LOCKHART CARIBBEAN CORP, 8-K/A, 1999-03-15

LOCKHART CARIBBEAN CORP
8-K/A, 1999-03-15
OPERATORS OF NONRESIDENTIAL BUILDINGS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A
(Amendment No. 1)

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): December 31, 1998
-----------------

LOCKHART CARIBBEAN CORPORATION
-------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

U.S. Virgin Islands
-------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)

333-35105 65-0491618
--------- ----------
(Commission File Number) (I.R.S. Employer Identification Number)

No. 44 Estate Thomas
St. Thomas,
U.S. Virgin Islands 00802
-------------------- ------
(Address of Principal Executive Officers) (Zip Code)

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

<PAGE>

Item 7. Financial Statements and Exhibits.

(a) Financial Statements of business acquired.

Audited financial statements of Guardian Insurance Company, Inc.
("Guardian") as of and for the two years ended December 31, 1997
are included in this amended report beginning on page F-1, and
audited financial statements of Heritage Insurance Company
(Caribbean), Limited ("Heritage") as of and for the two years
ended December 31, 1997 are included in this amended report
beginning on page F-__.

(b) Pro Forma financial information.

Pro forma financial statements reflecting the acquisition of
Guardian and Heritage are included in this amended report
beginning on page P-1.

None

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Dated: March 15, 1999 LOCKHART CARIBBEAN CORPORATION

By: /s/ John P. deJongh, Jr.
----------------------------
John P. deJongh, Jr.
President and Chief Operating
Officer

<PAGE>

GUARDIAN INSURANCE COMPANY, INC.
(a wholly-owned subsidiary of
Unlimited Holdings, Inc.)
Report and Financial Statements
December 31, 1997 and 1996

<PAGE>

Report of Independent Accountants

To the Board of Directors
and Stockholder of
Guardian Insurance Company, Inc.

In our opinion, the accompanying balance sheets and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Guardian Insurance Company, Inc. (a
wholly-owned subsidiary of Unlimited Holdings, Inc.) at December 31, 1997 and
1996, and the results of its operations and its cash flows for the years then
ended, 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 audits. We conducted our audits of these financial 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 statements
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

As discussed in Note 12 to the financial statements, the Company is a party to a
number of legal actions either as plaintiff or as a defendant. Given the various
stages of the cases, their ultimate outcome cannot be presently determined.
Their final resolution, however, may materially affect the financial position of
the Company.

PricewaterhouseCoopers LLP
San Juan, Puerto Rico
June 26, 1998, except for Note 13 which is
as of July 2, 1998

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1537464 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

F-1

<PAGE>

GUARDIAN INSURANCE COMPANY, INC.
(a wholly-owned subsidiary of Unlimited Holdings, Inc.)
Balance Sheets
December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1997 1996
---- ----
Assets

Investments:
Short-term investments ............................ $ 937,385 $ 895,592
Investment in real estate, at cost ................ 2,250,000 --
---------- ----------

Total investments ........................... 3,187,385 895,592

Cash ................................................. 655,650 177,982
Premiums receivable .................................. 217,168 339,030
Reinsurance recoverable on loss payments,
in litigation ....................................... 2,697,497 2,697,497
Reinsurance recoverable on loss payments,
from affiliates ..................................... 129,928 --
Deferred policy acquisition costs .................... 509,649 448,533
Property and equipment, net of accumulated
depreciation of $409,138 (1996 - $360,939) .......... 203,048 241,101
Income tax refund claim .............................. 855,967 855,967
Prepaid income taxes ................................. 150,000 150,000
Deferred income taxes ................................ 25,634 60,580
Accrued interest receivable .......................... 11,844 10,926
Other assets ......................................... 8,569 21,097
---------- ----------

Total assets ................................ $8,652,339 $5,898,305
========== ==========

Liabilities and Stockholder's Equity

Liabilities:
Unearned premiums ................................. $2,282,183 $2,053,563
Unpaid losses and loss adjustment expenses,
net of $236,498 (1996 - $389,523) reinsurance
recoverable on unpaid losses from affiliates ..... 1,112,696 1,438,714
Reinsurance premium payable ....................... -- 314,835
Loan payable to parent ............................ 390,900 --
Other liabilities and accrued expenses ............ 125,551 57,786
---------- ----------

Total liabilities ........................... 3,911,330 3,864,898
---------- ----------

Stockholder's equity:
Common stock, $90 par value; authorized
50,000 shares, 15,557 shares issued and
outstanding ...................................... 1,400,130 1,400,130
Additional paid-in capital ........................ 2,159,010 300,000
Retained earnings ................................. 1,181,869 333,277
---------- ----------

Total stockholder's equity .................. 4,741,009 2,033,407
---------- ----------

Total liabilities and stockholder's
equity ..................................... $8,652,339 $5,898,305
========== ==========

The accompanying notes are an integral part of these financial statements.

F-2
<PAGE>

GUARDIAN INSURANCE COMPANY, INC.
(a wholly-owned subsidiary of Unlimited Holdings, Inc.)
Statements of Income and Retained Earnings
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1997 1996
---- ----
Revenues:
Premiums written .............................. $ 5,286,958 $ 5,576,547
Less - Premiums ceded on catastrophic insurance 158,134 1,818,658
----------- -----------

Net premiums written ............................. 5,128,824 3,757,889
(Increase) decrease in unearned premium .......... (228,619) 481,040
----------- -----------

Premiums earned .................................. 4,900,205 4,238,929
Investment income, net of interest expenses
of $0 in 1997 (1996 - $186,000) ............... 62,426 157,942
Net realized loss on investments ................. -- (579,876)
Other income ..................................... -- 74,289
----------- -----------

Total revenues .......................... 4,962,631 3,891,284
----------- -----------

Claims and underwriting expenses:
Losses and loss adjustment expenses ........... 2,121,632 4,136,639
Payroll and payroll taxes ..................... 479,549 613,838
Commission expense ............................ 937,698 986,128
Other underwriting expenses
and general and administrative expenses ...... 540,214 999,093
----------- -----------

Total claims and underwriting expenses .. 4,079,093 6,735,698
----------- -----------

Income (loss) before income taxes ....... 883,538 (2,844,409)
----------- -----------

Current income tax expense ....................... 326,486 --
Deferred income tax benefit ...................... (291,540) --
----------- -----------

Income tax expense ...................... 34,946 --
----------- -----------

Net income .............................. 848,592 (2,844,409)

Retained earnings at beginning of the year ...... 333,277 3,177,686
----------- -----------

Retained earnings at end of the year ............. $ 1,181,869 $ 333,277
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
GUARDIAN INSURANCE COMPANY, INC.
(a wholly-owned subsidiary of Unlimited Holdings, Inc.)
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) ............................. $ 848,592 ($2,844,409)
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................ 48,203 58,134
Loss on sale of investments ................. -- 579,876
Gain on sale of property and equipment ...... -- (7,240)
Net change in provision for income taxes .... 34,946 (7,559)
Decrease (increase) in premiums receivable .. 121,862 (86,140)
(Increase) decrease in reinsurance
recoverable on loss payments ............... (129,928) 7,320,149
(Increase) decrease in deferred policy
acquisition costs .......................... (61,116) 395,022
Decrease in other receivables and other
assets ..................................... 11,610 193,618
Increase (decrease) in unearned premium ..... 228,620 (481,041)
Decrease in reserve for losses and loss
adjustment expenses ........................ (326,018) (8,911,358)
Increase (decrease) in other liabilities and
accrued expenses ........................... 67,765 (131,390)
(Decrease) increase in reinsurance
premiums payable .......................... (314,835) 58,850
Decrease in due to parent ................... -- (13,907)
----------- -----------
(318,891) (1,032,986)
----------- -----------

Net cash provided by (used in)
operating activities ................... 529,701 (3,877,395)
----------- -----------

Cash flows for investing activities:
Purchase of property and equipment ............ (10,242) (154,839)
Net change in short-term investments .......... (41,791) 175,620
Sale of property and equipment ................ -- 45,000
Proceeds from sale of investments ............. -- 7,541,333
----------- -----------

Net cash (used in) provided by
investing activities ................... (52,033) 7,607,115
----------- -----------

Cash flow from financing activities:
Repayment of short-term loan .................. -- (4,793,392)
Proceeds from issuance of stock ............... -- 950,000
----------- -----------

Net cash used in financing
activities ............................. -- (3,843,392)

Net increase (decrease) in cash .................. 477,668 (113,672)

Cash at the beginning of year .................... 177,982 291,654
----------- -----------

Cash at the end of year .......................... $ 655,650 $ 177,982
=========== ===========
Supplemental schedule of non-cash
financing activities:
Real estate investment transferred by the
parent
Common stock issued ......................... 90 --
Additional paid in capital .................. 1,859,010 --
----------- -----------

Change in stockholder's equity .............. $ 1,859,100 $ --
=========== ===========

Supplemental cash flow information:
Interest paid ................................. $ -- $ 186,000
=========== ===========

Income taxes paid ............................. $ -- $ --
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

GUARDIAN INSURANCE COMPANY, INC.
(a wholly-owned subsidiary of Unlimited Holdings, Inc.)
Notes to Financial Statements
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1. Organization and Summary of Significant Accounting Policies

Organization

Guardian Insurance Company, Inc. (the Company) is incorporated as a
domestic insurer under the laws of the U.S. Virgin Islands. The Company
commenced operations in July 1984 and is a wholly-owned subsidiary on
Unlimited Holdings, Inc., a real estate holding company (see Note 14). The
Company operates under the regulations of the Insurance Commissioner of the
U.S. Virgin Islands.

Since inception and until August 1996, the Company was engaged in the
property and casualty lines of business. Currently, the Company is
primarily engaged in the automobile and liability insurance (see Note 11).

During 1995, as a result of Hurricane Marilyn, the Company incurred
substantial losses amounting to approximately $10.5 million, net of
reinsurance. As a result, the Commissioner of Insurance issued the Company
a Cease and Desist order in August 1996. The Order restricted the Company
from writing new and renewal property insurance business until either, the
Company's aggregate exposures and retention have been reduced to a level
acceptable to the Commissioner of Insurance and consistent with guidelines
established by the National Association of Insurance Commissioners or a
minimum of $3,200,000 of additional capital was infused into the Company.

The Company complied with the order with the following actions:

o Effective August 7, 1996 the Company ceased writing new and renewal
property insurance business and currently limits its business
principally to automobile and liability insurance coverage. The
Company has completely eliminated the aggregate exposure and retention
in the property business.

o During 1996, in an effort to bolster its capital, its parent company,
Unlimited Holdings, Inc., contributed $950,000 of additional capital
to the Company.

o During 1997, Unlimited Holdings, Inc. transferred a parcel of land to
the Company, as more fully described in Note 2, which increased
capital by an additional $1.86 million.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which differ in certain aspects
from the statutory accounting basis prescribed by the Insurance
Commissioner of the U.S. Virgin Islands.

Use of Estimates in the Preparation of Financial Statements

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.

F-5
<PAGE>

Investments

Short-term investments represent certificate of deposits whose maturities,
at the time of acquisition, are one year or less.

Investment in real estate represents the original cost of a parcel of land
transferred to the Company by its parent (see Note 2). This investment is
non-income producing.

To comply with the regulations of the Commissioner of Insurance of the U.S.
Virgin Islands, the Company maintains a depository agreement with the
Commissioner whereby $500,000 in certificates of deposit is held in lieu of
a surety bond. At December 31, 1997, the Company had $525,000 (1996 -
$500,000) deposited on behalf of the Commissioner. These certificates of
deposit are shown as short-term investments in the accompanying financial
statements.

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. Acquisition costs deferred are reduced by any related
deferred ceded commission income. The method used to compute deferred
policy acquisition costs limits the amount of such deferred costs to the
lower of such costs or estimated realizable value. In determining estimated
realizable value, the method considers the premiums to be earned, losses
and loss expenses and certain costs to cover run-off expenses as the
premiums are earned. Amortization charged to income for the year amounted
to approximately $1,185,000 (1996 - $1,509,000).

Deferred acquisition costs are reviewed periodically to assure their
recoverability. The recoverability of the deferral is calculated without
considering investment income.

Property and Equipment

Furniture, fixtures and equipment are stated at cost. Depreciation is
determined on the straight-line basis over the estimated useful lives of
furniture, fixtures and equipment. Upon sale or retirement, the cost and
related accumulated depreciation are removed from the accounts and any
resulting profit or loss is included in income. Expenditures for renewals
and improvements are capitalized while maintenance and repairs are charged
to income as incurred.

Unearned Premiums and Revenue Recognition

Unearned premiums represent the portion of premiums written that apply to
the unexpired terms of net policies in force. These premiums are recognized
as revenue over the period of insurance coverage, calculated principally on
a daily pro-rata method on a policy by policy basis.

F-6

<PAGE>

Losses and Loss Adjustment Expenses

Liabilities for unpaid claims and claim expenses are estimates of future
payments to be made on insurance claims for reported losses and estimates
of losses incurred but not reported. No estimated amounts of salvage and
subrogation on unpaid property and casualty claims are deducted from the
liability for unpaid claims since such amounts are not material for the
Company. Estimated recoveries are evaluated in terms of their estimated
realizable value. The Company does not discount the liabilities for unpaid
losses and loss adjustment expenses.

The Company establishes loss reserves for insured events that have
occurred, which include estimates of both future payments of losses and
related future expenses. The process by which reserves are established for
insured events and related litigation requires reliance upon estimates
based on available data that reflects past experience, current trends and
other information, and the exercise of informed judgment. Such process is
subject to uncertainties that are normal, recurring and inherent in the
insurance business. As information develops which varies from experience,
provides additional data or, in some case, augments data which previously
were not considered sufficient for use in determining reserves, changes in
the Company's ultimate liabilities may be required. The effects of these
changes are charged/credited to income for the periods in which they are
determined. Management believes that the reserve for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of losses
and claims to date. However, there can be no assurance that the amount
ultimately paid will not exceed such estimates.

The primary data utilized to estimate losses and loss adjustment expense
liabilities were adjusted for what management believes to be abnormal
claims experience due to Hurricanes Marilyn, Hortense and Bertha.

Reinsurance

In the normal course of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events that can cause unfavorable
underwriting results by reinsuring certain levels of risks in various areas
of exposure with other insurers and reinsurers. To the extent, however,
that reinsuring companies may not be able to meet their obligations under
reinsurance agreements, the Company remains liable.

Premiums and commissions related to insurance ceded are accounted for as a
reduction of premiums written and acquisition and commission costs,
respectively.

Reinsurance premiums, commissions and expense reimbursements, related to
reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the
reinsurance contracts. Accordingly, reinsurance premiums are reported as
prepaid reinsurance premiums and amortized over the remaining contract
period in proportion to the amount of insurance protection provided.
Premiums ceded and recoveries of losses and loss adjustment expenses have
been reported as a reduction of premiums earned and loss and loss
adjustment expenses incurred, respectively. Commission and expense
allowances received in connection with reinsurance ceded have been
accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly.

F-7
<PAGE>

Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy.

Income Taxes

Income taxes are reported under the asset and liability method. Deferred
tax assets and liabilities are reported for the expected future tax
consequences of temporary differences recognized in the Company's financial
statements and tax returns.

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 that 50%) that some portion or all of the deferred tax asset will
not be realized.

Fair Values of Financial Instruments

The Company uses the following methods and assumptions in estimating its
fair value disclosures:

Cash and short-term investments: the carrying amounts reported in the
balance sheet for these instruments approximate their fair values.

Investment in real estate: fair value of $2.2 million is based on a
"contract of sale" signed by the Company as described in Note 13.

Loan payable to parent: fair value approximates carrying amount due to
recent issuance date and current interest rates.

Premiums receivable, other accounts receivable, other liabilities and
accrued expenses: the carrying amounts reported in the balance sheet
for these instruments approximate their fair values.

2. Capitalization Transaction

In December 1997, Unlimited Holdings, Inc. transferred to the Company a
parcel of land with a cost of $2,250,000 to increase the capital surplus
and further capitalize the Company. The property secures a term loan
payable to the parent company with a balance payable of $390,900. This
parcel of land is partially utilized in the business of the Company and is
currently a non-income producing asset.

Under the loan agreement of the parent, the property and its encumbrances
cannot be sold or transferred without prior consent of the holder of the
mortgage note. Should the holder of the mortgage call the note, as
permitted by the loan documents, management believes, based on the value of
the property, that financing could be obtained without a material effect on
the result of operations of the Company. At December 31, 1997, the mortgage
note on the property had not been transferred to Guardian.

This capitalization transaction was approved by the Commissioner of
Insurance of the U.S. Virgin Islands. Under the U.S. Virgin Islands
Insurance Code, investment in land is subject to certain limitations as an
admitted asset. The Commissioner, exercising its right under the Code,

F-8
<PAGE>

permitted the Company to admit in full the net asset value ($1,859,100) of
the land transferred to the Company.

3. Property and Equipment

Property and equipment as of December 31, consist of:

Useful lives 1997 1996
------------ ---- ----
EDP equipment 3 $ 36,983 $ 36,983
Furniture and fixtures 5-10 242,760 242,760
Leasehold improvements 5-10 195,577 195,577
Automobiles 5 136,866 126,720
-------- --------
612,186 602,040
Less - Accumulated depreciation 409,138 360,939
--------- --------
$203,048 $241,101
======== ========

4. Unpaid Losses and Loss Adjustment Expenses

Information related to the liability for unpaid losses and loss adjustment
expenses follows:

1997 1996
---- ----
Unpaid losses and loss adjustments
expenses ................................ $ 1,828,000 $ 12,065,000
Reinsurance recoverable on unpaid
losses .................................. (389,000) (7,672,000)
------------ ------------
Unpaid losses and loss adjustment
expenses, net, at beginning of year .... 1,439,000 4,393,000
------------ ------------
Incurred losses and loss adjustment
expenses:
Current year ........................... 1,999,000 1,793,000
Prior years ............................ 123,000 2,449,000
------------ ------------
Total ............................... 2,122,000 4,242,000
------------ ------------
Losses and loss adjustment expenses
paid:
Current year ........................... 1,475,000 1,280,000
Prior years ............................ 973,000 5,916,000
------------ ------------
Total ............................... 2,448,000 7,196,000
------------ ------------
Unpaid losses and loss adjustment
expenses, at end of year ................ 1,113,000 1,439,000

Reinsurance recoverable on unpaid
losses .................................. 236,000 390,000
------------ ------------

Unpaid losses and loss adjustment
expenses, gross, at end of year ......... $ 1,349,000 $ 1,829,000
============ ============

During 1996, the Company incurred approximately $4,070,000 in net losses
attributable to Hurricane Marilyn which hit the Virgin Islands in 1995.
Subsequent losses were much larger than anticipated. As indicated in Note 1
to the financial statements, changes in the ultimate liabilities for
insured events may be required as information develops which varies from
experience,

F-9
<PAGE>

provides additional data or, in some cases, augments data which previously
were not considered sufficient for use in determining loss reserves.

5. Reinsurance

The Company has a reinsurance program and from time to time may enter into
different reinsurance agreements as management may deem appropriate based
on the advice of its consultants. During the year ended December 31, 1997,
all the reinsurance was shared with a related party. The deposit premiums
are allocated based on the percentages of premiums written for the ceding
line of business. For the year ended December 31, 1997, 86.15% of deposit
premiums were allocated to the Company. The Company's principal reinsurance
agreement provides coverage to protect the Company from losses arising from
a loss or disaster of a catastrophic nature on automobile line of business.
Under such coverage, the Company retains an exposure for the first $50,000
of losses and is also exposed to losses in excess of $3,000,000.

Information with respect to reinsurance ceded by the Company follows:

At December 31,
----------------------------
1997 1996
---- ----
Balance Sheet
-------------
Reinsurance recoverable on paid losses

- from third party, in litigation $2,697,497 $2,697,497
- from related party 129,928 --
---------- ----------

$2,827,425 $2,697,497
Unpaid losses recoverable (including
incurred but not reported losses and
loss adjustment expenses), from
related party $ 236,000 $ 390,000
=========== ===========

Reinsurance premium payable $ -- $ 314,835
=========== ===========

Year ended December 31,
---------------------------------------------
1997 1996
------------------ -----------------------

Statements of Income
--------------------
Written Earned Written Earned
------- ------ ------- ------
Premiums ceded $158,134 $158,134 $1,818,658 $1,544,761
======== ======== ========== ==========
Ceded losses and loss
adjustment expenses $153,025 $8,318,768
======== ==========
Commission income on
reinsurance $ 4,046 $ 221,289
======== ==========

F-10

<PAGE>

6. Loan Payable to Parent

In connection with the capitalization transaction disclosed in Note 2, the
Company assumed a mortgage loan effectively connected to the land
transferred. At December 31, 1997, the current and non-current portion of
the mortgage loan is as follows:

Current $ 27,132
Non-current 363,768
---------
$ 390,900
=========

7. Related Party Transactions

The Company's primary related party transactions include reinsurance (see
Note 5) and rental of facilities it uses in its operations (see Note 10).

8. Income Taxes

The Company is subject to income taxes in the U.S. Virgin Islands. As a
result of the losses described in Note 1, the Company elected to carryback
these as permitted by the tax laws of the U.S. Virgin Islands. The
accompanying financial statements reflect an income tax refund claim of
$855,967 (1996 - $855,967) for this carryback. In addition, at December 31,
1996 the Company had unused carryforward losses of approximately
$2,401,000. The Company utilized some of those losses during 1997. Thus,
during 1997 a deferred income tax benefit of $326,486 was realized due to
the reversal of the valuation allowance created for the available net
operating losses. At December 31, 1997, the Company has remaining
approximately $1,560,000 of loss carryforwards expiring in 2011.

At December 31, the Company has deferred tax assets and liabilities as
follows:

1997 1996
---- ----
Deferred tax assets:
Unearned premiums $170,707 $153,607
AMT Credit 45,536 45,536
Loss carryforwards 583,439 909,952
Valuation allowance (583,439) (880,764)
--------- --------
216,243 228,331
Deferred tax liability - deferred policy
acquisition costs 190,609 167,751
--------- ---------
Net deferred tax asset $ 25,634 $ 60,580
========= =========

F-11

<PAGE>

9. Stockholder's Equity

The reconciliation of stockholder's equity as of December 31 and net income
for the year then ended presented in accordance with generally accepted
accounting principles (GAAP) and the statutory basis of accounting (SAP)
follows:

1997 1996
------------------------ -----------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
Based on GAAP $848,592 $4,741,009 ($2,844,409) $2,033,407
-------- ---------- ----------- ----------
Non-admitted assets:
<S> <C> <C>
Reinsurance recoverable (2,697,497) (2,697,497)
Property and equipment (200,629) (236,452)
Premiums receivable (24,726) (18,883)
Miscellaneous receivable (8,568) (21,101)
Provision for overdue
reinsurance (25,988) -- --
Refundable income taxes
recorded under GAAP 816,471
Deferred acquisition costs:
Beginning of year 448,533 843,556
End of year (509,649) (509,649) (448,533) (448,533)
Income taxes, net 34,946 (25,634) -- (60,580)
-------- ---------- ---------- ----------
(26,170) (3,492,691) 1,211,494 (3,483,176)
-------- ---------- ---------- ----------
Based on SAP $822,422 $1,248,318 $(1,632,915) $(1,449,769)
======== ========== ========== ==========
</TABLE>

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 Commissioner of Insurance customarily, in accordance with
NAIC rules, requires a maximum ratio of net written premiums to capital and
surplus of 3:1. At December 31, 1997, the Company's ratio of net written
premiums to statutory surplus was 4:1 (1996 - 3:1). The current ratio may
indicate that future operations may be curtailed by the Commissioner unless
additional capital is obtained.

At December 31, 1997 and 1996, the Company 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, 1997 and 1996 the Company
was in compliance with the RBC requirements.

10. Commitments

The Company leases office space, parking and other property from its parent
company. The operating leases are renewed monthly and call for monthly
rental payments of $15,595. In addition, the Company leases its U.S. Virgin
Islands claims office in St. Croix under an operating lease agreement which
is renewed every month. Total rent expense for 1997 was $196,000 (1996 -
$203,000).

F-12

<PAGE>

11. Financial Instruments With Off-Balance Sheet Risk and Concentration of Risk

The Company participates in a catastrophic cover agreement that provides
reinsurance protection coverage up to a certain level. The Company will be
held liable for such losses only if the reinsurer fails to meet its
obligations under existing agreements. All premiums written by the Company
relate to automobile and related risks in U.S. Virgin Islands. The Company
had no other significant concentration of risk in any specific industry in
its portfolio as of December 31, 1997 and 1996.

12. Contingencies

Litigation Against the Company

In the normal course of business the Company has various outstanding claims
pending litigation. The Company has recorded reserves for these losses as a
component of unpaid losses. As indicated in Note 1 to the financial
statements, changes in the ultimate liability for insured events may be
required as information develops and pending litigation is settled.
Management, with the advice of counsel, believes that reserves established
for these claims are adequate.

In addition to the above, the Company is a defendant in twelve (12) pending
lawsuits arising as a result of Hurricane Marilyn. The Company denied
coverage to these policyholders as the policyholders' misrepresented
material facts, primarily concerning the construction of their covered
property on the insurance application. Management believes that the outcome
of pending litigation will be favorable. However, the ultimate outcome of
this litigation is unknown at the present time. No provision for any
liability that might result if the litigation is disposed of unfavorably
has been made in the accompanying financial statements.

Litigation the Company Has Initiated

The Company has brought action in the District Court of the Virgin Islands
against one of the Company's reinsurance brokers (Bain Hogg International
Limited) (the broker), and Eagle Star Reinsurance Company, Limited (the
reinsurer), a reinsurance company with which the Company ceded risk under a
first surplus property treaty (the Treaty). This action was commenced by
the Company seeking collection of the $2.7 million reinsurance shown in the
accompanying balance sheet, under the contract and/or damages against the
Broker for breach of fiduciary duty and breach of contract.

The Treaty specified that it was a continuous contract in respect of risks
having an inception, renewal, or anniversary date on or after January 22,
1993 subject to three months Notice of Cancellation at anniversary date
being December 31 any year. The Company has a cover note from the Broker
dated December 20, 1993 which sets forth the terms of the reinsurance
agreement to which the Reinsurer had subscribed. The Company submitted
certain risks and applicable accounts and premiums under the Treaty to the
Broker. Those ceded risks included the applicable significant losses
incurred and paid by the Company resulting from Hurricane Marilyn. The
Broker contends that on or about September 20, 1993 the Reinsurer sent to
the Broker a letter containing a provisional notice of termination of the
Treaty. Neither the Broker or the Reinsurer contend that either sent such a
notice to the Company. The Company has continued to rely on the existence
of the Treaty and there presently exists a substantial sum due

F-13
<PAGE>

to the Company of $2,697,000, under the Treaty, no part of which has been
paid by the Reinsurer.

The status of the action is that both the Broker and the Reinsurer have
established legal action in the Queens Bench Division of the Commercial
Court in London and have challenged the Virgin Island's Court's
jurisdiction over the dispute and have sought an order to compel
arbitration if the motion to dismiss on jurisdictional grounds is not
granted. The London Court has upheld its jurisdiction, and rather than
submit to the jurisdiction of the English Court, Guardian did not proceed
as a litigant there, and in its absence, the London Court entered a
decision by default in favor of Bain Hogg. In the Eagle Star action, the
London Court appointed an arbitrator, and again, Guardian elected not to
participate in the London action in order to preserve its objections to
that court and arbitrator's jurisdiction. In Guardian's absence, the London
arbitrator ruled in favor of Eagle Star.

Meanwhile, in the Virgin Islands action, both Bain Hogg and Eagle Star
challenged the VI court's jurisdiction over the dispute. After full
briefing, the District Court initially held that it lacked jurisdiction
over Eagle Star, but that it had jurisdiction over Bain Hogg. Guardian then
filed a motion to reconsider the ruling as to Eagle Star, contending that
the Court should have allowed discovery regarding Eagle Star's contacts
with the Virgin Islands before ruling, if it did not consider the evidence
already submitted sufficient to confirm jurisdiction. Over Eagle Star's
objection, the Court agreed with Guardian's position and entered an order
granting reconsideration, and giving Guardian the right to conduct
discovery as to Eagle Star's contacts with the Virgin Islands before a
final decision on jurisdiction. That discovery is now in progress.
Management, based on the advice of legal counsel, is of the opinion that it
is likely that the District Court will, on reconsideration, find that it
does have jurisdiction over Eagle Star.

While it is not possible to predict with certainty the outcome of
litigation involving factual and legal complexities of this type,
management is of the opinion, based on the advise of counsel, that there is
good probability that the Company will prevail in its claims against the
Broker under Virgin Islands law as long as the Virgin Islands Courts retain
jurisdiction over that claim for trial. In addition, it is more likely than
not that the Company will prevail against the Reinsurer on its claims
before a Virgin Islands jury. If the claim against the Reinsurer is
referred to arbitration, management is of the opinion on the advice of
counsel that there is a reasonable prospect of a favorable outcome for the
Company. Discovery has not yet been conducted and there may be facts not
yet revealed which could have an impact on the outcome.

In addition, the Company is suing Risk Management Solutions, Inc. (RMS), a
company that provided Earthquake and Hurricane risk assessment shortly
before Hurricane Marilyn. The risk assessment included catastrophic
reinsurance recommendations to the company. Hurricane Marilyn caused $22.5
million in damages to Guardian's property portfolio. Risk Management
Solutions' catastrophic reinsurance recommendation was that Guardian should
reinsure up to $11.1 million. Guardian already had up to $15 million in
reinsurance and, on the basis of the RMS analysis, halted attempts to
purchase an additional $10 million in reinsurance. Guardian's claim for
damages is a minimum of $8.6 million. While it is not possible to predict
with certainty the outcome of this litigation, management is of the
opinion, based on the advice of counsel, that there is good probability
that the Company will prevail on its claims although amounts to be
recovered are not estimable. No amount has been recorded as receivable on
the accompanying financial statements.

F-14

<PAGE>

13. Subsequent Event - Real Estate

On July 2, 1998, the Company signed a contract of sale covering the parcel
of land described in Note 2. The contract of sale provides the holder an
option to buy the aforementioned property for $2.2 million. The final sale
is subject to certain conditions. Closing is to be made prior to December
31, 1998. The option expired without being exercised.

14. Subsequent Event - Sale of the Company (Unaudited)

On December 31, 1998, Unlimited Holdings, Inc., Guardian's parent company,
sold the Company to Lockhart Caribbean Corporation in a stock purchase
transaction. Prior to the sale, Guardian declared dividends to Unlimited
Holdings, Inc. of:

1. $2,697,497 relating to the reinsurance recoverable on loss
payment in litigation;

2. $135,000 reinsurance recoverable on paid losses from affiliates;

3. The litigation against RMS disclosed in the last paragraph of
Note 12 for which no asset or liability has been recorded in the
financial statements.

F-15

<PAGE>

HERITAGE
INSURANCE COMPANY (CARIBBEAN) LIMITED
Report and Financial Statements
December 31, 1997 and 1996

F-16
<PAGE>

Report of Independent Accountants

To the Board of Directors and Stockholders of
Heritage Insurance Company (Caribbean ) Limited

In our opinion, the accompanying balance sheets and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Heritage Insurance Company
(Caribbean) Limited at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
San Juan, Puerto Rico
February 28, 1998

CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1537465 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report

F-17
<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Balance Sheet
December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1997 1996
---- ----
Assets

Investments:
Short-term investments ...................... $ 108,197 $ 55,576
Fixed maturities - Debt securities
available for sale, at market value ........ 640,945 674,277
----------- -----------

Total investments ..................... 749,142 729,853

Cash ........................................... 278,343 761,468
Premiums and other receivable, net of
allowance for uncollectible amounts
of $7,000 (1996 - $7,000) ..................... 12,702 18,784
Deferred acquisition costs ..................... 33,467 100,843
Unearned reinsurance premiums .................. 78,847 632,854
Equipment and furniture and fixtures,
net of accumulated depreciation of
$19,178 (1996 - $6,393) ....................... 44,748 57,533
Other assets ................................... 47,846 31,969
----------- -----------

$ 1,245,095 $ 2,333,304
=========== ===========

Liabilities and Stockholders' Equity

Reinsurance payable ............................ $ 12,093 $ 514,330
Unpaid losses and loss adjustment expenses,
net of reinsurance recoverable on unpaid
losses of $0 (1996 - $28,800) ................. 71,000 84,700
Unearned premiums .............................. 272,984 844,816
Unearned reinsurance commissions ............... 14,266 137,326
Accrued expenses ............................... 4,211 13,046
----------- -----------

374,554 1,594,218
----------- -----------
Stockholders' equity:
Common stock, $1 par value; authorized,
issued and outstanding 250,000 shares ...... 250,000 250,000
Additional paid-in capital .................. 348,687 348,687
Retained earnings ........................... 285,166 203,506
Unrealized loss on debt securities .......... (13,312) (63,107)
----------- -----------

870,541 739,086
----------- -----------

$ 1,245,095 $ 2,333,304
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-18
<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Statement of Operations and Retained Earnings
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1997 1996
---- ----
Written premiums ................................ $ 842,353 $ 1,307,440
Change in unearned written premiums ............. 571,832 (458,990)
----------- -----------

Written premiums earned ...................... 1,414,185 848,450
----------- -----------

Ceded premiums .................................. 243,009 871,719
Change in unearned reinsurance premiums ......... 554,007 (424,795)
----------- -----------

Earned premiums ceded ........................... 797,016 446,924
----------- -----------

Net premiums earned ............................. 617,169 401,526

Interest income ................................. 48,394 54,799
Other income .................................... 11,153 33,050
Gain on sale of investment securities ........... 3,053 3,315
----------- -----------

Total revenues ............................. 679,769 492,690
----------- -----------

Claims and underwriting expenses:
Losses and loss adjustment expenses .......... 261,290 224,300
Commission expense, net of reinsurance
commissions of $46,790 (1996 - $189,268) .... 56,472 (33,201)
Administrative expenses ...................... 117,900 106,350
Professional fees ............................ 35,624 51,885
Other ........................................ 126,823 154,015
----------- -----------

Total claims and underwriting expenses ..... 598,109 503,349
----------- -----------

Income (loss) before income taxes .......... 81,660 (10,659)

Income tax expense .............................. -- --
----------- -----------

Net income (loss) .......................... 81,660 (10,659)

Retained earnings at beginning of the year ...... 203,506 214,165
----------- -----------

Retained earnings at end of the year ............ $ 285,166 $ 203,506
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-19
<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Statement of Cash Flows
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) ................................ $ 81,660 ($ 10,659)
--------- ---------
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Depreciation .................................... 12,785 6,393
Bad debt expense ................................ -- 7,000
Gain on sale of fixed maturity investments ...... (3,053) (3,315)
Accretion of discount on investment securities .. (28,501) (29,639)
Change in assets and liabilities:
(Increase) decrease in:
Deferred acquisition costs .................... 67,376 (48,666)
Unearned reinsurance premiums ................. 554,007 (424,796)
Premiums receivable ........................... 6,082 (2,545)
Other assets .................................. (15,877) 5,493
Increase (decrease) in:
Accounts payable to reinsurers, net ........... (473,437) 581,530
Unpaid losses and loss adjustment
expenses, net ................................ (42,500) (27,233)
Unearned premiums ............................. (571,832) 458,990
Accrued expenses .............................. (8,835) 12,782
Unearned reinsurance commissions .............. (123,060) 96,926
--------- ---------

Total adjustments ........................... (626,845) 632,920
--------- ---------

Net cash (used) provided by operating
activities ................................. (545,185) 622,261
--------- ---------

Cash flows for investing activities:
Proceeds from sales or maturities of fixed
maturity investments ............................. 260,076 228,226
Purchases of fixed maturity investments ........... (145,395)
Purchase of equipment, furniture and fixtures ..... -- (63,926)
Net increase in short-term investments ............ (52,621) (2,571)
--------- ---------

Net cash provided by investing activities ....... 62,060 164,300
--------- ---------

Cash flows from financing activities -
Decrease in short term borrowings ................... -- (96,397)
--------- ---------

Net (decrease) increase in cash and cash
equivalents ......................................... (483,125) 690,164

Cash at beginning of period .......................... 761,468 73,875
--------- ---------

Cash at end of period ................................ $ 278,343 $ 761,468
========= =========

The accompanying notes are an integral part of these financial statements.

F-20
<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

1. Organization and Summary of Significant Accounting Policies

Heritage Insurance Company (Caribbean) Limited ("the Company"),
organized under the laws of the British Virgin Islands, is a property
and casualty insurer authorized to issue insurance policies in the
British Virgin Islands, Anguilla and the Turks and Caicos Islands.

The significant accounting policies followed by the Company in the
preparation of its financial statements are as follows:

Use of Estimates in the Preparation of Financial Statements

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.

Investments

Short-term investments represent certificates of deposit whose
maturities, at the time of acquisition are one year or less.

Investment securities are classified into one of three categories:
held-to-maturity, available-for-sale, or trading. Debt securities for
which the enterprise has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings for the period. Debt
(fixed maturity) and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings for the period and
reported as a separate component of stockholders' equity.

Amortization of premium and accretion of discounts of debt securities
are recognized in interest income under a method that approximates the
interest method. Any gains or losses on the sale of investment
securities are determined using the specific identification method.

Deferred Acquisition Costs

Acquisition costs vary with and are primarily related to the
acquisition of insurance contracts and consist mainly of commission
expenses.

Policy acquisition costs related to unearned premiums are deferred and
amortized in proportion to premium revenue recognition. The deferred
portions of acquisition costs recovered from reinsurers are reported as
unearned reinsurance commissions.

F-21

<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such
costs are determined to be unrecoverable, they are expensed at the time
of such determination.

For the year ended December 31, 1997, amortization charged to income
amounted to approximately $170,638 (1996 - $107,400).

Equipment and Furniture and Fixtures

Equipment and furniture and fixtures are recorded at cost, net of
accumulated depreciation. Depreciation is provided on the straight-line
method over the estimated useful life of five (5) years. Expenditures
for major betterments and additions are capitalized while replacements,
maintenance and repairs which do not extend the life of the assets are
charges to expense as incurred. When assets are sold, retired or
otherwise disposed of, their cost and related accumulated depreciation
are removed from the accounts, and any gain or loss is reflected in
current operations.

Unearned Premiums

The portion of premiums written 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. Amounts paid to reinsurers on premiums ceded related to the
unexpired portions of reinsurance contracts are reported separately as
assets (unearned reinsurance premiums), and amortized over the
remaining contract period in proportion to the amount of insurance
protection provided.

Unpaid Losses and Loss Adjustment Expenses

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 by the Company. Estimated recoveries
are evaluated in terms of their estimated realizable value. The Company
does not discount the liabilities for unpaid losses and loss adjustment
expenses.

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 were
not considered sufficient for use in determining reserves, changes in
the Company's ultimate liabilities may be required. The effects of
these changes are charged or credited to income for the periods in
which they are determined.

F-22

<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

Reinsurance

The Company originates insurance policies and cedes 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. Reinsurance
recoveries are recorded as a reduction of unpaid loss and loss
adjustment expenses incurred.

No recoveries from reinsurers were made on paid losses during 1997
(1996 - $64,861).

Contingent Commissions

The Company's primary insurance activity involves covering risks in the
British Virgin Islands and the Turks and Caicos 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, 1997 and 1996.

Income Taxes

The tax authorities in the British Virgin Islands have taken the
position that the Company will be subject to tax based on financial
statements prepared in accordance with generally accepted accounting
principles. As discussed on Note 7, such financial statements reflected
net income of $81,660 which was significantly offset by net operating
loss carryforwards of approximately $61,000.

Income taxes are provided under the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are
recorded for the expected future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and
operating loss and tax credit carry forwards. 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 of the deferred tax asset will not be
realized.

The ultimate realization of deferred tax is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, if any, future taxable
income, and tax planning strategies in making this assessment.

F-23

<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

Fair Values of Financial Instruments

The Company uses the following methods in estimating its fair value
disclosures:

Cash, short-term investments, premium receivables and other
receivables, other liabilities and accrued expenses: the
carrying amounts reported in the balance sheet for these
instruments approximate their fair values.

Debt securities available for sale: fair values are based on
quoted market prices obtained from independent pricing
services.

2. Investments

The amortized cost value, gross unrealized gains, gross unrealized
losses, and approximate market value of debt securities
available-for-sale, by contractual maturity, are as follows:

<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Due after 10 years
Callable U.S. Municipal Bonds $265,138 ($ 4,263) $260,875
Zero-coupon certificates of
Municipal Bonds 389,119 --------- (9,049) 380,070
--------- --------- --------
Total debt securities $654,257 $ -- ($13,312) $640,945
======== ========= ======== ========
</TABLE>

<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Due after 5 years
through ten years
Callable U.S. Municipal Bonds $ 48,225 ($ 851) $ 47,374
Interest only certificates backed
by U.S. Treasury securities 58,897 $5,732 64,629
Due after 10 years
Callable U.S. Municipal Bonds 265,471 (21,486) 243,985
Zero-coupon certificates of
Municipal Bonds 364,791 (46,502) 318,289
--------- ------ -------- --------

Total debt securities $737,384 $5,732 ($68,839) $674,277
========= ====== ========= ========
</TABLE>

Expected maturities on debt securities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.

F-24
<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

Proceeds from sales of available-for-sale securities and gross realized
gains and losses on such sales are as follows:

1997 1996
---- ----
Proceeds from sales $260,076 $228,226
Gross realized gains 3,383 4,043
Gross realized losses 330 728

The change in net unrealized gains in investment securities
available-for-sale are as follows:

1997 1996
---- ----
Net unrealized (losses) gains at
beginning of year ($63,107) $ 536
Net change during the year 49,795 (63,643)
-------- --------
Net unrealized (losses) gains at
end of year ($13,312) ($63,107)
======== ========

The Company maintains under custody with its investment broker,
zero-coupon certificates of U.S. Municipal Bonds with an amortized cost
of approximately $389,000 as of December 31, 1997, (1996 - $365,000) to
comply with a $250,000 deposit requirement imposed to the Company by
the Insurance Commissioner of the British Virgin Islands prior to the
Insurance Act, 1994 (the Act). 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, the Company 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 the Company to maintain a deposit of $100,000. The
Company complied with this requirement by maintaining, under the
custody of a commercial bank, certificates of deposit of approximately
$108,000 (1996 - $56,000). At December, 31, 1996, the Company also held
a debt security with an amortized cost of approximately $59,000.

3. Related Party Transactions

During 1997 an affiliated entity charged the Company approximately
$136,000 (1996 - $107,000) for salary and other administrative
expenses. In addition, receivables from affiliates, amounting to
approximately $36,000 existed at December 31, 1997 (1996 - $20,000).

4. Reinsurance

The Company shares reinsurance agreements with an affiliated company.
The deposit premiums are allocated based on the percentages of premiums
ceded for each line of business. For the year ended December 31, 1997,
approximately 13.85% of deposit premiums were allocated to the Company.

F-25

<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

Principal reinsurance agreements are as follows:

o Direct automobile and general third party liability and
employees liability in an excess of loss basis for claims over
$100,000 per occurrence up to a limit (two layers) of
$1,000,000.

o Direct risks of physical loss or damage of buildings and their
contents are reinsured completely up to a limit of $1,000,000.

The Company also has coverage to protect itself from losses in excess
of certain limits arising from a loss or disaster of a catastrophic
nature. The Company's retention in excess of loss reinsurance
agreements amounts to $50,000 up to a limit (three layers) of
$3,000,000.

In addition, the Company has in force facultative reinsurance in which
the Company cedes 100% of the risk to cover its exposure in specific
insurance policies.

5. Financial Instruments with Off-Balance Sheet Risk and Concentration of
Credit Risk

The Company is participant in catastrophic cover agreements made with
reinsurers that provide insurance protection coverage up to a certain
level for losses exceeding the Company's risk retention. Even though
these agreements are legally binding, the Company will be liable for
such risks only if the reinsurer fails to meet its obligations under
existing agreements.

The Company originates insurance policies mainly in the British Virgin
Islands and the Turks and Caicos Islands. The Company had no other
significant concentration of risk in any specific industry or
geographical area in its risk portfolio as of December 31, 1997.

6. Unpaid Losses and Loss Adjustment Expenses

Information related to the liability for unpaid losses and loss
adjustment expenses follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unpaid loss and loss adjustment expenses, gross at beginning of year $113,500 $140,733
Less: Reinsurance recoverable on unpaid losses
and loss adjustment expenses 28,800 96,000
---------- ----------
Unpaid losses and loss adjustment expenses, net, at beginning of year 84,700 44,733
---------- ----------

Incurred losses and loss adjustment expense:
Provision for insured events of current year 284,990 184,333
(Decrease) increase in the provision for insured events of prior years (23,700) 39,967
261,290 224,300
---------- ----------
Loss payments, including loss adjustment expenses:
Payments attributable to insured events of the current year 203,890 180,513
Payments attributable to insured events of prior years 71,100 68,681
---------- ----------
274,990 249,194
Less: Reinsurance recovered on loss payments -- 64,861
---------- ----------
274,990 184,333
---------- ---------

Unpaid losses and loss adjustment expenses, gross 71,000 113,500
Less: Reinsurance recoverable in unpaid losses -- 28,000
---------- ----------
Unpaid losses and loss adjustment expenses, net,
at end of year $ 71,000 $ 84,700
========= =========
</TABLE>

F-26

<PAGE>

HERITAGE INSURANCE COMPANY (CARIBBEAN) LIMITED
Notes to Financial Statements
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------

7. Stockholders' Equity

The reconciliations of stockholders' equity as of December 31, 1997 and
1996 and net income for the years then ended presented in accordance
with generally accepted accounting principles (GAAP) in the
accompanying financial statements with the statutory basis of
accounting (SAP) as per the statutory basis financial statements filed
with Insurance Commissioner of the British Virgin Islands follows:

<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
Stockholder's Stockholder's
Net Income equity Net income equity
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Based on GAAP $ 81,660 $870,541 ($ 10,659) $739,086
Deferred acquisition costs -
beginning of year 100,843 52,177
Deferred acquisition costs -
end of year (33,467) (33,467) (100,843) (100,843)
Unearned reinsurance commissions -
beginning of year (137,326) (40,400)
Unearned reinsurance commissions -
end of year 14,266 14,266 137,326 137,326
Non-admitted assets under SAP (106,024)
Allowance for uncollectible amounts,
under GAAP 7,000 7,000
Other items 7,788
Valuation of investment not allowable assets (79,237)
------- -------- -------- --------
Based on SAP $ 33,764 $752,317 $ 44,601 $696,332
======== ======== ======== ========
</TABLE>

The Insurance Commissioner of the British Virgin Islands has requested
the Company to maintain a minimum capital of $250,000. As of December
31, 1997 and 1996 the Company was in compliance with this requirement.

The superintendent of Insurance of the Turks & Caicos Island requires
the Company to maintain a deposit of $100,000. As of December 31, 1997
and 1996, the Company was in compliance with this requirement.

8. Subsequent Event (unaudited)

On December 31, 1998, Heritage Insurance Company was sold to Lockhart
Caribbean Corporation in a stock purchase transaction. Prior to the
sale, Heritage declared dividends to its parent of $36,000 and $33,000
related to an account receivable from affiliates and property and
equipment, respectively, not forming part of the sale.

F-27

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial statements of
Lockhart Caribbean Corporation ("the Company") give effect to the acquisition by
the Company of Guardian Insurance Company, Inc. ("GIC") and Heritage Insurance
Company (Caribbean) Ltd. ("HIC") in one transaction accounted for as a purchase.
The unaudited pro forma condensed balance sheet as of September 30, 1998 shows
the effect of the acquisitions as if the transaction had occurred on September
30, 1998. The unaudited pro forma condensed statements of operations for the
nine months ended September 30, 1998, and for the year ended December 31, 1997
show the effect of the transaction as if it had occurred on January 1, 1997, and
carried forward through the end of the interim period, September 30, 1998.

The Company acquired GIC and HIC for 1.5 times the combined value of equity as
of December 31, 1997 after certain adjustments. The equity of GIC was reduced by
approximately $3.9 million of which approximately $2.7 million is a reinsurance
recoverable that is in litigation, and approximately $1.2 million is an amount
agreed to by both buyer and seller as a possible exposure for some property
insurance claims from Hurricane Marilyn in 1995, which are also in litigation.
The purchase price paid by the Company consisted of $125,000 in cash, a
short-term note payable to the seller for $1,125,000 and approximately 185,000
shares of Class A Common Stock valued at $6.50 per share. These shares are
subject to mandatory redemption at $8.30 per share for a 180-day period
commencing three years from the closing of the transaction. Additional shares of
Class A Common Stock (the "Additional Shares") will be conveyed to the seller if
the property insurance claims are settled for less than the amount established
by agreement as the exposure for such claims, and if the Company is able to
offset future net income of GIC against a net loss carryforward of approximately
$1.6 million at December 31, 1997. The value of the Additional Shares shall not
exceed 1.5 times the $1.2 million exposure for the property insurance claims. If
any Additional Shares are issued, the amount will be treated as an increase in
the purchase price, added to goodwill, and amortized over the remaining life of
goodwill.

The assets of GIC and HIC include an investment in real estate of $2.2 million,
which is approximately the same amount established by a market value appraisal
in August 1998. The excess of the purchase price over the fair value of the
assets and liabilities acquired was allocated to goodwill. The final allocation
may differ from that used in the unaudited pro forma condensed consolidated
financial statements.

These pro forma condensed financial statements may not be indicative of the
results that actually would have occurred if the transactions had been effected
on the dates indicated or which may be obtained in the future.

P-1

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
As of September 30, 1998
(000's)

Lockhart
Caribbean
Historical Adjustments Pro Forma
---------- ----------- ---------
Assets
------
Operating property, net of
accumulated depreciation ............. $33,923 $ 198 (1) $34,121
Investment in real estate .............. 2,250 (1) 2,250
Restricted assets ...................... 500 (1) 500
Cash and cash equivalents .............. 382 1,546 (1&2) 1,928
Debt securities available for sale ..... 252 (1) 252
Accounts and note receivable ........... 2,040 119 (1) 2,159
Income tax refund claim ................ 856 (1) 856
Prepaid expenses ....................... 421 421
Deferred costs ......................... 299 496 (1) 795
Other assets ........................... 1,223 701 (1) 1,924
Goodwill ............................... 103 (1) 103
------ ----- ------
Total assets ........................... $38,288 $7,021 $45,309
------ ----- ------
Liabilities & Stockholders' Equity
- ----------------------------------
Liabilities:
Notes and loans payable .............. $27,856 $ 498 (1&3) $28,354
Note to Selling Shareholders ......... 1,125 (4) 1,125
Unearned premiums .................... 2,060 (1) 2,060
Unpaid losses and loss
adjustment expenses ................ 1,598 (1) 1,598
Accounts payable ..................... 433 433
Tenant security deposits ............. 469 469
Accrued expenses and other
liabilities ........................ 1,177 121 (1) 1,298
Deferred income taxes ................ 1,019 84 (1) 1,103
------ ----- ------
Total liabilities ...................... 30,954 5,486 36,440

Mandatorily Redeemable Securities ...... 1,535 (5) 1,535

Stockholders' Equity:
Preferred stock, par value $0.01:
Authorized shares 1,000,000,
none issued
Class A common stock, par value $0.01:
Authorized shares 40,000,000,
Issued and outstanding--47,020 ..... 1 1
Class B common stock, par value $0.01:
Authorized shares 9,000,000,
Issued and outstanding--8,663,867 .. 87 87
Additional paid-in capital ........... 7,040 7,040
Retained earnings .................... 206 206
------ ----- ------
Total shareholders' equity ............. 7,334 7,334
------ ----- ------
Total liabilities and
shareholders' equity ................. $38,288 $7,021 $45,309
------ ----- ------

P-2

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 1998
(Unaudited)
(000's)

For purposes of determining the effect of the acquisitions of GIC and HIC on the
Company's Condensed Consolidated Balance Sheet as of September 30, 1998, the
following pro forma adjustments have been made. The pro forma condensed balance
sheet shows the effect of the acquisitions as if the transaction had occurred on
September 30, 1998.

(1) Assets and liabilities acquired from GIC and HIC
and allocation of the purchase price:
Purchase Price:
Cash .............................................. $ 125
Note to selling shareholders ...................... 1,125
Mandatorily Redeemable Shares--184,931 shares
of Class A Common Stock @ $8.30 per share ....... 1,535
-----
Total Purchase Price ................................ 2,785
Transaction cost .................................... 56
-----
Total Acquisition Cost .............................. $2,841

Operating property .................................. 198
Investment in real estate ........................... 2,250
Restricted Assets ................................... 500
Cash and cash equivalents ........................... 1,602
Debt securities available for sale .................. 252
Accounts and note receivable ........................ 119
Income tax refund claim ............................. 856
Deferred costs ...................................... 496
Other assets ........................................ 701
-----
Total assets ........................................ 6,974

Notes and loans payable ............................. 373
Unearned premiums ................................... 2,060
Unpaid losses and loss adjustment expenses .......... 1,598
Accrued expenses and other liabilities .............. 121
Deferred income taxes ............................... 84
-----
Total liabilities ................................... 4,236

Net Assets .......................................... 2,738
-----
Goodwill ............................................ 103

(2) The Company paid a total of $56,128 in transaction
costs. ................................................ 56

(3) A loan of $125,000 was extended by a financial
institution for the cash portion of the purchase price. 125

(4) A short-term note payable to the selling shareholders
for $1,125,000 was executed at the closing of the
transaction. .......................................... 1,125

(5) Mandatorily Redeemable Shares-buyer has the right to
require the seller to redeem the 184,931 shares of
Class A Common Stock conveyed at closing for a price
of $8.30 per share for a 180-day period commencing
three years from the closing of the transaction. ...... 1,535

P-3

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Statement of Operations (Unaudited)
For the Nine Months Ended September 30, 1998
(000's)

Lockhart
Caribbean
Historical Adjustments Pro Forma
---------- ----------- ---------
Revenues:
Rental income ........................ $3,164 $3,164
Tenant reimbursements ................ 484 484
Net premiums earned .................. $3,791 (1) 3,791
Investment income .................... 116 (1) 116
Premium finance revenue .............. 96 96
Other operating income ............... 76 76
------ ----- ------
Total revenue .......................... 3,820 3,907 7,727

Expenses:
Claims and underwriting expenses ..... 3,974 (2) 3,974
Depreciation and amortization ........ 922 5 (3) 927
Other operating expenses ............. 2,592 2,592
------ ----- ------
Total expenses ......................... 3,514 3,979 7,493

Operating income ....................... 306 (72) 234

Other income (expense):
Interest expense ..................... (1,751) (73)(4) (1,824)
Other income and (expense) ........... 2 2
Gain on sale of operating property ... 2,342 2,342
------ ----- ------
Total other income (expense) ........... 593 (73) 520

Income (loss) before taxes ............. 899 (145) 754
Income taxes ........................... 336 81 (5) 417
------ ----- ------
Net income ............................. $ 563 $ (226) $ 337
------ ----- ------
Earnings per share:
Basic--Class B ....................... 0.06 0.04
Basic--Class A ....................... 0.02 0.00

P-4

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Statement of Operations (Unaudited)
For the Year Ended December 31, 1997
(000's)

Lockhart
Caribbean
Historical Adjustments Pro Forma
---------- ----------- ---------
Revenues:
Rental income ........................ $ 4,466 $ 4,466
Tenant reimbursements ................ 477 477
Net premiums earned .................. $5,517 (1) 5,517
Investment income .................... 125 (1) 125
Other operating income ............... 164 164
------ ----- ------
Total revenue .......................... 5,107 5,642 10,749

Expenses:
Claims and underwriting expenses ..... 4,677 (2) 4,677
Depreciation and amortization ........ 1,447 7 (3) 1,454
Other operating expenses ............. 3,233 3,233
------ ----- ------
Total expenses ......................... 4,680 4,684 9,364

Operating income ....................... 427 958 1,385

Other income (expense):
Interest expense ..................... (2,248) (97)(4) (2,345)
Other income and (expense) ........... (324) (324)
Gain on sale of operating property ... 2 2
------ ----- ------
Total other income (expense) ........... (2,570) (97) (2,667)

Income (loss) before taxes ............. (2,143) 861 (1,282)
Income taxes ........................... (774) 20 (5) (754)
------ ----- ------
Net income ............................. $(1,369) $ 841 $ (528)
------ ----- ------
Earnings per share:
Basic--Class B ....................... (0.24) (0.14)
Basic--Class A ....................... (0.20) (0.10)

P-5

<PAGE>

LOCKHART CARIBBEAN CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Statements of Operations
(Unaudited)
(000's)

For purposes of determining the effect of the acquisitions of GIC and HIC on the
Company's Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1998, and for the year ended December 31, 1997, the
following pro forma adjustments have been made. The pro forma financial
statements show the effect of the transaction as if it had occurred January 1,
1997, and carried forward through to the end of interim period, September 30,
1998.

Nine Months
Ended Year Ended
Sep 30, 1998 Dec 31, 1998
------------ ------------
(1) Total revenues for GIC and HIC:
Net premiums earned ........................ $ 3,791 $ 5,517
Investment income 116 125

(2) Total operating expenses for GIC and HIC ..... 3,974 4,677

(3) Amortization of goodwill over 15 years ....... 5 7

(4) Interest expense on $125,000 loan from
financial institution at 8.25% (0.50% above
prime rate), and on $1,125,000 loan from
seller at 7.75% (prime rate). ................ 73 97

(5) Provision for income taxes ................... 81 20

(6) Basic net income per share have been
determined by using the two-class method.
The two-class method is an earning allocation
formula that determine 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:

Basic:
Class A Common Stock ..................... 204,351 185,697
Class B Common Stock ..................... 8,663,867 8,640,874

P-6