mortgage  on  properties  at the Red Hook Plaza
Shopping Center,  a conditional  assignment of leases and rents, and a guarantee
of LCC up to a maximum amount of $750,000.  Red Hook Plaza, Inc., a wholly-owned
subsidiary of HELM, is the borrower on this note.

HELM  obtained  a $1  million  non-revolving  line of  credit  from a  financial
institution.  $746,000  and  $300,000  was  drawn  on the line of  credit  as of
December 31, 1997 and 1996, respectively. The balance outstanding under the line
of credit is due and payable in April 2000.  However,  if there are no events of
default, the financial institution has agreed to convert the balance outstanding
on April 1, 2000 to a term loan  payable  in 15 years and  bearing  interest  at
prime plus .5%.  Interest  is  accrued  on the  unpaid  balance at .5% above the
institution's prime rate and is payable monthly.

The proceeds  from the  $500,000  demand notes to HELM and LRI were used for the
development of Lockhart Mall at Lockhart  Gardens Shopping Center and the Market
Square  East  development  project.  The demand  notes are payable on demand and
interest is paid in variable monthly installments. Interest is computed based on
the  institution's  prime rate (8.50% at December 31, 1997) plus .5%. The demand
notes  represent  advances  to HELM  and LRI  until  the  final  closing  of two
construction  loans  ($1.8  million  for Market  Square  East and  $577,000  for
Lockhart projects) already committed by a financial institution.

                                      F-12

<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4.   Notes Payable (continued)

The  financial  institution  granted a moratorium  on principal  payments of the
three  mortgage  notes due to the effects of Hurricane  Marilyn.  The moratorium
period was from  November  1995 to July 1996 for the $3.7  million  mortgage  to
HELM,  and from November  1995 to January 1996 for the $1.9 million  mortgage to
HELM and the  $883,000  mortgage  to LRI.  The  principal  payments  during  the
moratorium  period  were added to the balloon  payments  due when the notes were
scheduled to mature.

Installment Notes

In 1990,  HELM  purchased a lease on its  Drake's  Passage  property  through an
installment  note  payable.  The note  was  scheduled  to  mature  in 1997.  The
acquisition  of the lease was  recorded  as a  capitalized  asset at the present
value of the  acquisition  cost.  The  capitalized  asset and discount are being
amortized  over  the  seven  year  term of the  installment  note.  The note was
liquidated in 1996 with the proceeds of the $14.6  mortgage note. As of December
31, 1997, the lease was fully amortized.

In February 1997,  HELM  purchased a vehicle for $13,800  through an installment
note  payable.  The note  matures  on  January 1, 2002 and is payable in monthly
principal  installments of $230 plus interest at 1.25% over prime rate (9.75% at
December 31, 1997).

In July,  1996, HELM purchased a vehicle for $59,000 through an installment note
payable.  The note  matures on June 1, 2001 and is payable in monthly  principal
installments  of $983 plus  interest at 1.25% over prime rate (9.75% at December
31, 1997).

Line of Credit

On August 1, 1997,  LCC  obtained  an  additional  line of credit  amounting  to
$400,000  from a financial  institution.  $343,723 has been drawn on the line of
credit as of December  31,  1997.  The line of credit  expires on July 31, 1998.
Advances under the line of credit will bear interest at the institution's  prime
rate (8.5% at December 31, 1997).

Principal  payments of notes  payable for the five years  subsequent to December
31, 1997, and in the aggregate, are as follows:

         1998                                 $  1,243,419
         1999                                    1,014,963
         2000                                   19,175,966
         2001                                       65,063
         2002                                       56,407
         Thereafter                              4,397,988
                                          ---------------------
                                               $25,953,806
                                          =====================

                                      F-13

<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



5.   Income Taxes

At  December  31,  1997,  the  Company  has  operating  loss   carryforwards  of
approximately  $1,650,000  and  $1,792,000  available to offset  future  taxable
income through the years 2012 and 2011, respectively.

At December 31, 1997 and 1996 net deferred income taxes (liabilities)  consisted
of the following:

                                                     1997           1996
                                               -------------- ----------------

  Depreciation                                  $    638,014   $     632,004
  Provision for doubtful accounts receivable          82,601          38,676
  Basis of operating property                     (2,788,285)     (2,788,285)
  Contributions carry-forward                         95,175          25,295
  Deferred revenue                                    74,800               -
  Operating loss carry-forward                     1,248,803         670,260
                                               -------------- ----------------

                                                 $  (648,892)    $(1,422,050)
                                               ============== ================


The  differences  between  income taxes at the  statutory  rate of 37.4% and the
income tax  provision  (benefit) in the  accompanying  statements  of operations
amount to $27,025,  $28,021  and  $20,148 for the years ended  December 3, 1997,
1996  and  1995,  respectively,  and  are  due  to  nondeductible  expenses  and
miscellaneous items.


6.   Leases

The Companies  receive rental income from leases for retail and office  building
space and ground leases to tenants under  noncancelable  lease  agreements which
expire at various  dates.  Five year  renewal  options are  available  with most
leases.  The leases provide for minimum annual rental payments plus adjustments,
if  applicable,  for certain  additional  costs  incurred by the lessor and/or a
percentage  of gross  sales.  Included  in rental  income  for the  years  ended
December  31,  1997,   1996  and  1995  are  $52,000,   $77,000  and   $100,000,
respectively, of rent attributable to a percentage of tenants' gross sales.

At December 31, 1997, the approximate future minimum rental income over the next
five years under the lease agreements were as follows:

   1998                                               $  4,649,000
   1999                                                  5,106,000
   2000                                                  5,279,000
   2001                                                  5,260,000
   2002                                                  5,469,000
                                                   -------------------

   Aggregate future minimum rental income              $25,763,000
                                                   ===================

                                      F-14
<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


7.    Lease Termination and Deferred Revenue

In July 1997, Woolworth Corporation  (Woolworth) decided to close its department
store  operations  throughout  the  United  States,  including  the U.S.  Virgin
Islands,  and as of October 31, 1997,  ceased  retail sales at Lockhart  Gardens
Shopping  Center.  Woolworth's  lease  did not  expire  until  2001,  and it was
obligated  to make base rental  payments and tenant  reimbursements  until lease
expiration.  The Company,  through H.E. Lockhart Management,  Inc., negotiated a
lease  termination  agreement.  The new tenant that took possession of the space
occupied by Woolworth reimbursed the Company for the payment made to Woolworth.

The amount received from the Tenant for lease  acquisition has been deferred and
will be  amortized  over the  initial  term of the  lease  on the  straight-line
method.


8.   Transactions with Related Parties

The  amounts  from  shareholders  are  interest  bearing  and  have no  specific
repayment  terms.  However,  if the maximum offering of $13 million is sold, the
Company  will use  approximately  $525,000  of the last one  million  raised  to
repurchase  approximately  80,769  shares of Class B Common  Stock from  certain
Class B Stockholders including those holding notes payable to the Company. Those
shareholders  holding  notes payable to the Company have agreed to use a portion
of the  proceeds  from  the  sale  of  shares  to the  Company  to  repay  their
indebtedness to the Company.

A shareholder of LCC and member of the Board of Directors is also a partner of a
law firm which renders legal  services to LCC.  During the years ended  December
31,  1997,  1996 and 1995 fees paid to the law firm  amounted  to  approximately
$147,000, $201,000 and $100,000, respectively.

In  November  1997,  HELM  purchased  a vehicle for $23,000 for one of the major
shareholders of the Company.


9.   Employee Benefit Plan

The Company,  through HELM, sponsors a  defined-contribution  retirement benefit
plan,  subject to ERISA,  that  covers  substantially  all  employees.  The plan
provides that the Company will match the employee-directed contributions up to a
maximum of $500. The Company's  contributions  pursuant to the plan for the year
ended December 31, 1997 were approximately $16,600.


10.  Dividends

Dividends  payment dates are scheduled for the last day of each month,  with the
per share amount paid per dividends  determined by the Board of Directors at its
quarterly  meetings.  A dividend of $332,581  was  declared  and paid to Class B
shareholders for the entire 1997 fiscal year.

                                      F-15

<PAGE>

                 Lockhart Caribbean Corporation and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



11.  Impact of Year 2000 - Unaudited

The Company is assessing the  modifications or replacements of its software that
may be necessary for its computer  systems to function  properly with respect to
the dates in the year 2000 and thereafter. The Company does not believe that the
cost of either modifying existing software or converting to new software will be
significant  or that the year  2000  issue  will  pose  significant  operational
problems for its computer systems.


12.   Subsequent Events

On March 1, 1998,  the Company  increased  its  revolving  line of credit from a
financial  institution  from  $400,000 to $550,000.  Advances  under the line of
credit will bear interest at the  institution's  prime rate.  The line of credit
expires on September 30, 1998.

On March  31,  1998,  LRI sold 3.7 acres of land at Sugar  Estate  Park for $2.8
million.  The Company used a portion of the  proceeds  from the sale to repay an
existing  mortgage  note payable with an  outstanding  balance of $737,723 as of
December 31, 1997.

                                      F-16


<PAGE>

                                  Exhibit List

*2.1     Plan of Recapitalization

*3.1     Amended and Restated  Articles of Incorporation  of Lockhart  Caribbean
         Corporation

*3.2     Amended and Restated Bylaws of Lockhart Caribbean Corporation

*3.3     First Amendment to the Amended and Restated  Articles of  Incorporation
         of Lockhart Caribbean Corporation

*4.1     Reference is made to Exhibits 3.1 and 3.2 *4.2 Specimen  Class A Common
         Stock Certificate

*4.3     Warrant Agreement (including form of Warrant Certificate)

*4.4     Subscription Escrow Agreement

*10.1    Loan Agreement between H.E. Lockhart Management, Inc. and Banco Popular
         de Puerto Rico dated October 21, 1996

*10.2    Stock Purchase  Agreement,  dated as of October 3, 1997, by and between
         Carib National Group Inc.,  Richard E.W. Grant, The Grant Trust,  Zenon
         Development  Corporation and Leslie and Cathy-Mae  Sitaram and Lockhart
         Caribbean Corporation

*10.3    Purchase and Sale Agreement between Red Hook Holding and Jedmacks, Inc.
         and H.E. Lockhart Management, Inc. dated as of January 6, 1995

*10.4    Red Hook Plaza, Inc. Installment Note dated February 15, 1995

*10.5    Purchase and Sale Agreement  between Miller  Properties,  Inc. and Fort
         Mylner Properties, Inc. dated as of June 14, 1996

*10.6    Purchase and Sale Agreement between Miller Properties,  Inc. and Golden
         Orange Centers, Inc. dated as of June 14, 1996

*10.7    Lockhart Caribbean Corporation Long Term Incentive Plan

*10.8    Form of Lockhart Caribbean Corporation Dividend Reinvestment Plan

*21      Subsidiaries of Lockhart Caribbean Corporation

27.1     Financial Data Schedule for the years ended December 31, 1996 and 1997

-------------------------------
*   Incorporated by reference from the corresponding exhibit filed with the
    Registrant's Registration Statement on Form S-11 (Commission File No. 333-
    35105).



<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized

                         LOCKHART CARIBBEAN CORPORATION



Date:  May 4, 1998               By:        /s/ John P. deJongh, Jr.
                                          --------------------------
                                          John P. deJongh, Jr., President


         Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


Date:  May 4, 1998               By:        /s/ John P. deJongh, Jr.
                                          --------------------------
                                          John P. deJongh, Jr., President
                                          Director (Principal Executive Officer)


Date:  May 4, 1998               By:        /s/ Cornel Williams
                                          ---------------------
                                          Cornel Williams, Chief Financial
                                          Officer (Principal Financial Officer
                                          and Principal Accounting Officer)


Date:  May 4, 1998               By:        /s/ George H.T. Dudley
                                          ------------------------
                                          George H.T. Dudley, Co-Chairman of the
                                          Board of Directors


Date:  May 4, 1998               By:        /s/ Wesley S. Williams, Jr.
                                          -----------------------------
                                          Wesley S. Williams, Jr., Co-Chairman
                                          of the Board of Directors


Date:   May 4, 1998              By:        /s/ Lisa S. Curreri
                                          ---------------------
                                          Lisa S. Curreri, Director


Date:   May 4, 1998              By:        /s/ Kathleen P. Goldberg
                                          --------------------------
                                          Kathleen P. Goldberg, Director


Date:   May 4, 1998              By:        /s/ William H. Hastie
                                          -----------------------
                                          William H. Hastie, Director


Date:   May 4, 1998              By:        /s/ Herbert E. Lockhart, III
                                          ------------------------------
                                          Herbert E. Lockhart, III, Director


Date:   May 4, 1998              By:        /s/ John E. Oxendine
                                          ----------------------
                                          John E. Oxendine, Director