<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                                   FORM 10-K/A

(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, 1998

                                       or

( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the transition period from ____________ to ____________

                  Commission File Number 0-27462

                                  RISCORP, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                                  <C>
           Florida                                                                  65-0335150
(State or other jurisdiction of                                      (I.R.S. Employer Identification Number)
 incorporation or organization)

2 North Tamiami Trail, Suite 608, Sarasota, Florida                                      34236 -5642
     (Address of principal executive offices)                                              (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (941) 366-5015

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                                             Name of Each Exchange
                     Title of Each Class                                       on which Registered
                     -----------------------                                  --------------------
                     <S>                                                     <C>
                               None                                                       None
                     -----------------------                                  --------------------
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:

                      Class A Common Stock, $.01 par value
                                (Title of Class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                   Yes X       No
                                      ---        ---

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. ( )

The aggregate market value of shares of the registrant's Class A Common Stock
held by non-affiliates of the registrant as of May 31, 1999 was $16,981,537.

The number of shares of the registrant's Common Stock issued and outstanding as
of May 31, 1999 was 38,593,114 consisting of 14,258,671 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.

Documents Incorporated by Reference:  None
<PAGE>   2


                                  RISCORP, INC.
                          ANNUAL REPORT ON FORM 10-K/A
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                  Description                                                                   Page
                                  -----------                                                                   ----
<S>                            <C>                                                                              <C>
                                                                       PART I

Item 1.                        Business                                                                           1

Item 2.                        Properties                                                                        16

Item 3.                        Legal Proceedings                                                                 16

Item 4.                        Submission of Matters to a Vote
                               of Security Holders                                                               19

                                                                      PART II

Item 5.                        Market for Registrant's Common
                               Equity and Related Stockholder Matters                                            19

Item 6.                        Selected Financial Data                                                           20

Item 7.                        Management's Discussion and Analysis
                               of Financial Condition and Results
                               of Operations                                                                     21

Item 8.                        Financial Statements and Supplementary Data                                       29

Item 9.                        Changes in and Disagreements with
                               Accountants on Accounting and
                               Financial Disclosure                                                              29

                                                                      PART III

Item 10.                       Directors and Executive Officers
                               of the Company                                                                    29

Item 11.                       Executive Compensation                                                            30

Item 12.                       Security Ownership of Certain
                               Beneficial Owners and Management                                                  32

Item 13.                       Certain Relationships and Related Transactions                                    34

                                                                      PART IV

Item 14.                       Exhibits, Financial Statement
                               Schedules, and Reports on Form 8-K                                                36

                               Signatures                                                                        38
</TABLE>
<PAGE>   3


                                     PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

           This Annual Report on Form 10-K/A contains forward-looking
statements, particularly with respect to Risk Factors, Legal Proceedings, and
the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations. Additional written or
oral forward-looking statements may be made by RISCORP, Inc. ("RISCORP") and its
subsidiaries (collectively, the "Company") from time to time in filings with the
Securities and Exchange Commission or otherwise. Such forward-looking statements
are within the meaning of that term in Sections 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such statements may
include, without limitation, projections of revenues, income, losses, cash
flows, plans for future operations, financing needs, estimates concerning the
effects of litigation or other disputes, as well as assumptions regarding any of
the foregoing.

           Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements. Many factors could contribute to such differences
and include, among others, uncertainties with respect to the final purchase
price to be paid by Zenith Insurance Company ("Zenith") pursuant to that certain
Asset Purchase Agreement by and among RISCORP, certain of its subsidiaries named
therein, and Zenith, dated June 17, 1997, as amended (the "Asset Purchase
Agreement"); the actual outcome of pending litigation, including, without
limitation, the litigations currently pending with Zenith; the Company's ability
to gain approval and receive payment from the Florida Department of Labor; the
Company's need for additional capital to meet operating requirements; and other
factors mentioned elsewhere in this report.

OVERVIEW

           On April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith.
In connection with this sale, the Company ceased substantially all of its former
business operations, including its insurance operations, effective April 1,
1998. Accordingly, after such date, the operations of the Company consisted
primarily of the administration of the day-to-day activities of the surviving
corporate entities, compliance with the provisions of the Asset Purchase
Agreement, and the investment, protection, and maximization of the remaining
assets of the Company. At the present time, the Company has no plans to resume
any operating activities.

           Prior to April 1, 1998, the Company offered managed care workers'
compensation insurance and services designed to lower the overall costs of
work-related claims, while providing quality cost-effective care to injured
employees. As of March 31, 1998, the Company provided workers' compensation
insurance and services to approximately 18,000 policyholders, principally in
Florida and the southeastern United States.


                                       1
<PAGE>   4


ASSET PURCHASE AGREEMENT WITH ZENITH

           On June 17, 1997, the Company entered into the Asset Purchase
Agreement with Zenith for the sale of substantially all of the assets of the
Company related to its workers' compensation and other insurance business,
including the Company's existing inforce business, and the right to all new and
renewal policies (the "Asset Sale"). The transaction closed on April 1, 1998.
Pursuant to a covenant not to compete set forth in the Asset Purchase Agreement,
the Company agreed that it would not compete in the workers' compensation
insurance business in the United States for a three-year period following the
closing date. Accordingly, after the transaction closed, the Company ceased to
be engaged in the workers' compensation or managed care businesses. In
connection with the transaction, Zenith assumed certain liabilities related to
the Company's insurance business, including $15 million in Company indebtedness
owed to American Re-Insurance Company.

       In connection with the Asset Sale, Zenith paid the Company $35 million in
cash, of which $10 million was placed in escrow to secure its indemnification
obligations to Zenith. Pursuant to the terms of the Asset Purchase Agreement,
the final purchase price to be paid by Zenith will be the amount by which the
book value of the transferred assets exceeds the book value of the transferred
liabilities assumed by Zenith at closing. On June 9, 1998, RISCORP delivered to
Zenith a closing date balance sheet (the "Proposed Business Balance Sheet")
representing the audited statement of transferred assets and transferred
liabilities as of Apri1 1, 1998. The Proposed Business Balance Sheet indicated
RISCORP's proposal as to the final purchase price of approximately $141 million,
less the $35 million previously paid by Zenith.

           Subsequent to June 9, 1998, Zenith suggested adjustments to the
Proposed Business Balance Sheet that totaled approximately $211 million. These
suggested adjustments principally related to differences in the estimation of
loss and loss adjustment expense reserves and the estimate of the allowance for
uncollectible receivables. The adjustments proposed by Zenith reflected Zenith's
position that the aggregate value of the liabilities assumed by Zenith exceeded
the value of the assets transferred by approximately $70 million.

           On July 10, 1998, RISCORP and Zenith engaged a nationally recognized
independent accounting firm to serve as neutral auditors and neutral actuaries
(the "Independent Expert") to resolve the items in dispute between the parties
and to determine the Final Business Balance Sheet for this transaction. On March
19, 1999, the Independent Expert delivered its determination of the Final
Business Balance Sheet and, as such, its conclusion that the book value of the
transferred assets exceeded the book value of the transferred liabilities
assumed by Zenith at closing by $92.3 million. Therefore, pursuant to the terms
of the Asset Purchase Agreement and given the $35 million previously paid by
Zenith at closing, Zenith is required to pay an additional $57.3 million in
immediately available funds on or before March 26, 1999, plus interest thereon
of 6.13 percent from April 1, 1998 through the final payment date. Of this
amount, $53.5 million, plus the interest component, is required to be paid to
RISCORP, and $3.8 million is required to be deposited into escrow to further
secure the Company's indemnification obligations to Zenith. RISCORP has reported
the results of the Independent Expert's determinations in the accompanying 1998
consolidated financial statements; however, RISCORP



                                       2
<PAGE>   5


is in the process of analyzing the basis for the adjustments to the Proposed
Business Balance Sheet and is evaluating its alternatives related thereto.

           The sale to Zenith is more fully described in Note 1(b) of the
accompanying consolidated financial statements.

BASIS OF PRESENTATION

           As previously disclosed, due to the sale to Zenith, the Company
ceased substantially all of its business operations as of April 1, 1998.
However, given the operations of the Company for the period January 1, 1998 to
April 1, 1998, a description of the Company's former business operations and the
workers' compensation industry are included in this report to comply with the
requirements of the Exchange Act and the rules and regulations of the Securities
and Exchange Commission. At the present time, the Company has no plans to resume
any operating activities.

INDUSTRY

           Workers' compensation benefits are mandated and regulated by
individual states, and most states require employers to provide medical benefits
and wage replacement to individuals injured at work, regardless of fault.
Virtually all employers in the United States are required either to purchase
workers' compensation insurance from a private insurance carrier, a
state-sponsored assigned risk pool, a self-insurance fund (an entity that allows
employers to pool their liabilities for obtaining workers' compensation
coverage), or, if permitted by their state, to be self-insured. Workers'
compensation laws generally require two kinds of benefits for injured employees:
(i) medical benefits that include expenses related to diagnosis and treatment of
the injury, as well as rehabilitation, if necessary, and (ii) payments that
consist of temporary wage replacement or permanent disability payments.

PROGRAMS AND PRODUCTS

Workers' Compensation Products

           Prior to the sale to Zenith, the Company operated in a single
industry segment. The Company's products and rating plans encompassed a variety
of options designed to fit the needs of a wide selection of employers. The most
basic product was a guaranteed cost contract, where the premium was set in
advance and changes were made only when changes occurred in policyholder
operations or payrolls. The premium for these policies was based on state
approved rates, which varied depending on the type of work performed by each
employee and the general business of the insured. The Company also offered
several loss sensitive plans (retrospective rating, dividend, and large
deductible plans) which determined the final premium paid based largely on the
insured's losses during the policy period. Employers large enough to qualify had
their premiums based on their loss experience over a three-year period. This
loss experience was adjusted by the type of business and associated risks. In
Florida, policyholders could also qualify for one or more premium credits (5
percent and 2 percent) by agreeing to comply with drug-free workplace and/or
safe workplace policies, respectively. Policyholders that elected to assume a
certain amount of financial risk could elect a deductible that made them
responsible for the first portion of any claim.



                                       3
<PAGE>   6


In exchange for the deductible election, the employer received a premium
reduction. As a result of the sale to Zenith, the Company no longer offers any
programs or products.

Workers' Compensation Management Services

           Prior to the sale to Zenith, the Company provided fee-based workers'
compensation insurance management services to self-insurance funds and
governmental risk-sharing pools, and performed all the services of an insurance
carrier except assumption of the underwriting risk. The Company generally
required that it be given complete managerial control over the fund's or pool's
operations, and that it be entitled to share in cost savings it generated in
addition to its base fees. As of March 31, 1998 (immediately prior to the sale
to Zenith), the Company provided these services to four entities (representing
approximately 3,000 employers) with standard premiums in force under management
of approximately $80 million. The largest contracts were with Governmental Risk
Insurance Trust, North Carolina Commerce Fund, and Third Coast Insurance
Company. Effective January 1, 1998, the Company entered into an agreement for
the sale of the Company's 50 percent interest in Third Coast Holding Company
("Third Coast"). Third Coast owned a 100 percent interest in Third Coast
Insurance Company. The Company no longer provides any workers' compensation
management services.

Workers' Compensation Managed Care Arrangements  ("WCMCAs")

           Effective January 1, 1997, Florida law mandated that workers'
compensation insurers provide all medical care through WCMCAs. Under these
arrangements, the Company was allowed to direct injured employees to a provider
network in which employees were required to participate or face possible denial
of medical cost coverage.

           The Company developed a provider network which covered the entire
state of Florida and included approximately 5,000 physicians and 650 hospital
and ancillary facilities as of March 31, 1998. The Company believed that its
ability to obtain discounted medical fees, manage utilization, and track medical
outcomes for providers that participated in its network enhanced its ability to
manage claims. This provider network was assumed by Zenith on April 1, 1998.

SALES

           Prior to the sale to Zenith, the Company's workers' compensation
products and services were sold by independent insurance agencies. As of March
31, 1998, the Company had appointed approximately 800 agencies in four states
which sold its products, of which approximately 400 were in Florida. These
independent agencies were viewed by the Company as important to its success. As
a result of the Asset Sale, the Company no longer maintains relationships with
any agencies.

CUSTOMERS

           The Company insured over 18,000 policyholders as of March 31, 1998.
The Company generally requested that its agencies target customers that complied
with a return-to-work program, maintained a drug-free workplace, were proactive
in seeking to minimize injuries in the workplace,



                                       4
<PAGE>   7


and were financially sound or, for certain types of policies, were willing to
provide adequate security. The Company did not target any particular industry
and believes that its policies were issued to a diversified mix of employers.
However, the Company generally did not insure certain employers which it
considered to be high risk, including nuclear facilities operators, asbestos
removers, and certain other high-risk employers. The Company no longer has any
customers.

EMPLOYEES

           Since April 1, 1998, the Company has had no employees or insurance
operations and has provided no services to self insurance funds or other
insurance related entities. Those services normally provided by employees are
currently being outsourced. The Company had approximately 580 full-time
employees at March 31, 1998. Of the Company's employees, approximately 435
provided services to the Company's customers and 145 worked in the Company's
administrative and financial functions. The Company's employees were not subject
to collective bargaining agreements. The Company believed that its employee
relations and staffing were satisfactory to meet its former operating levels.

REINSURANCE

           In connection with the sale to Zenith, the Company entered into an
assumption and indemnity reinsurance agreement with Zenith effective April 1,
1998. Under the terms of that agreement, the Company ceded to Zenith 100 percent
of its outstanding loss reserves (including incurred but not reported losses)
and 100 percent of its unearned premiums as of April 1, 1998. Zenith issued
assumption certificates to all the Company's former policyholders.

           Pursuant to the terms of the Asset Purchase Agreement, Zenith agreed
to assume all of the Company's obligations under its then current and prior
insurance and reinsurance contracts. The terms of the Asset Purchase Agreement,
including the assumption and indemnity reinsurance agreement, were approved by
the Florida and Missouri Insurance Departments on March 31, 1998 and April 1,
1998, respectively.

           As more fully explained in Note 1(b) of the accompanying consolidated
financial statements, the Company transferred its reinsurance assets and
liabilities in their entirety to Zenith on April 1, 1998. Prior to the sale to
Zenith, the Company shared the risks and benefits of the workers' compensation
insurance that it wrote with other insurance and reinsurance companies through
various reinsurance agreements. For a further discussion of reinsurance, see
Note 8 to the accompanying consolidated financial statements included herein.

           To the extent that the reinsurers, including Zenith, are unable to
meet their contractual obligations, the Company may be contingently liable for
any losses and loss adjustment expenses ceded. Any such failure on the part of
the Company's reinsurers could have a material adverse effect on the Company's
financial condition.



                                       5
<PAGE>   8


A.M. BEST RATINGS OF INSURANCE SUBSIDIARIES

           Due to the discontinuation of the Company's insurance operations,
RISCORP's insurance subsidiaries are no longer rated by A.M. Best, an insurance
rating organization, or any other rating organization.

           Prior to the sale to Zenith, the Company's limited operating history,
pending litigation, and other factors affected the ability of the insurance
companies to obtain favorable A.M. Best and comparable ratings. A.M. Best
ratings are based on, among other things, a comparative analysis of the
financial condition and operating performance of insurance companies as
determined by their publicly available reports and meetings with the entities'
officers. A.M. Best ratings are weighted towards factors of concern to
policyholders and are not weighed toward the protection of investors. In
assigning ratings, companies may fall within one of three A.M. Best rating
groupings: Best's Ratings, Best's Financial Performance Ratings, or Not Rated
("NR"). The NR category identifies the primary reason a rating opinion was not
assigned.

           At December 31, 1998, RISCORP's three insurance subsidiaries, RISCORP
Insurance Company ("RIC"), RISCORP Property & Casualty Insurance Company
("RPC"), and RISCORP National Insurance Company ("RNIC"), were each assigned a
Best's classification of NR-3 (Rating Procedure Inapplicable). An NR-3
classification is assigned to companies that are not rated by A.M. Best because
the A.M. Best normal rating procedures do not apply due to a company's unique or
unusual business features.

COMPETITION

           Since April 1, 1998, the Company has not provided any insurance
products or services. However, prior to ceasing its insurance operations, the
Company competed in a highly competitive market. The Company's competitors
included, among others, insurance companies, specialized provider groups,
in-house benefits administrators, state insurance pools, and other significant
providers of health care and insurance services. A number of the Company's
former competitors were significantly larger, had greater financial and
operating resources than the Company, and could offer their services nationwide.
After a period of absence from the market, traditional national insurance
companies re-entered the Florida workers' compensation insurance market, which
re-entry increased competition in the Company's principal market segment. In
addition, the Company faced significant competition in its newer markets,
particularly North Carolina and Alabama. The Company did not offer the full line
of insurance products which were offered by some of its competitors.



                                       6
<PAGE>   9


REGULATION

General

           The Company's business was subject to state-by-state regulation of
workers' compensation insurance (which in some instances included rate
regulation and mandatory fee schedules) and workers' compensation insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the 50 states and by certain
federal laws. In addition, many states limit the maximum amount of dividends,
distributions, and loans that may be made in any year by insurance companies.
The Company did not make any shareholder dividends or distributions during 1998.

           The Company may from time to time need additional surplus to meet
certain state regulatory requirements. There can be no assurance that capital
will continue to be available when needed or, if available, will be on terms
acceptable to the Company.

           In accordance with the terms of the Asset Purchase Agreement, RISCORP
entered into a non-compete agreement with Zenith and, pursuant thereto, its
insurance subsidiaries cannot re-enter the insurance business for a period of
three years from April 1, 1998. In addition, in connection with the approval of
the sale to Zenith, RISCORP voluntarily consented to a request from the Florida
Insurance Department to discontinue writing any new or renewal insurance
business for an indefinite period of time.

           Based on the inability of the Company to write any new or renewal
insurance business for an indefinite period of time, the impact of the
non-compete on the marketability of RISCORP's insurance subsidiaries, and the
future need for operating capital, RISCORP is presently considering the
surrender of the Certificates of Authority ("COAs") of its insurance
subsidiaries. If RISCORP surrenders the COAs of its insurance subsidiaries, it
would be able to dividend funds from the insurance subsidiaries to RISCORP
without regulatory approval.

Premium Rate Restrictions

           State regulations governing the workers' compensation system and
insurance business in general imposed restrictions and limitations on the
Company's business operations. Among other matters, state laws regulate not only
the kind of workers' compensation benefits that must be paid to injured workers,
but also the premium rates that may be charged to insure employers for those
liabilities. As a consequence, the Company's ability to pay insured workers'
compensation claims out of the premium revenue generated from the sale of such
insurance was dependent on the level of premium rates permitted by state laws.
In this regard, it is significant that, in certain instances applicable to the
Company, the state regulatory agency that regulated workers' compensation
benefits was not the same agency that regulated workers' compensation insurance
premium rates and, in certain circumstances, such agencies' regulations were
incompatible.



                                       7
<PAGE>   10


Financial and Investment Restrictions

           Insurance company operations are subject to financial restrictions
that are not imposed on most other businesses. State laws require insurance
companies to maintain minimum capital and surplus levels and place limits on the
amount of insurance premiums a company may write based on the amount of the
company's surplus. These limitations restricted the rate at which the Company's
insurance operations could grow. The Company's 1998 statutory filings indicated
that, as of December 31, 1998, its insurance subsidiaries met applicable state
minimum capital and surplus requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

           State laws also require insurance companies to establish reserves for
the payment of policyholder liabilities and impose restrictions on the type of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its insurance subsidiaries' assets more conservatively
than if those companies were not subject to the state law restrictions which may
prevent the Company from obtaining as high a return on these assets than it
might otherwise be able to realize.

Participation in State Guaranty Funds

           Every state in which the Company operated has established one or more
insurance guaranty funds or associations that are charged by state law to pay
claims of policyholders insured by companies that become insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims of insolvent insurers. This
type of guaranty fund is separate from the Florida Special Disability Trust Fund
("SDTF") which is designed to pay insurers for certain benefits paid to
previously injured Florida workers. Pursuant to the terms of the Asset Purchase
Agreement, Zenith assumed all liabilities and obligations with respect to
guaranty fund assessments and similar charges attributable to the Company's
former insurance operations.

Statutory Accounting and Solvency Regulation

           State regulation of insurance company financial transactions and
financial condition are based on statutory accounting principles ("SAP"). SAP
differs in a number of ways from generally accepted accounting principles
("GAAP") which govern the financial reporting of most other businesses. In
general, SAP financial statements are more conservative than GAAP financial
statements, often resulting in lower asset values and higher liability values.

           State insurance regulators closely monitor the SAP-basis financial
condition of insurance companies and can impose financial and operating
restrictions on an insurance company, including: 1) transfer or disposition of
assets; 2) withdrawal of funds from bank accounts; 3) extension of credit or
making loans; and 4) investment of funds.



                                       8
<PAGE>   11


         At December 31, 1998 and 1997, each of RISCORP's insurance subsidiaries
maintained statutory capital and surplus that met the minimum capital and
surplus requirements in each state in which the individual company was licensed.

           The National Association of Insurance Commissioners has adopted
risk-based capital standards to determine the capital requirements of an
insurance carrier based upon the risks inherent in its operations. The
standards, which have not yet been adopted in Florida, require the computation
of a risk-based capital amount which is then compared to a carrier's actual
total adjusted capital. The computation involves applying factors to various
financial data to address four primary risks: asset risk, insurance underwriting
risk, credit risk, and off-balance sheet risk. These standards provide for
regulatory intervention when the percentage of total adjusted capital to
authorized control level risk-based capital is below certain levels. At December
31, 1998 and 1997, RISCORP's insurance subsidiaries' statutory surplus was in
excess of any risk-based capital action level requirements.

           The Florida Insurance Department completed an examination of the
statutory books and records of RIC and RPC as of December 31, 1996 and issued
final reports on the examinations in October 1998. There were no adjustments to
the capital and surplus of RPC and $3.5 million of adjustments which reduced the
capital and surplus of RIC. The most significant examination adjustment to the
capital and surplus of RIC was the non-admission by the examiners of $2.2
million of investments that were held by a bank outside of Florida. The
remaining $1.3 million of adjustments related primarily to certain related party
receivables that were either collected or charged to expense in 1997. These
statutory adjustments had no material impact on the accompanying GAAP-based
financial statements.

           On October 9, 1997, the Missouri Insurance Department completed an
examination of RNIC's books and records as of December 31, 1996, and issued a
final report on the 1996 examination in January 1998. The statutory capital and
surplus as of December 31, 1996 determined by the examiners was $1.7 million
less than that reported by RNIC in its 1996 statutory financial statements. One
of the examination adjustments was the non-admission of a $0.9 million accounts
receivable balance relating to the loss portfolio transfer from the Occupational
Safety Association of Alabama ("OSAA"), an Alabama self-insured workers'
compensation fund. This balance was paid in full by OSAA. The remaining $0.8
million of adjustments pertained to items that were either collected or charged
to expense during 1997. These examination adjustments related only to the
statutory financial statements and had no impact on the accompanying GAAP-based
financial statements.



                                       9
<PAGE>   12


LOSSES AND LOSS ADJUSTMENT EXPENSES

           On April 1, 1998, the Company's net liabilities for losses and loss
adjustment expense were transferred to Zenith; accordingly, at December 31,
1998, no liability for losses and loss adjustment expense was necessary.

           Prior to the sale to Zenith, the Company established its estimated
liability for losses and loss adjustment expenses based on facts then known,
estimates of future claims trends, experience with similar cases, and historical
Company and industry trends. These trends included loss payment and reporting
patterns, claim closures, and product mix.

           The following table presents an analysis of losses and loss
adjustment expenses and provides a reconciliation of beginning and ending
reserves for 1998, 1997, and 1996.

<TABLE>
<CAPTION>
                                                                          1998           1997           1996
                                                                        --------      ---------       --------
                                                                                    (in thousands)
<S>                                                                     <C>           <C>            <C>
Gross reserves for losses and loss adjustment
  expenses, beginning of year                                           $437,038      $458,239       $261,700
Less reinsurance recoverables                                            184,251       180,698        100,675
Less SDTF recoverable                                                     45,211        49,505         51,836
Less prepaid managed care fees                                             8,420        31,958         16,369
                                                                        --------      --------       --------
Net balance at January 1                                                 199,156       196,078         92,820
                                                                        --------      --------       --------

Assumed during year from loss portfolio transfers and acquisitions            --            --         88,212
                                                                        --------      --------       --------

Incurred losses and loss adjustment expenses related to:
  Current year                                                            14,860       125,764        123,986
  Prior years                                                             11,717        (2,401)         3,023
                                                                        --------      --------       --------
    Total incurred losses and loss adjustment expenses                    26,577       123,363        127,009
                                                                        --------      --------       --------

Losses and loss adjustment expenses paid related to:
  Current year                                                             1,717        45,646         56,088
  Prior years                                                             26,760        74,639         55,875
                                                                        --------      --------       --------
    Total losses and loss adjustment expenses paid                        28,477       120,285        111,963
                                                                        --------      --------       --------
Net balance at December 31                                               197,256       199,156        196,078

Plus reinsurance recoverables                                            214,302       184,251        180,698
Plus SDTF recoverables                                                    44,552        45,211         49,505
Plus prepaid managed care fees                                             6,182         8,420         31,958
                                                                        --------      --------       --------
                                                                         462,292       437,038        458,239

Less reserves for losses and loss adjustment
  expenses transferred to Zenith                                         462,292            --             --
                                                                        --------      --------       --------
Gross reserves for losses and loss adjustment
  expenses at December 31                                               $     --      $437,038       $458,239
                                                                        ========      ========       ========
</TABLE>



                                       10
<PAGE>   13



           The following table shows the development of losses and loss
adjustment expenses for 1988 through 1997. The development data for 1998 is not
available due to the transfer of the liabilities for losses and loss adjustment
expenses to Zenith on April 1, 1998. The top line of the table indicates the
estimated liabilities for unpaid losses and loss adjustment expenses as reported
at the end of the stated year. Each calendar year-end reserve includes estimated
unpaid liabilities for the current accident year and all prior accident years.
The cumulative amount paid portion of the table presents the amounts paid as of
subsequent years on those claims for which liabilities were carried as of each
specific year. The section captioned "Liability Re-estimated as of" shows the
original recorded liabilities as adjusted at the end of each subsequent year to
give effect to the cumulative amounts paid and all other facts and information
discovered during each year. For example, an adjustment made in 1996 for 1992
loss reserves will be reflected in the re-estimated ultimate liability for each
of the years 1992 through 1995. The cumulative redundancy (deficiency) line
represents the cumulative change in estimates since the initial liabilities were
established. It is equal to the difference between the initial reserve and the
latest liability re-estimated amount.

           The table below represents combined development for RIC, RPC, and
their predecessors through 1995. Calendar year 1996 estimates of ultimate
liabilities include reserves assumed with the purchase of RNIC and the
subsequent loss portfolio transfers of five self-insurance funds. Effective in
1996, the Company has separately reported unallocated loss adjustment expenses
previously included in general and administrative expenses. The cumulative paid
and re-estimated liability data in the following table have been restated for
all years to reflect this change. The table presents development data by
calendar year and does not relate the data to the year in which the accident
occurred.

<TABLE>
<CAPTION>
                                                                      AS OF DECEMBER 31
                             ----------------------------------------------------------------------------------------------------
                                                                        (In thousands)
                             1988    1989      1990       1991        1992       1993       1994         1995      1996      1997
                             ----    ----      ----       ----        ----       ----       ----         ----      ----      ----
<S>                        <C>     <C>       <C>       <C>         <C>         <C>        <C>          <C>       <C>       <C>
Loss and loss adjustment
  expenses, net            $  954  $11,273   $36,323   $ 68,674    $ 96,755    $152,406   $128,453     $92,820   $196,078  $199,156
Cumulative Amount Paid:
  One Year Later              355    8,927    19,335     32,241      47,572     122,603     95,229      55,875     74,639
  Two Years Later             902   14,922    34,010     55,794     116,193     164,840    127,395      77,823
  Three Years Later         1,185   19,675    44,551     91,441     134,193     172,699    141,803
  Four Years Later          1,595   22,587    59,651    100,307     137,782     177,603
  Five Years Later          1,665   26,943    62,775    102,468     140,671
  Six Years Later           1,801   27,870    63,620    103,936
  Seven Years Later         1,821   28,141    64,129
  Eight Years Later         1,662   28,563
  Nine Years Later          1,862

Liability Re-estimated as of:
  One Year Later            1,016   18,508    44,192     71,145     115,116     156,866    133,651      95,843    193,677
  Two Years Later           1,219   20,541    49,429     83,918     123,472     156,303    139,992      96,189
  Three Years Later         1,462   24,514    55,485     91,477     123,298     162,811    144,138
  Four Years Later          1,890   27,108    58,588     91,821     125,751     167,907
  Five Years Later          1,977   26,670    57,867     92,878     131,074
  Six Years Later           1,785   26,023    57,981     96,905
  Seven Years Later         1,734   26,067    59,986
  Eight Years Later         1,567   26,814
  Nine Years Later          1,763

Cumulative Redundancy
 (Deficiency)                (809) (15,541)  (23,663)   (28,231)    (34,319)    (15,501)   (15,685)     (3,369)     2,401
</TABLE>



                                       11
<PAGE>   14


            As the foregoing table indicates, the Company's reserving results in
its early years were adversely impacted by its short operating history and the
relative age of the accounts it insured. Additionally, the inclusion of
unallocated loss adjustment expenses in the table increased the cumulative
deficiency for all years. From 1992 through March 31, 1998, the Company believes
its reserving methodologies became more reliable. Key factors for this
improvement were: 1) the ability to identify trends and reduce volatility based
on a larger claims database; 2) the maturation of the Company's managed care
approach to claims; and 3) industry reforms.

RISK FACTORS

           In evaluating the Company, prospective investors should carefully
consider the following risk factors, in addition to the other information
contained in this Annual Report.

Cessation of Business Operations

           On April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith.
In connection with the Asset Sale, RISCORP ceased substantially all of its
former business operations, including its insurance operations, effective April
1, 1998. Accordingly, since such date, the operations of the Company have
consisted, and will continue to consist, primarily of the administration of the
day-to-day activities of the surviving corporate entities, compliance with the
provisions of the Asset Purchase Agreement, and the investment, protection, and
maximization of the remaining assets of the Company. At the present time, the
Company has no plans to resume any operating activities.

Control by a Single Shareholder

           The Company's equity consists of RISCORP's Class A and Class B Common
Stock, which vote together as a single class on all issues, except as otherwise
required by law. Mr. William D. Griffin owns beneficially 22,176,052 shares of
RISCORP's Class B Common Stock, each share of which has ten times the voting
power of a share of Class A Common Stock. As a result, Mr. Griffin controls
approximately 86 percent of the combined voting power of the Class A and Class B
Common Stock and controls the outcome of substantially all shareholder votes.

Uncertainties Relating to the Availability of Cash Proceeds for Distribution to
Shareholders

           On March 19, 1999, the Independent Expert delivered its determination
of the Final Business Balance Sheet and, as such, its conclusion that the book
value of the transferred assets exceeded the book value of the transferred
liabilities assumed by Zenith at closing by $92.3 million. Therefore, pursuant
to the terms of the Asset Purchase Agreement and given the $35 million
previously paid by Zenith at closing, Zenith is required to pay an additional
$57.3 million in immediately available funds on or before March 26, 1999, plus
interest thereon of 6.13 percent from April 1, 1998 through the final payment
date. Of this amount, $53.5 million, plus the interest component, is required to
be paid to RISCORP, and $3.8 million is required to be deposited into escrow to
secure the Company's indemnification obligations to Zenith.



                                       12
<PAGE>   15


           Of the cash proceeds to be received from Zenith in connection with
the Asset Purchase Agreement, approximately 85 percent have been, or will be,
used to (i) fund the working capital requirements of the Company, (ii) resolve
all claims and contingencies pending against RISCORP and its subsidiaries and to
fund all expenses associated therewith, (iii) fund all other liabilities not
transferred to Zenith, and (iv) satisfy any statutory reserve or capital
requirements to which RISCORP's regulated subsidiaries are subject following the
closing of the transaction with Zenith. Fifteen percent of the cash proceeds
received from Zenith is to be held in escrow until the second anniversary of the
Closing Date. Such escrowed funds are to be used to indemnify Zenith against
liabilities (other than those transferred) and any misrepresentation, breach, or
nonfulfillment of any agreement contemplated in the Asset Purchase Agreement.
After the two year anniversary of the Closing Date, if no indemnification claim
is pending, the funds remaining in escrow are to be paid to the Company with
accrued interest, and such amount, if any, is to be available for the purposes
set forth in items (i), (ii), (iii), and (iv) above.

           The Company anticipates that, after satisfaction of all claims and
contingencies pending against the Company and its subsidiaries and after funding
all expenses associated therewith, the remaining proceeds, if any, will be
distributed to those shareholders of record on a record date to be established
by RISCORP's Board of Directors in connection with any future dividends or
distributions. Such claims and contingencies include all litigation pending or
hereafter instituted against RISCORP, its subsidiaries, and their respective
officers, directors, and agents, including, without limitation, the litigation
with Zenith.

           While the Company believes that a portion of the proceeds will
ultimately be available for distribution to shareholders, it is currently
anticipated that the resolution of various contingent liabilities, including the
Company's indemnification obligations to Zenith, will take at least two years.
In addition, the Company is unable to predict when its litigation with Zenith
will be resolved and what effect such resolution will have on funds available to
shareholders. Pursuant to the terms of RISCORP's Amended and Restated Articles
of Incorporation, the holders of Class A Common Stock and Class B Common Stock
are entitled to participate in any dividends declared or paid by RISCORP or
distributions to the holders of common stock in connection with any liquidation,
dissolution, or winding up of the Company ratably on a per share basis.

           Any future distribution of closing proceeds will be at the discretion
of the Board of Directors and available only to RISCORP shareholders on a record
date to be established at a later time in connection with any such future
distribution. Shareholders that currently are record holders of Class A Common
Stock or Class B Common Stock who are not record holders at the time a record
date is established in connection with a future distribution will not be
entitled to participate in any such distribution of closing proceeds. The Board
of Directors intends to solicit additional shareholder approval prior to a final
distribution of closing proceeds. Although interim distributions or dividends to
shareholders do not require shareholder approval, a final distribution of
closing proceeds will require additional shareholder approval.



                                       13
<PAGE>   16


Personal Holding Company Income

           Following the consummation of the Asset Sale, the Company ceased
substantially all of its former business operations and invested a substantial
portion of its remaining assets in interest bearing obligations pending the
resolution of various outstanding claims and other contingencies. Under the
Internal Revenue Code of 1986, as amended (the "Code"), corporations that have
60 percent or more of their income from various passive sources, including
dividends and interest, and that have 50 percent or more of their outstanding
stock held by five or fewer individuals, are subject to a tax of 39.6 percent on
their undistributed personal holding company income, as defined in the Code, in
addition to their regular income tax. Because the Company has ceased to have
active business income, but will not be able to liquidate or make other
distributions promptly, it is anticipated that in one or more post-1998 tax
years the Company will be considered to be a personal holding company and will
either be subject to the personal holding company tax in addition to the regular
income tax or will be required to distribute an amount equal to the taxable
income earned by the Company, net of certain expenses and with certain other
adjustments, as regular dividends taxable as ordinary income to shareholders to
avoid the imposition of such a tax. In an effort to avoid unfavorable tax
treatment, the Company, pending resolution of claims or contingencies, may
invest in obligations the interest of which is excluded from gross income for
federal income tax purposes. The Company's failure to make such investments or
in the alternative to make distributions of net investment income, if any, could
have a material adverse affect on the amount distributable to shareholders.

Investment Company Act Considerations

           While the Company does not intend to conduct its affairs in a manner
which would require registration as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), a determination
that it is an investment company subject to registration could materially
increase its administrative costs and regulatory requirements.

           The Investment Company Act places restrictions on the capital
structure, business activities, and corporate transactions of companies
registered thereunder. Generally, a company is deemed to be an investment
company subject to registration if its holdings of "investment securities"
(generally, securities other than securities issued by majority controlled,
non-investment company subsidiaries, and government securities) exceed 40
percent of the value of its total assets exclusive of government securities and
cash items on an unconsolidated basis. Pursuant to a rule of the Securities and
Exchange Commission (the "Commission") under the Investment Company Act, a
company that otherwise would be deemed to be an investment company may be
excluded from such status for a one-year period provided that such company has a
bona fide intent to be engaged primarily, as soon as reasonably possible (and in
any event within that one-year period), in a business other than that of
investing, reinvesting, owning, holding, or trading in securities. If the
Company would otherwise be deemed to be an investment company under the
Investment Company Act, the Company intends to rely on such exemption while it
attempts to resolve all contingencies pending against the Company, and will not
register as an investment company under the Investment Company Act during the
one-year period following the closing of the Asset Sale.



                                       14
<PAGE>   17


           Registration by the Company under the Investment Company Act would
require the Company to comply with various reporting and other requirements
under the Investment Company Act, would subject the Company to certain
additional expense, and could limit the Company's options for future operations.

           Because the Company does not expect to have resolved all
contingencies pending against it within the one-year period referred to above,
the Company may be required either to (i) apply to the Commission for exemptive
relief from the requirements of the Investment Company Act or (ii) invest
certain of its assets in government securities and cash equivalents that are not
considered "investment securities" under the Investment Company Act. There can
be no assurance that the Company will be able to obtain exemptive relief from
the Commission. Alternatively, investments in government securities and cash
equivalents could yield a significantly lower rate of return than other
investments which the Company could make if it chose to register as an
investment company.

ITEM 2. PROPERTIES

           On April 1, 1998, the Company sold its headquarters building in
Sarasota, Florida to Zenith in accordance with the terms of the Asset Purchase
Agreement. The building contained 112,000 square feet of space, as well as an
adjacent parking facility. The Company currently leases an aggregate of 17,000
square feet of office space at four other locations in three states, including
Florida, under terms expiring through January 2001. The Company incurred rent
expense of $0.2 million for 1998. The Company has aggregate continuing lease
commitments through October 2000 of $0.2 million related to two locations in
which offices were closed during 1997.

ITEM 3. LEGAL PROCEEDINGS

         Zenith Litigation. On or about January 11, 1999, Zenith filed a lawsuit
against RISCORP and certain of its subsidiaries in federal court in New York
setting forth 14 separate causes of action arising out of the Asset Purchase
Agreement and certain ancillary agreements. The complaint seeks an unspecified
total amount of damages, but the amount of compensatory damages sought is in
excess of $30 million, together with an unspecified amount of punitive damages
and attorneys' fees. Zenith's claims include, among others, that the Company (i)
breached certain representations and warranties set forth in the Asset Purchase
Agreement, (ii) failed to transfer certain assets to Zenith, (iii) failed to
operate its business in the ordinary course, (iv) failed to reimburse Zenith for
certain payments, and (v) fraudulently induced Zenith to execute the Asset
Purchase Agreement due to certain alleged verbal representations made with
respect to RISCORP's Year 2000 compliance.

         On October 16, 1998, RISCORP and certain of its subsidiaries filed an
action against Zenith in federal court in Tampa, Florida alleging a breach of
the Asset Purchase Agreement. The Company amended its complaint in Florida on
January 25, 1999, and added ten additional claims arising out of Zenith's
failure to indemnify the Company for certain claims of third parties. The
Company also added two other claims, one for breach of contract and one for




                                       15
<PAGE>   18


conversion, related to Zenith's taking of $4.1 million the Company had on
deposit with the South Carolina Insurance Department.

         The Company intends to vigorously defend those claims asserted by
Zenith and to vigorously prosecute the Company's claims; however, there can be
no assurance as to the ultimate outcome of this litigation.

         Securities Litigation. Between November 20, 1996 and January 31, 1997,
nine shareholder class-action lawsuits were filed against RISCORP and other
defendants in the United States District Court for the Middle District of
Florida. In March 1997, the court consolidated these lawsuits and appointed
co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants RISCORP,
three of its executive officers, one non-officer director, and three of the
underwriters for RISCORP's initial public offering. The plaintiffs in the
consolidated complaint purport to represent the class of shareholders who
purchased RISCORP's Class A Common Stock between February 28, 1996 and November
14, 1996. The consolidated complaint alleges that RISCORP's Registration
Statement and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and omissions, in
violation of Sections 11 and 15 of the Securities Act, Sections 10(b) and 20(a)
of the Exchange Act, and Rule 10b-5 promulgated thereunder. The consolidated
complaint seeks unspecified compensatory damages.

           In July 1998, the parties executed a stipulation and agreement of
settlement in which the Company agreed to pay $21 million in cash to a
settlement fund to settle this litigation. The Company has paid $0.5 million as
an advance to the settlement fund. The remainder of the settlement fund is to be
paid from the proceeds of the second payment due under the Asset Purchase
Agreement with Zenith. On July 29, 1998, the court issued a preliminary approval
order in which it certified the purported class for settlement purposes. The
court held a settlement fairness hearing on December 15, 1998. At that hearing,
the court announced its opinion that the settlement was fair and reasonable and
should be approved. The parties have executed several amendments to the
settlement agreement extending the deadline after which plaintiffs may terminate
the settlement agreement and resume litigation. Under the most recent amendment,
the Company has until March 24, 1999 in which to fully fund the settlement
agreement from the proceeds of the Zenith transaction. If the settlement fund is
not fully funded by that date, plaintiffs have the right to terminate the
settlement agreement pursuant to procedures specified in the agreement.

           The Company estimates that $8 million of insurance proceeds will be
available for contribution to the settlement amount, as well as related costs
and expenses. The Company recognized the $21 million proposed settlement and the
related insurance proceeds in the 1997 consolidated statement of operations.
Because the settlement agreement is contingent on the Company's receipt of an
additional payment from Zenith in connection with the Asset Sale, there can be
no assurance that this litigation will be ultimately settled on the terms
described herein.

           OSAA Litigation. On August 20, 1997, the OSAA Workers' Compensation
Fund (the "Fund") filed a breach of contract and fraud action against the
Company and others. The Fund



                                       16
<PAGE>   19


entered into a Loss Portfolio Transfer and Assumption Reinsurance Agreement
dated August 26, 1996 and effective September 1, 1996 with RNIC. Under the terms
of the agreement, RNIC assumed 100 percent of the outstanding loss reserves
(including incurred but not reported losses) as of September 1, 1996.
Co-defendant Mr. Peter D. Norman ("Norman") was a principal and officer of
Independent Association Administrators, Inc. ("IAA") prior to its acquisition by
RISCORP in September 1996. The complaint alleges that Norman and IAA breached
certain fiduciary duties owed to the Fund in connection with the subject
agreement and transfer. The complaint alleges that RISCORP has breached certain
provisions of the agreement and owes the Fund monies under the terms of the
agreement. The Fund claims, per a Loss Portfolio Evaluation dated February 26,
1998, that the Fund overpaid RNIC by $6 million in the subject transaction. The
court has granted RNIC's Motion to Compel Arbitration per the terms and
provisions of the agreement. RNIC has appealed the trial court's ruling which
prevents the American Arbitration Association from administering the arbitration
between RNIC and the Fund. The Alabama Supreme Court has stayed the current
arbitration. The dispute between the Fund and RNIC is expected to be resolved
through arbitration. The other defendants, including IAA, have appealed to the
Supreme Court of Alabama the trial court's denial of their motions to compel
arbitration. RNIC intends to vigorously defend the Fund's claim.

           Bristol Hotel Litigation. On March 13, 1998, RIC and RPC were added
as defendants in a purported class action filed in the United States District
Court for the Southern District of Florida, styled Bristol Hotel Management
Corporation, et. al., v. Aetna Casualty & Surety Company, a/k/a Aetna Group, et.
al. Case No. 97-2240-CIV-MORENO. The plaintiffs purport to bring this action on
behalf of themselves and a class consisting of all employers in the State of
Florida who purchased or renewed retrospectively rated or adjusted workers'
compensation policies in the voluntary market since 1985. The suit was
originally filed on July 17, 1997 against approximately 174 workers'
compensation insurers as defendants. The complaint was subsequently amended to
add the RISCORP defendants. The amended complaint named a total of approximately
161 insurer defendants. The suit claims that the defendant insurance companies
violated the Sherman Antitrust Act, the Racketeer Influenced and Corrupt
Organizations Act ("RICO"), and the Florida Antitrust Act, committed breach of
contract and civil conspiracy, and were unjustly enriched by unlawfully adding
improper and illegal charges and fees onto retrospectively rated premiums and
otherwise charging more for those policies than allowed by law. The suit seeks
compensatory and punitive damages, treble damages under the Antitrust and RICO
claims, and equitable relief. RIC and RPC moved to dismiss the amended complaint
and have also filed certain motions to dismiss the amended complaint filed by
various other defendants.

           On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants. On September 13, 1998, the plaintiffs filed
a Notice of Appeal. On February 9, 1999, the district court issued, sua sponte,
an Order of Reconsideration in which the court indicated its desire to vacate
the dismissal of the RICO claims and pendant state claims based on a recent
decision of the United States Supreme Court. Although the Plaintiffs have
indicated that they will seek to have the appeal terminated and the case
remanded to the district court, no formal motion has been filed with the Court
of Appeals. Management will continue to monitor the progress of the appeals
process as necessary and intends to defend the case vigorously if it is returned
to the district court for further proceedings.



                                       17
<PAGE>   20


           Employee Matters. In June 1997, the Company terminated a number of
employees in connection with a workforce reduction. As a result of the workforce
reduction, a number of former employees have initiated proceedings, including
arbitration, against the Company for certain severance benefits. The Company
intends to vigorously defend these suits; however, there can be no assurance
that it will prevail in these proceedings.

           The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light of legal
and other defenses available to the Company, contingent liabilities arising from
such threatened and pending litigation in the ordinary course are not presently
considered by management to be material.

           Other than as noted above, no provision had been made in the
accompanying consolidated financial statements for the foregoing matters at
December 31, 1998.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

           Following RISCORP's initial public offering on February 29, 1996, the
Company's Class A Common Stock ($.01 par value) was traded on the NASDAQ Stock
Market's National Market under the symbol "RISC." There is no public market for
RISCORP's Class B Common Stock. Due to RISCORP's inability to timely file its
Annual Report on Form 10-K for the year ended December 31, 1996 or its Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, RISCORP's Class A
Common Stock was delisted on July 2, 1997. Despite RISCORP's timely filing of
all periodic reports for all periods subsequent to the third quarter of 1997,
RISCORP's Class A Common Stock has remained delisted, and RISCORP has no
intention to seek readmission for listing on NASDAQ or any other national
securities exchange. Accordingly, since July 2, 1997, there has been no public
market for the RISCORP's Class A Common Stock.

           As of December 31, 1998, there were 376 record holders of Class A
Common Stock. The following table sets forth the high and low per share bid
prices for RISCORP's Class A Common Stock for each quarterly period, as reported
to RISCORP by a national brokerage firm. Such over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                         Per Share Bid Information for Class A Common Stock
---------------------------------------------------------------------------------------------------
                                 1998                                         1997
               ----------------------------------------       -------------------------------------
                 1st        2nd        3rd        4th           1st      2nd       3rd       4th
               Quarter    Quarter    Quarter    Quarter       Quarter   Quarter   Quarter   Quarter
               -------    -------    -------    -------       -------   -------   -------   -------
<S>            <C>        <C>        <C>        <C>            <C>      <C>       <C>       <C>
High            2 1/2       2 3/8     2 1/8     1 1/32         4 3/8     3 3/4     1 1/8    1 1/2
Low             25/32     1 31/32       7/8      23/32         1 7/8     15/16       3/8      5/8
</TABLE>

           No dividends have been declared or paid since RISCORP's initial
public offering and it is not anticipated that dividends will be paid in the
foreseeable future.



                                       18
<PAGE>   21


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31
                                     ------------------------------------------------------------
                                     1998         1997          1996          1995           1994
                                     ----         ----          ----          ----           ----
                                               (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                <C>          <C>           <C>           <C>           <C>
INCOME STATEMENT DATA:
Revenues:
 Premiums earned                   $25,819      $179,729      $173,557      $135,887      $  1,513
 Fees and other income               5,906        20,369        31,733        22,397        56,712
 Net realized gains                  4,280         1,546           105         1,016            --
 Net investment income               7,103        16,447        12,194         6,708         1,677
                                   -------      --------      --------      --------      --------
    Total revenues                  43,108       218,091       217,589       166,008        59,902
                                   -------      --------      --------      --------      --------
Expenses:
 Losses and loss
  adjustment expenses               24,016       104,052       114,093        82,532          (716)
 Unallocated loss
  adjustment expenses                2,561        19,311        12,916        10,133         8,804
 Commissions and general and
  administrative expenses           34,191        70,800        65,685        48,244        35,869
 Interest                              676         1,919         2,795         4,634         1,750
 Depreciation and amortization       2,736         7,423        11,500         1,683         1,330
                                   -------      --------      --------      --------      --------
    Total expenses                  64,180       203,505       206,989       147,226        47,037
                                   -------      --------      --------      --------      --------
</TABLE>


<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31
                                          -----------------------------------------------------------------
                                             1998           1997          1996          1995         1994
                                          ---------       --------      --------      --------      -------
<S>                                       <C>             <C>           <C>           <C>           <C>
Income (loss) from operations               (21,072)        14,586        10,600        18,782       12,865
Loss on sale of net assets to Zenith        (47,747)            --            --            --           --
                                          ---------       --------      --------      --------      -------
Income (loss) before income taxes           (68,819)        14,586        10,600        18,782       12,865
Income taxes (1)                              2,056          7,300         8,202         5,099        5,992
                                          ---------       --------      --------      --------      -------
    Net income (loss)                     $ (70,875)      $  7,286      $  2,398      $ 13,683      $ 6,873
                                          =========       ========      ========      ========      =======
Net income (loss) per share (4)           $   (1.91)      $   0.20      $   0.07      $   0.49      $  0.24
                                          =========       ========      ========      ========      =======
Net income (loss) per share assuming
  dilution (4)                            $   (1.91)      $   0.20      $   0.07      $   0.45      $  0.23
                                          =========       ========      ========      ========      =======
Weighted average common
  shares outstanding                         37,012         36,892        34,648        28,100       28,100
                                          =========       ========      ========      ========      =======
Weighted average common
  shares and common share
  equivalents outstanding (2)(3)             37,012         37,116        36,406        30,093       30,093
                                          =========       ========      ========      ========      =======

BALANCE SHEET DATA (AT END OF YEAR):
Cash and investments                      $  37,686       $253,634      $281,963      $ 92,713      $47,037
Total assets                                123,393        749,650       828,442       443,242       93,908
Long-term debt                                   --         15,609        16,303        46,417       27,840
Shareholders' equity                         95,566        163,533       157,308        16,157        3,895
</TABLE>


(1)      Certain subsidiaries of RISCORP were S Corporations prior to the
         Reorganization [as referred to in Note 1(a) to the Company's
         consolidated financial statements] and were not subject to corporate
         income taxes.

(2)      The 1995 shares exclude 2,556,557 shares of Class A Common Stock
         reserved for issuance pursuant to the exercise of stock options
         outstanding as of December 31, 1995, having a weighted average exercise
         price of $3.96 per share.

(3)      The 1997 and 1996 shares include 790,336 and 225,503 shares,
         respectively, of Class A Common Stock pursuant to the contingency
         clauses in the acquisition agreement with IAA. See Notes 4 and 20 to
         the Company's consolidated financial statements.

(4)      The Company has adopted Statement of Financial Accounting Standards No.
         128, "Earnings Per Share". As required by that pronouncement, these
         amounts have, for all years presented, been recalculated in accordance
         with its provisions.



                                       19
<PAGE>   22


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

         As discussed more fully in Note 1(b) of the accompanying consolidated
financial statements, RISCORP and certain of its subsidiaries sold substantially
all of their assets and transferred certain liabilities to Zenith on April 1,
1998. In connection with this sale, RISCORP ceased substantially all of its
former business operations, including its insurance operations, effective April
1, 1998. Accordingly, after such date, the operations of the Company consisted
primarily of the administration of the day-to-day activities of the surviving
corporate entities, compliance with the provisions of the Asset Purchase
Agreement, and the investment, protection, and maximization of the remaining
assets of the Company.

        Since April 1, 1998, the Company has had no employees or insurance
operations, and has provided no services to self-insurance funds or other
insurance related entities. Because of the significant changes in the operating
activities of the Company after April 1, 1998, a comparison of the results of
operations for 1998 to 1997 and 1996 is meaningless. Therefore, the results of
operations for the nine months ended December 31, 1998 are explained separately
with no comparison to the comparable prior periods. The results of operations of
the Company prior to the April 1, 1998 sale to Zenith, compared to the
comparable period in 1997 and 1996 are included to comply with the requirements
of the Exchange Act and the rules and regulations of the Securities and Exchange
Commission; however, those results of operations are not indicative of the
operations of the Company since April 1, 1998 and are not indicative of any
future operations by the Company since no future operations are anticipated.

RESULTS OF OPERATIONS

APRIL 1, 1998 TO DECEMBER 31, 1998

         During the nine months ended December 31, 1998, the Company's primary
operating activities were the defense of the Proposed Business Balance Sheet,
the investment of the net $25 million initial payment received from Zenith on
April 2, 1998, the investment of other invested assets retained by the Company,
compliance with the provisions of the Asset Purchase Agreement, and the
administration of the day-to-day activities of the surviving corporate entities.
Compliance with the provisions of the Asset Purchase Agreement included the
transfer of all of the assets and liabilities, not retained by the Company, to
Zenith, and assisting with the orderly transition of the Company's insurance
operations to Zenith.

         At December 31, 1998, the Company had investments totaling $16 million,
of which $4.6 million consisted of securities to be transferred to Zenith. Those
securities were primarily regulatory deposits and securities held in trust in
connection with certain reinsurance agreements.

         The following comments pertain to the other balances on the December
31, 1998 balance sheet.



                                       20
<PAGE>   23


         -        Restricted cash and cash equivalents consisted primarily of
                  the $10 million initial purchase price payment which is being
                  held in escrow under the terms of the Asset Purchase
                  Agreement.

         -        The $49.9 million receivable from Zenith represents the
                  remaining purchase price to be received from Zenith in
                  connection with the Asset Sale. A more in-depth discussion of
                  the receivable amount can be found in Note 1(b) of the
                  accompanying financial statements.

         -        Deferred income taxes of $3.1 million consisted of federal and
                  state income taxes that are anticipated to be recovered in
                  future years. At this time, this asset is expected to be fully
                  recoverable.

         -        Other assets of $7.3 million consisted primarily of prepaid
                  insurance coverages of $4.1 million, retainers paid to certain
                  professionals and consultants of $1.1 million, and accrued
                  investment income of $2.1 million, of which $1.8 million
                  relates to interest receivable from Zenith.

         -        In March 1999, the Company collected $11.9 million of the
                  $17.3 million of recorded income taxes recoverable. The
                  remaining balance is expected to be received during 1999.

         -        Accounts receivable-other of $7.7 million consisted primarily
                  of a $2.3 million receivable which is expected to be realized
                  upon the redemption of the Company's outstanding stock and
                  $4.8 million of certain insurance recoverables which is
                  expected to be received when the accrued legal settlements
                  discussed herein are actually paid.

         -        Accrued expenses and other liabilities totaled $27.8 million
                  and consisted primarily of $20.5 million of an accrued legal
                  settlement, $2.5 million of accrued legal, accounting,
                  auditing, and actuarial expenses that primarily relate to the
                  defense of the Proposed Business Balance Sheet, $1.3 million
                  of trade accounts payable, $1 million of income taxes payable,
                  $0.6 million of unpaid restructuring cost relating to the June
                  1997 corporate restructuring, and $1 million of other accruals
                  and payables.

        The Company's operating results for the nine months ended December 31,
1998 resulted in a net loss of $61.6 million. The following comments pertain to
the Company's revenues and expenses for the nine months ended December 31, 1998:

         -        The $47.7 million loss on the sale to Zenith represents the
                  adjustment to the purchase price as determined by the
                  Independent Expert [see Note 1(b) of the accompanying
                  consolidated financial statements].

         -        Net realized gains were $2.8 million. The net realized gains
                  consisted primarily of gains on the sale of securities
                  transferred to Zenith in connection with the Asset Purchase
                  Agreement. For 1998, the net realized gains were $4.3 million,
                  of which $1.3



                                       21
<PAGE>   24


                  million was the gain on the sale of Third Coast recognized in
                  the first quarter of 1998, more fully discussed in Note 4 of
                  the accompanying consolidated financial statements.

         -        Net investment income was $3.8 million. Net investment income
                  consisted of $1.8 million of interest income on the $49.9
                  million receivable from Zenith, interest income of $0.4
                  million on the $10 million balance in escrow, and $1.6 million
                  of investment portfolio income.

         -        Operating expenses totaled $18.6 million. This amount included
                  three significant non-recurring expenses that relate to the
                  sale to Zenith. The first non-recurring expense totaled $3.4
                  million and consisted of severance payments to certain of the
                  Company's former executives and employees. The second expense
                  totaled $4.1 million and consisted of the issuance of RISCORP
                  stock to The Phoenix Management Company, Ltd. ("Phoenix") in
                  accordance with a Restricted Stock Award Agreement. The third
                  expense totaled $2.8 million and represented a payment for a
                  tax gross up related to the issuance of the restricted stock
                  award to Phoenix. The remaining $8.3 million of operating
                  expenses consisted of $2.8 million of accounting and auditing
                  expenses, $1.7 million of recurring operating expenses such as
                  rent, telephone, insurance, and similar costs, $1 million of
                  adjustments to the Proposed Business Balance Sheet (discussed
                  more fully in Note 1(b) of the accompanying consolidated
                  financial statements), $0.9 million of management expenses,
                  $0.3 million of transition expenses incurred as a result of
                  the sale to Zenith, and $1.6 million of other expenses.

         -        In September 1998, the Company received a reimbursement of
                  $1.2 million of legal fees incurred in 1997 and 1998 in
                  connection with payments made on behalf of certain former
                  officers and directors of the Company. This reimbursement was
                  included as a reduction in commissions and underwriting and
                  administrative expenses in the accompanying 1998 consolidated
                  statement of operations.

         -        Depreciation and amortization expense was $0.3 million. The
                  Company transferred all assets subject to amortization to
                  Zenith in connection with the sale and, based on discussions
                  with representatives of Zenith, retained $0.3 million of fixed
                  assets (consisting primarily of computer equipment) which is
                  being depreciated over three years.

         -        Interest expense was $0.7 million.

         Net investment income for 1998 was $7.1 million compared to $16.4
million in 1997, a net decrease of $9.3 million. The decline in investment
income was due to a decline in invested assets (including the receivable from
Zenith) of $157.6 million for 1998 compared to 1997. The decrease in invested
assets was primarily due to the sale to Zenith and the decline in written
premiums as discussed elsewhere herein.



                                       22
<PAGE>   25


PRIOR TO APRIL 1, 1998

           The discussion that follows relates to the operations and operating
philosophy of the Company's activities which existed prior to April 1, 1998 and
includes the results for the year ended December 31, 1998 compared to 1997 and
1996.

           Prior to 1996, the Company's at-risk operations were focused in
Florida. During 1996, RISCORP acquired RNIC and its 19 licenses and assumed
business from several self insurance funds outside of Florida which allowed
RISCORP to diversify its at-risk operations. A comparison of the Company's
direct written premiums for 1998, 1997, and 1996 (prior to reinsurance cessions
or assumptions) by state is presented below (in millions):

<TABLE>
<CAPTION>
                                           DIRECT PREMIUMS WRITTEN
                                       -------------------------------
                                       1998 (A)      1997         1996
                                       --------      ----         ----
         <S>                           <C>          <C>          <C>
         Florida                       $ 29.2       $180.8       $270.8

         Alabama                          4.1         39.1         21.7

         North Carolina                   4.4         32.2         41.4

         Other                            1.0         28.4         22.8
                                       ------       ------       ------
         Total                         $ 38.7       $280.5       $356.7
                                       ======       ======       ======
</TABLE>

         (a) 1st quarter 1998, prior to the sale to Zenith.

         Direct written premiums were reduced by specific reinsurance cessions
(1996), the 50 percent quota-share reinsurance agreement for the Company's
Florida workers' compensation business (1996), and the 65 percent quota-share
reinsurance agreement (effective October 1, 1996), with another reinsurer for
certain non-Florida business. The 65 percent quota-share reinsurance agreement
was reduced to 60 percent effective January 1, 1997 and was cancelled on a
run-off basis on December 31, 1997.

         The majority of the Company's premiums were written in Florida, a
regulated pricing state where premiums for guaranteed cost products were based
on state-approved rates. However, prior to the sale to Zenith, the Company also
offered policies which were subject to premium reductions as high deductible
plans, participating dividend plans, or other loss sensitive plans. Pricing for
these plans tended to be more competitively based, and the Company experienced
increased competition during 1997 and 1998 in pricing these plans. In addition,
in October 1996, the Florida Insurance Commissioner ordered workers'
compensation providers to reduce rates by an average of 11.2 percent for new and
renewal policies written on or after January 1, 1997. Concurrently, with the
premium reduction effective January 1, 1997, the 10 percent managed care credit
was phased out. This credit had been offered since 1994 to employers who met
certain criteria for participating in a qualified workers' compensation managed
care arrangement. In October 1997, Florida further reduced premium rates by 1.7
percent for new and renewal policies written on or after January 1, 1998. North
Carolina approved a 13.7 percent decrease in loss costs, effective April 1,
1997, that the Company adopted in October 1997, which resulted in an overall
effective rate reduction of 8.4 percent.

         The Company experienced increased pricing pressures during 1997. During
1997, the Company made the strategic decision to discontinue writing business
owners' protection, commercial multiple peril, and auto, and to focus on its
core workers' compensation business.



                                       23
<PAGE>   26


Net written premiums on these lines of business were less than $1 million during
1997 and were less than $0.5 million in 1996.

         In June 1997, the Company implemented a strategic plan to consolidate
several of its field offices and announced its intention to close all field
offices, except Charlotte, North Carolina, and Birmingham, Alabama, by the end
of 1997, and to cease writing new business in certain states, including
Oklahoma, Virginia, Missouri, Mississippi, Louisiana, and Kansas. The estimated
impact of the decision to discontinue writing business in those states was a
reduction of $16 million in direct premiums written.

         The Company attempted to lower claims costs by applying managed care
techniques and programs to workers' compensation claims, particularly by
providing prompt medical intervention, integrating claims management and
customer service, directing care of injured employees through a managed care
provider network, and availing itself of potential recoveries under subrogation
and other programs.

         Part of the Company's claims management philosophy was to seek
recoveries for claims which were reinsured or which could be subrogated or
submitted for reimbursement under various state recovery programs. As a result,
the Company's losses and loss adjustment expenses were offset by estimated
recoveries from reinsurers under specific excess-of-loss and quota-share
reinsurance agreements, subrogation from third parties, and state "second
disability" funds, including the Florida Special Disability Trust Fund ("SDTF").

         The following table shows direct, assumed, ceded, and net earned
premiums for 1998, 1997, and 1996 (in millions):

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31
                                          -------------------------------
                                          1998 (A)      1997         1996
                                          --------      ----         ----
         <S>                              <C>          <C>          <C>
         Direct premiums earned            $ 48.4      $328.2       $326.9

         Assumed premiums earned              0.1        18.8         11.7

         Premiums ceded to reinsurers       (22.7)     (167.3)      (165.0)
                                           ------      ------       ------
         Net premiums earned               $ 25.8      $179.7       $173.6
                                           ======      ======       ======
</TABLE>

         (a) 1st quarter 1998, prior to the sale to Zenith.

         The Company experienced a decrease in direct earned premiums in the
last six months of 1997 and the first quarter of 1998 primarily due to the
decrease in new and renewal premiums experienced by the Company in the second,
third, and fourth quarters of 1997. These premium declines resulted from, among
other things, the adverse publicity pertaining to the A.M. Best ratings of
RISCORP's insurance subsidiaries, RISCORP's inability to file its 1996 Form
10-K, 1997 Form 10-Qs, and 1996 audited statutory financial statements in a
timely manner, the delisting of RISCORP's stock by NASDAQ, and the failure by
Zenith to provide a cut through endorsement for the non-Florida business, as
requested by the Company.

         The $1.3 million net increase in the direct premiums earned for 1997
compared to 1996 was primarily the result of the following factors:

         -        The infusion of $68.9 million of capital into RISCORP's
                  insurance subsidiaries from RISCORP's initial public offering
                  ("IPO") proceeds allowed the insurance subsidiaries



                                       24
<PAGE>   27


                  to increase their premium writing capacity and, as a result,
                  the Company was able to increase premiums during the last nine
                  months of 1996 due to its expanded premium writing
                  capabilities. Written premiums were earned pro rata over the
                  policy periods (usually 12 months); therefore, increased
                  premiums written during the last nine months of 1996 had a
                  positive impact on earned premiums in 1996 and 1997.

         -        Written premiums increased in the third and fourth quarters of
                  1996 and the first quarter of 1997 from the assumption
                  reinsurance and loss portfolio agreements entered into by the
                  Company and from the acquisitions made by the Company during
                  1996.

         -        Enhanced marketing initiatives implemented by the Company
                  after the IPO to increase the number of policies and to write
                  accounts with larger premiums.

         In September 1995, the Company entered into a fronting agreement with
another insurer which enabled the Company to begin expansion into states where
the RISCORP insurance companies were not licensed. The fronting agreement was
cancelled effective December 31, 1997. The cancellation of the fronting
agreement and the sale to Zenith were the primary reasons that the assumed
premiums decreased to $0.1 million in 1998 from $18.8 million in 1997. The
increase in assumed premiums earned in 1997 from 1996 was primarily the result
of the Company recording $11.4 million of earned premiums from the National
Council on Compensation Insurance, Inc. pool participation. The assumed premiums
from the fronting agreement were $7.1 million and $11.7 million for 1997 and
1996, respectively. While the company assumed premiums from several insurers,
the fronting agreement generated the majority of the assumed premiums.

         For 1997 and 1996, the Company ceded 50 percent of its Florida premiums
under a quota-share reinsurance agreement and 60 percent of the business written
by RNIC under a separate quota-share agreement (65 percent during 1996) with
Chartwell Reinsurance Company ("Chartwell"). The Company terminated the
agreement with Chartwell at December 31, 1997; however, the reinsurer continues
to receive premiums and to be responsible for its portion of all losses incurred
on policies effective before the termination date. The decrease in ceded
premiums to $22.7 million in 1998 from $167.3 million in 1997 was due primarily
to the sale to Zenith and to the decrease in direct premiums earned discussed
above.

         Fee income for 1998 was $5.7 million compared to $20.4 million and
$31.7 million for 1997 and 1996, respectively. The decrease in fee income was
primarily due to sale of the insurance operations to Zenith. The decrease
between 1996 and 1997 was primarily due to the loss of service fees from the
conversion of the National Alliance for Risk Management ("NARM") self-insurance
funds of North Carolina and Virginia (which funds were previously managed by the
Company) to at-risk business via loss portfolio transfers and decreases in
RISCORP West Incorporated ("RWI") service fee income from the termination of
RWI's Mississippi and Louisiana service contracts. The decrease in fee income
was partially offset by new fees generated from the CompSource acquisition, the
fronting agreement, the new service agreement with Third Coast Insurance
Company, and growth in other existing fee products.



                                       25
<PAGE>   28


         Net investment income for 1998, 1997, and 1996 was $7.1 million, $16.4
million, and $12.2 million, respectively. Net investment income consists
entirely of earnings from the investment portfolio, excluding realized gains and
losses in 1997 and 1996. See the foregoing comments on the components of the
1998 investment income.

         The loss ratios for 1998, 1997, and 1996 were 93 percent, 58 percent,
and 67 percent, respectively. The increase in the 1998 loss ratio of 35 percent
was due primarily to adverse gross loss development during the first quarter of
1998 in the 1997 and prior accident years from certain business written in
Florida of $10.3 million, gross favorable loss development in Alabama and North
Carolina of $2.6 million, and gross adverse loss development of $0.3 million in
business written by RNIC and RPC in several smaller states. The decrease in the
loss ratio from 1996 to 1997 was due primarily to favorable development in
Florida (7 percent) and North Carolina (1 percent) and unfavorable development
in Alabama (1 percent) relating to the Company's 1996 and earlier accident
years' loss and loss adjustment reserves. The favorable development in the
Florida business was due primarily to the reduction in the loss and loss
adjustment expense reserves resulting from an actuarial analysis completed in
the fourth quarter of 1997 and the favorable development for the 1996 accident
year resulting primarily from favorable development of post-1993 Florida
accident years due to enhanced savings form the legislative changes that became
effective in 1994.

         Unallocated loss adjustment expenses for 1997 were $19.3 million
compared to $12.9 million for 1996, a net increase of $6.4 million. This
increase was primarily due to the increased premium volume, increased loss
reserves during 1997, and unfavorable loss development. The unallocated loss
adjustment expense ratio for 1998, 1997, and 1996 was 10 percent, 11 percent,
and 7 percent, respectively. The 4 percent increase in the 1996 to 1997 ratio
was primarily due to increased personnel and personnel related costs.

         Commissions and general and administrative expenses for 1998, 1997, and
1996 were $34.2 million, $70.8 million, and $65.7 million, respectively. The net
increase of $5.1 million from 1996 to 1997 is primarily the result of a $6.3
million increase in the amortization of deferred acquisition costs, a $2.1
million increase in personnel expenses primarily related to severance payments
incurred in connection with the June 1997 workforce reduction, a $5.9 million
increase in accounting, auditing, consulting, and legal expenses primarily
resulting from the Company's inability to file its 1996 financial statements in
a timely manner, a $2.8 million increase in postage, telephone, and insurance
expenses, a $13 million expense recognized in the fourth quarter of 1997 in
connection with the proposed settlement of the securities class action lawsuit,
a $5 million increase relating to expenses associated with the NCCI pool
participation, a $5.3 million increase in commissions paid to agents, and a $1.7
million reduction in ceding commission income. These expense increases were
offset by reductions in marketing related travel expenses of $1.5 million,
decreases in premium taxes of $8.5 million resulting from a decline in written
premiums, and a decline in bad debt expenses of $27 million. The Company had no
employees at the end of 1998 and approximately 580 at December 31, 1997.

         Interest expense for 1997 and 1996 was $1.9 million and $2.8 million,
respectively. The decrease was due to the repayment of $28.6 million of debt in
March 1996 using the proceeds from RISCORP's initial public offering.



                                       26
<PAGE>   29


           Depreciation and amortization expense for 1997 and 1996 were $7.4
million and $11.5 million, respectively.

LIQUIDITY AND CAPITAL RESOURCES

           The Company historically met its cash requirements and financed its
growth through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations were premiums and investment
income, and its cash requirements consisted primarily of payment of losses and
loss adjustment expenses, support of its operating activities, including various
reinsurance agreements and managed care programs and services, capital surplus
needs for its insurance subsidiaries, and other general and administrative
expenses. RISCORP and certain of its subsidiaries sold substantially all of
their assets and transferred certain liabilities to Zenith on April 1, 1998. In
connection with this sale to Zenith, the Company ceased substantially all of its
former business operations and, accordingly, after April 1, 1998, the Company's
primary source of cash flow has been generated from investment income. The
Company's future cash requirements are expected to be satisfied through
investment income and the liquidation of investments.

           Cash flow from operations for 1998, 1997, and 1996 was $(37.6)
million, $(22.9) million and $28.1 million, respectively. The decrease from 1997
to 1998 was due primarily to reductions in unearned premiums resulting from a
decrease in direct premiums written and increases in losses and loss adjustment
expenses, unallocated loss adjustment expenses, and commissions and underwriting
and administration expenses in relation to premiums earned during the first
quarter of 1998, and the expenses related to the sale to Zenith. These expenses
included severance payments to certain employees, the payment of accrued
employee benefits, and the payment of other expenses related to the sale. The
decrease from 1996 to 1997 was due primarily to reductions in unearned premiums,
and loss and loss adjustment expense reserves, resulting from a decrease in
direct premiums written of $76.2 million, as well as increases in commissions
and general and administrative expenses and unallocated loss adjustment expenses
of $4.8 million and $6.4 million, respectively.

           The Company has projected cash flows through December 1999 and
believes it has sufficient liquidity and capital resources to support its
operations. The liquidity of the Company could be materially adversely affected
if Zenith should prevail in the dispute resolution process with respect to the
determination of the final purchase price. Furthermore, the adverse resolution
of certain legal issues or any material delay in the Company's receipt of the
final payment of the ultimate purchase price determined to be payable by Zenith
could have a material adverse effect on the Company's liquidity. See "Sale to
Zenith," "Legal Proceedings," and "Recent Developments."

YEAR 2000

           The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing of date and date-sensitive
calculations by computers and other machinery as the Year 2000 is approached and
reached. These problems may arise from hardware and software unable to
distinguish dates in the "2000's" from dates in the "1900's" and



                                       27
<PAGE>   30


from other sources, such as the use of special codes and conventions that make
use of a date field.

           Effective April 1, 1998, RISCORP ceased substantially all of its
former business operations, including its core insurance and managerial services
operations. RISCORP's computer systems and proprietary computer software,
including the policy issue and management system and the claims systems, were
included in the assets sold to Zenith, pursuant to the Asset Purchase Agreement.

           Effective April 1, 1998, the Company entered into a computer
outsourcing agreement. Under the terms of that agreement, the vendor is to
provide the Company with computer configuration, software installation, network
configuration and maintenance, telecommunication coordination, computer
maintenance, and other computer-related services. The agreement is for a period
of 36 months.

           Due to the cessation of its operations, RISCORP does not believe it
has any material third-party relationships that present significant Year 2000
risks. The Company has requested confirmation from the financial institutions
with which it maintains accounts that such institutions are Year 2000 compliant.

           Based on its limited operations, the Company believes its most
reasonably likely worst case scenario Year 2000 problem would be a temporary
inability to access its accounts with financial institutions if such
institutions' systems are not Year 2000 compliant. Because the Company does not
expect that the Year 2000 will have a material adverse effect on the Company, it
has determined that it is unnecessary to develop a contingency plan.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The Company's consolidated financial statements, notes, and
supplementary schedules are set forth on pages F-2 to F-50 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

           There were no changes in, or disagreements with, accountants on
accounting or financial disclosure for the two years ended December 31, 1998.



                                       28
<PAGE>   31


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Directors and Executive Officers

           Set forth below is certain information as of December 31, 1998,
concerning the Company's executive officers, continuing directors, and nominees
for director.

<TABLE>
<CAPTION>
Name                                                Position
----                                                --------
<S>                                       <C>
Frederick M. Dawson                       Chief Executive Officer, President and Director
Edward W. Buttner IV                      Chief Accounting Officer
Walter E. Riehemann                       Chief Investment Officer, Treasurer and Secretary
Seddon Goode, Jr.                         Director
George E. Greene III                      Director
Walter L. Revell                          Director
</TABLE>

           Frederick M. Dawson, age 59, joined the Company in May 1997 as Chief
Executive Officer, and was elected to serve as President and as a director in
June 1997. Mr. Dawson holds a majority interest in The Phoenix Management
Company, Ltd. ("Phoenix"), a Florida limited partnership which provides
management services for the Company, and controls the operations of Phoenix as
president of its general partner. Prior to joining the Company, Mr. Dawson was
Chairman, President and Chief Executive Officer of Integon Life Insurance
Corporation from December 1994 to July 1995 and Harcourt General Insurance
Companies from August 1992 to December 1994. Mr. Dawson's previous experience
includes executive positions with Beneficial Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.

           Edward W. Buttner IV, age 45, has served as the Company's Chief
Accounting Officer since April 1, 1998, pursuant to the Accounting Outsourcing
Agreement. See "Certain Relationships and Related Transactions." Since 1997, Mr.
Buttner has practiced as a Certified Public Accountant in Jacksonville, Florida,
where is currently a principal of BHC, a public accounting firm. Prior to
founding BHC, Mr. Buttner was employed in various capacities with Ernst & Young
LLP from June 1, 1976, including as a partner from October 1, 1988 to April 3,
1992.

           Walter E. Riehemann, age 32, has served as Chief Investment Officer,
Treasurer and Secretary since April 2, 1998, pursuant to the Management
Agreement. See "Certain Relationships and Related Transactions." Prior to the
consummation of the Asset Sale, Mr. Riehemann served as Senior Vice President,
General Counsel and Secretary of the Company from October 1997. Mr. Riehemann
joined the Company as Associate General Counsel in August 1995 and was promoted
to Vice President, General Counsel and Secretary in June 1997. Prior to joining
the Company, Mr. Riehemann was associated with the law firms of Powell,
Goldstein, Frazer & Murphy, Atlanta, Georgia (1993 to 1995), Long, Aldridge &
Norman, Atlanta, Georgia (1993), and Jones, Day, Reaves & Pogue, Dallas, Texas
(1990 to 1993).



                                       29
<PAGE>   32


         Seddon Goode, Jr., age 66, served as a Director of the Company since
1996. Mr. Goode has served as President and Director of University Research
Park, Inc. since 1981. From 1977 to 1984, Mr. Goode served as Chairman of First
Charlotte Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice
President, Chief Financial Officer and Director of Interstate Securities
Corporation. Mr. Goode is also a director of Trion, Inc. and is a director and
chairman of Canal Industries, Inc.

         George E. Greene III, age 63, served as a Director of the Company since
1995. Mr. Greene has been a private consultant since 1994. Mr. Greene served in
various management positions with Florida Power Corporation, and other
subsidiaries of Florida Progress Corporation from 1962 to 1993. Mr. Greene
retired from Florida Power Corporation as a Senior Vice President on January 1,
1994.

         Walter L. Revell, age 63, served as a Director with the Company since
1995. Mr. Revell has been Chairman and Chief Executive Officer of H.J. Ross
Associates, Inc., a consulting, engineering, architectural and planning firm,
since 1991; Chairman and Chief Executive Officer of Revell Investments
International, Inc. since 1984 and was President and Chief Executive Officer of
Post, Buckley, Schuh & Jernigan, Inc., a consulting, engineering, architectural
and planning firm, from 1974 to 1983. Mr. Revell is also a director of St. Joe
Corporation and Dycom Industries, Inc.

Section 16(a) Compliance

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than ten percent of the Common Stock of the company, to file reports of
ownership and changes in ownership with the Commission. Officers, directors, and
ten percent shareholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) reports they file.

         Based solely on its review of the copies of such reports received by
it, and written representations from certain reporting persons that no
Commission Forms 3, 4, or 5 were required to be filed by those persons, the
Company believes that during 1998, its officers, directors and ten percent
beneficial owners timely complied with all applicable filing requirements, with
the exception of (i) Mr. Buttner, the Company's Chief Accounting Officer, who
filed, subsequent to the due date, a Form 3 indicating that he owns no shares of
Common Stock, and (ii) Phoenix, which filed as a joint filer with Dawson
Managers, Inc., its general partner, subsequent to the due date, a Form 3
reporting their ownership of 1,725,000 shares of Class A Common Stock.

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth certain summary information concerning
compensation paid by the Company to the Company's Chief Executive Officer during
1998. The Company had no executive officers as of December 31, 1998, and none of
the Company's other executive officers during 1998 earned more than $100,000 in
salary and bonus during 1998.



                                       30
<PAGE>   33


<TABLE>
<CAPTION>
                                                                                           Long-Term
                                                           Annual Compensation            Compensation
                                                       ---------------------------      ----------------
Name and                                                                                Restricted Stock           All Other
Principal Position                         Year        Salary ($)        Bonus ($)        Award(s) ($)          Compensation ($)
------------------                         ----        ----------        ---------      ----------------        ----------------
<S>                                        <C>        <C>                <C>            <C>                     <C>
Frederick M. Dawson                        1998       $112,500(1)               --         1,725,000(2)          $1,050,000(3)
Chief Executive Officer                    1997        279,808            $525,000                --                  8,334(4)
                                           1996            --                   --                --                     --
</TABLE>

(1)      Represents payments made to Mr. Dawson from January 1, 1998 to April 1,
         1998 pursuant to the terms of his employment agreement. As of the
         consummation of the Asset Sale, Mr. Dawson's employment agreement was
         terminated and Mr. Dawson received a severance payment which
         constituted all amounts remaining to be paid to Mr. Dawson under his
         employment agreement.
(2)      Represents a restricted stock award for 1,725,000 of Class A Common
         Stock (subject to certain vesting provisions) granted pursuant to the
         Management Agreement dated February 18, 1998 between the Company and
         Phoenix. Mr. Dawson owns a majority interest in Phoenix and controls
         its operations as President of its general partner.
(3)      Represents a severance payment paid to Mr. Dawson on April 2, 1998,
         which constituted all amounts remaining to be paid to Mr. Dawson under
         his employment agreement. In connection with this lump sum payment, Mr.
         Dawson's employment agreement was terminated.
(4)      Represents $7,397 for temporary housing and $937 in group term life
         insurance premiums.

Compensation of Directors

           For the period prior to April 1, 1998, directors who were not
employees of the Company were paid $40,000 annually plus $1,000 for each board
meeting attended and $1,000 for each day of committee meetings attended if such
meeting occurred on a day other than that of a scheduled meeting of the Board of
Directors. Effective April 1, 1998, directors who are not officers of the
Company were paid $60,000 annually plus $1,500 for each Board meeting attended,
and $1,500 for each day of committee meetings attended if such meeting day
occurred on a day other than that of a scheduled meeting of the Board of
Directors. All directors receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board of Directors. No
director who was an employee or officer of the Company received separate
compensation for services rendered as a director.

Employment Agreement and Severance Agreements

           As a result of the Asset Sale, a change of control of the Company
occurred (as defined in Mr. Dawson's employment agreement with the Company) and
on April 2, 1998, Mr. Dawson received a lump sum payment of $1,050,000, which
constituted all amounts remaining to be paid under his employment agreement. In
connection with this lump sum payment, Mr. Dawson's employment agreement was
terminated.

           At various times during the two years prior to the consummation of
the Asset Sale, RISCORP Management Services, Inc., a wholly owned subsidiary of
the Company ("RMS"), entered into employment agreements with certain of the
Company's management employees, including the following executive officers:
Steven J. Berling, Gregory Kuzma, Stephen C. Rece



                                       31
<PAGE>   34


and Walter E. Riehemann. Upon the consummation of the Asset Sale, Messrs. Kuzma
and Rece had the right to terminate their employment agreements with RMS and
receive termination benefits due to the material changes in the nature of their
duties and responsibilities in connection with their continued employment with
Zenith. The termination benefits for Messrs. Kuzma and Rece were three times
their base salary (using 1997 salary levels, the termination benefits were
$450,000 and $525,000, respectively). Each of the foregoing officers were also
entitled to receive outplacement services at RMS's expense for one year
following the termination of their employment. The RMS agreements between
Messrs. Berling and Kuzma were assumed by Zenith and each elected to become
employed by Zenith. Notwithstanding Mr. Berling's continued employment with
Zenith, Mr. Berling instituted a claim against the Company asserting his right
to receive severance benefits from the Company equal to three times his 1997
base salary of $225,000. The Company disputed Mr. Berling's right to receive any
additional compensation from the Company under the terms of his employment
agreement and the matter was submitted to binding arbitration for resolution of
the issues in dispute. On February 5, 1999 the arbitrator denied Mr. Berling's
claim in its entirety. In addition, Zenith has employed Messrs. Kuzma and Rece
at annual salaries of $150,000 and $175,000, respectively, plus bonuses and
benefits. Upon assuming the employment agreement of Mr. Kuzma, Zenith and RMS
agreed to share certain costs thereunder for a period of two years.
Specifically, RMS will fund 66.67% of the employer obligations under such
agreement and Zenith will fund 33.33% of such obligations. Mr. Kuzma is entitled
to receive a termination payment upon the termination of his employment with
Zenith of up to three times his base salary.

           In connection with the consummation of the Asset Sale, Mr.
Riehemann's employment with the Company was terminated and he received a lump
sum payment of $450,000 from the Company pursuant to the terms of his employment
agreement. Mr. Riehemann is also entitled to receive outplacement services at
RMS's expense for one year following the date of his termination. The Company
also paid Mr. Rece $350,000 in connection with the consummation of the Asset
Sale which was 66.67% of the severance benefit he was entitled to receive
pursuant to the terms of his employment agreement. Zenith agreed to assume the
balance of such severance obligation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The following table sets forth, as of May 31, 1999, information as to the
Company's Common Stock beneficially owned by: (i) each director of the of the
Company, (ii) each executive officer of the Company named in the Summary
Compensation Table, (iii) all directors and executive officers of the Company as
a group, and (iv) any person who is known by the Company to be the beneficial
owner of more than 5% of the outstanding shares of Class A Common Stock or Class
B Common Stock.



                                       32
<PAGE>   35


                 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)

<TABLE>
<CAPTION>
                                                 Class A Common                  Class B Common
                                                 --------------                  --------------
                                                                                                             Percent of
Name of Beneficial Owner                    Number            Percent       Number            Percent       Common Stock
------------------------                    ------            -------       ------            -------       ------------
<S>                                        <C>                <C>         <C>                 <C>           <C>
William D. Griffin(2)                             --             --       22,176,052           91.1%           57.5%
L. Scott Merritt(3)                               --             --        2,158,391            8.9             5.6
Blavin & Company,Inc.(4)                   1,982,000           13.9%              --             --             5.1
Chap-Cap Partners, L.P.(5)                   985,500            6.9               --             --             2.6
Seth Hamot(6)                                805,300            5.7               --             --             2.1
Thomas K. Albrecht(7)                        790,336            5.5               --             --             2.0
Peter D. Norman(8)                           790,336            5.5               --             --             2.0
Frederick M. Dawson(9)                     1,725,000           12.1               --             --             4.5
Seddon Goode, Jr                                  --             --               --             --              --
George E. Greene III                             200              *               --             --               *
Walter L. Revell                                  --             --               --             --              --
All directors and executive officers       1,725,200           12.1               --             --             4.5
    as a group
    (4 persons)(9)
</TABLE>

----------
*Less than 1%

(1)      Beneficial ownership of shares, as determined in accordance with
         applicable rules promulgated by the Securities and Exchange Commission
         (the "Commission") includes shares as to which a person has or shares
         voting power and/or investment power. The Company has been informed
         that all shares shown are held of record with sole voting and
         investment power, except as otherwise indicated.
(2)      Mr. Griffin's business address is 1830 Osprey Avenue, Suite 100A,
         Sarasota, Florida 34239. Mr. Griffin's shares of Class B Common Stock
         are owned of record by RISCORP Group Holding Company L.P. (17,268,841
         shares) and William D. Griffin Family Limited Partnership (4,907,211
         shares). The general partners of such limited partnerships are Gryphus
         Company I ("GI") and Gryphus Company II ("GII"), respectively. Mr.
         Griffin is the president, a director and the controlling shareholder of
         GI and GII. The business address of GI and GII is Bank of America
         Plaza, Suite 1100, 300 N. Fourth Street, Las Vegas, Nevada 89101. All
         of the shares of Class B Common Stock noted may be converted into
         shares of Class A Common Stock, on a one for one basis. If all of the
         Class B Common Stock shares noted were so converted into Class A Common
         Stock, Mr. Griffin would beneficially own 60.9% of the shares of Class
         A Common Stock. On September 18, 1997, Mr. Griffin resigned as a
         director of the Company and all other positions with the Company and
         its subsidiaries. The information herein regarding the stock ownership
         of Mr. Griffin, GI and GII was obtained from a Schedule 13G filed by
         such persons with the Commission on February 20, 1997. The Company
         makes no representation as to the accuracy or completeness of the
         information reported regarding Mr. Griffin, GI and GII.
(3)      Mr. Merritt's business address is 4711 Meadowview Circle, Sarasota,
         Florida 34233. Mr. Merritt has sole voting and investment power with
         respect to 2,158,391 shares of Class B Common Stock as trustee of
         certain irrevocable trusts created by Mr. Griffin for the benefit of
         his children. Mr. Griffin disclaims beneficial ownership of those
         shares. All of the shares of Class B Common Stock noted may be
         converted into shares of Class A Common Stock, on a one for one basis.
         If all of the Class B Common Stock shares noted were so converted into
         Class A Common Stock, Mr. Merritt would have sole voting and investment
         power with respect to 15.5% of the shares of Class A Common Stock. The
         information herein regarding the stock ownership of Mr. Merritt was
         obtained from a Schedule 13G filed by Mr. Merritt with the Commission
         on February 20, 1997. The Company makes no representation as to the
         accuracy or completeness of the information reported regarding Mr.
         Merritt.



                                       33
<PAGE>   36


(4)      The business address of Blavin & Company, Inc. is 29621 Northwestern
         Highway, Southfield, Michigan 48034. The information herein regarding
         the stock ownership of Blavin & Company, Inc. was obtained from a
         Schedule 13D filed by Blavin & Company, Inc. on March 27, 1998, and as
         amended on April 9, 1998, July 29, 1998, April 1, 1999 and May 7, 1999.
         The Company makes no representation as to the accuracy or completeness
         of the information reported regarding Blavin & Company, Inc.
(5)      Chap-Cap Partners, L.P. shares voting, dispositive power and beneficial
         ownership with respect to 985,500 shares of Class A Common Stock with
         Chapman Capital L.L.C. and Robert L. Chapman, Jr. The business address
         of Chap-Cap Partners, L.P., Chapman Capital , L.L.C. and Mr. Chapman is
         725 South Figueroa Street, 23rd Floor, Suite 2369, Los Angeles,
         California 90017. The information herein regarding the stock ownership
         of Chap-Cap Partners, L.P. was obtained from a Schedule 13D filed by
         Chap-Cap Partners, L.P. on March 23, 1999 and as amended on May 11,
         1999. The Company makes no representation as to the accuracy or
         completeness of the information reported regarding Chap-Cap Partners,
         L.P., Chapman Capital, L.L.C. and Mr. Chapman.
(6)      Mr. Hamot has sole voting and investment power with respect to 800,300
         shares of Class A Common Stock and shared voting and investment power
         with respect to 5,000 shares of Class A Common Stock. Of the 805,300
         shares beneficially owned by Mr. Hamot, 756,300 shares are owned of
         record by Costa Brava Partnership II Limited Partnership ("CBII") and
         5,000 shares are owned by Seth W. Hamot, as custodian for Gideon B.
         Hamot under the Massachusetts Uniform Transfers to Minors Act ("GBH").
         The general partner of CBII is Roark, Reardon & Hamot, Inc. ("RRH").
         Mr. Hamot is a principal of RRH. The business address of Mr. Hamot,
         CBII and RRH is 121-B Tremont Street, Brighton, Massachusetts 02155.
         The information herein regarding the stock ownership of Mr. Hamot, GBH,
         CBII and RRH was obtained from a Schedule 13D filed by such persons
         with the Commission on September 29, 1998, and as amended on April 21,
         1999. Such Schedule 13D also disclosed ownership by certain other
         individuals and entities who jointly filed such Schedule 13D with Mr.
         Hamot, GBH, CBII, and RRH of an aggregate of 213,000 shares of Class A
         Common Stock (or approximately 1.5% of the Class A shares outstanding),
         which shares are in addition to those disclosed as beneficially owned
         by Mr. Hamot. The Company makes no representations as to the accuracy
         or completeness of the information reported regarding Mr. Hamot, GBH,
         CBII, RRH or the other individuals and entities identified as joint
         filers in such Schedule 13D.
(7)      Mr. Albrecht's business address is 4137 Carmichael Road, Suite 330,
         Montgomery, Alabama 36106. Represents shares issued to Mr. Albrecht by
         the Company in connection with the settlement of claims made by Mr.
         Albrecht against the Company.
(8)      Mr. Norman's business address is 4137 Carmichael Road, Suite 330,
         Montgomery, Alabama 36106. Represents shares issued to Mr. Norman by
         the Company in connection with the settlement of claims made by Mr.
         Norman against the Company.
(9)      Includes 1,054,167 shares of restricted stock granted to Phoenix over
         which Mr. Dawson has voting power, and 670,833 shares granted to
         Phoenix that have vested or will vest within 60 days of the date hereof
         and over which Mr. Dawson has voting and investment power.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company entered into a Management Agreement (the "Management
Agreement") as of February 18, 1998, with Phoenix for the provision of various
management services to the Company immediately following the consummation of the
Asset Sale. Mr. Dawson owns a majority interest in Phoenix, a Florida limited
partnership, and controls its operations as president of the general partner.
Walter E. Riehemann owns a minority interest in Phoenix and serves as vice
president and secretary of the general partner. While neither Mr. Dawson nor Mr.
Riehemann continue as employees of the Company following the consummation of the
Asset Sale, the Management Agreement specifically provides that Mr. Dawson will
hold the titles of President and Chief Executive Officer of the Company and Mr.
Riehemann will hold the titles of Chief Investment Officer, Treasurer and
Secretary of the Company.



                                       34
<PAGE>   37


           Pursuant to the terms of the Management Agreement, Phoenix is paid
$100,000 per month, plus expenses, and was granted a restricted stock award for
1,725,000 shares of Class A Common Stock (subject to certain vesting provisions)
in consideration for its management services. The Management Agreement has an
initial term of three years commencing immediately following the consummation of
the Asset Sale, and the Company has the right to extend the term for an
additional year. The Company paid Phoenix a retainer of $600,000 immediately
following the consummation of the Asset Sale which will be applied by Phoenix
against the fees payable by the Company during the final six months of the
initial term. The restricted stock grant will vest monthly over the initial term
of the Management Agreement, and Phoenix will be entitled to all rights
applicable to holders of shares of Class A Common Stock with respect to all such
shares from the date of grant including, without limitation, the right to
receive any dividends or distributions payable on the restricted stock. Pursuant
to the terms of the Management Agreement, the Company will pay Phoenix an amount
which, on an after-tax basis, is sufficient to reimburse the partners of the
Management Company for all taxes (exclusive of state taxes) incurred in
connection with the Section 83(b) election which was filed with respect to such
grant. It is currently anticipated that the amount of this payment will be
approximately $2,900,000, payable in installments as the taxes are due. In the
event the Management Agreement is terminated by the Company prior to the
expiration of its initial term due to (i) the complete liquidation, dissolution
and winding up of all of the business and affairs of the Company including,
without limitation, the final distribution to all shareholders of the Company,
or (ii) the final distribution to the holders of the Class A Common Stock of the
Company, the vesting under the restricted stock grant will accelerate
immediately prior to such event and the Company will make a lump sum payment to
Phoenix equal to the unpaid balance of the amount it would have received in
monthly management fees during the initial term of the Management Agreement.

           Effective April 1, 1998, the Company entered into an Accounting
Outsourcing Agreement (the "Accounting Outsourcing Agreement") with Buttner
Hammock & Company, P.A. ("BHC"), pursuant to which BHC provides monthly
accounting, financial reporting, tax return preparation, and certain financial
and tax consulting services. Under the Accounting Outsourcing Agreement, Edward
Buttner has been designated as the Chief Accounting Officer for the Company and
each of its subsidiaries. The term of the Accounting Outsourcing Agreement is
thirty-six (36) months. In consideration for the services provided by BHC, the
Company is to pay BHC a monthly fee of approximately $100,000 during 1998, 1999,
and 2000, plus reasonable out-of-pocket costs. In addition, as defined in the
Accounting Outsourcing Agreement, BHC may also provide certain services to the
Company that are to be billed on an hourly rate basis. In connection with the
execution of the Accounting Outsourcing Agreement, the Company paid BHC a
retainer of $500,000 to be applied against the fees due for the final six months
of the initial term of the Accounting Outsourcing Agreement.



                                       35
<PAGE>   38


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


(a) List the following documents filed as part of this report:

    1.   Financial Statements.

<TABLE>
<S>        <C>                                                                                                              <C>
-          Independent Auditors' Report.....................................................................................F-1
-          Consolidated Balance Sheets at December 31, 1998 and 1997........................................................F-2
-           Consolidated Statements of Operations for the Years Ended December 31, 1998,
                1997, and 1996..............................................................................................F-4
-          Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
                December 31, 1998, 1997, and 1996...........................................................................F-5
-          Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
                1997, and 1996..............................................................................................F-6
-           Consolidated Statements of Comprehensive Income for the Years Ended
                December 31, 1998, 1997, and 1996...........................................................................F-8
-          Notes to Consolidated Financial Statements.......................................................................F-9
</TABLE>

    2.   Financial Statement Schedules

<TABLE>
<S>        <C>                                                                                                              <C>
-           I - Summary of investments - other than investments in related parties..........................................F-45
-          II - Condensed financial information of registrant...............................................................F-46
-          IV - Reinsurance.................................................................................................F-49
-          VI - Supplemental information concerning property-casualty insurance operations..................................F-50
</TABLE>

         All other schedules are omitted because of the absence of conditions
under which they are required or because the necessary information is provided
in the consolidated financial statements or notes thereto.

    3.   Exhibits

         Set forth in paragraph (c) below.

(b) Reports on Form 8-K

         None.

(c) Exhibits

         The following are filed as exhibits to this report:



                                       36
<PAGE>   39


<TABLE>
<CAPTION>
EXHIBIT #                DESCRIPTION
---------                -----------
<S>       <C>    <C>
3.1       -      Amended and Restated Articles of Incorporation.* (Incorporated
                 herein by reference to Exhibit 3.1 to RISCORP's Amendment No. 4
                 to Form S-1, as of February 28, 1996, Commission File Number
                 33-99760)
3.2       -      Bylaws.* (Incorporated herein by reference to Exhibit 3.2 to
                 RISCORP's Amendment No. 4 to Form S-1, as of February 28, 1996,
                 Commission File Number 33-99760)
4.1       -      Form of Common Stock Certificate.* (Incorporated herein by
                 reference to Exhibit 4.1 to RISCORP's Amendment No. 4 to Form
                 S-1, as of February 28, 1996, Commission File Number 33-99760)
10.1      -      Employment and Severance Agreement, dated as of January 1,
                 1995, by and between RISCORP Management Services, Inc. and
                 William D. Griffin.* (Incorporated herein by reference to
                 Exhibit 10.31 to RISCORP's Amendment No. 4 to Form S-1, as of
                 February 28, 1996, Commissions File Number 33-99760)**
10.2      -      Form of Registration Rights Agreement dated as of February 1,
                 1996, by and among RISCORP, Inc., RISCORP Management Services,
                 Inc., and William D. Griffin*. (Incorporated herein by
                 reference to Exhibit 10.57 of RISCORP's Amendment No. 4 to Form
                 5-1, as of February 28, 1996, Commission File Number 33-99760).
10.3      -      Asset Purchase Agreement with Zenith Insurance Company dated
                 June 17, 1997* (Incorporated herein by reference to Exhibit No.
                 2.1 to RISCORP's Form 8-K, dated July 2, 1997, Commission File
                 Number 0-27462).
10.4      -      Management Agreement of RISCORP, Inc., dated February 18, 1998,
                 by and between RISCORP, Inc. and subsidiaries and The Phoenix
                 Management Company, Ltd.* (Incorporated herein by reference to
                 Exhibit 10.83 to RISCORP's Annual Report on Form 10-K for the
                 year ended December 31, 1997, Commission File Number
                 0-27462.)**
10.6      -      Outsourcing Services Agreement, dated April 1, 1998, by and
                 between RISCORP, Inc. and Buttner Hammock & Company, P.A.*
11        -      Statement Re Computation of Per Share Earnings.*
21        -      List of Subsidiaries of the Registrant.*
27        -      Financial Data Schedule (for SEC use only).*
28.1      -      Information from Reports Furnished to State Insurance
                 Regulatory Authorities.* (Incorporated herein by reference to
                 Exhibit 28.1 1.1 to RISCORP's Amendment No. 4 to Form S-1, as
                 of February 28, 1996, Commission File Number 33-99760)
</TABLE>


* Previously filed.
**Management contract or executive compensation plan or arrangement.



                                       37
<PAGE>   40


SIGNATURES

           Pursuant to the requirement of the Securities Act of 1933, the
Registrant has duly caused this Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 2nd day of June 1999.

                                    RISCORP, INC.

                                    By:  /s/ Frederick M. Dawson
                                       -----------------------------------------
                                         Frederick M. Dawson
                                         President and Chief Executive Officer


           PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM
10-K/A REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE                                 TITLE                                      DATE
---------                                 -----                                      ----
<S>                                       <C>                                    <C>
/s/ Frederick M. Dawson
-------------------------------
Frederick M. Dawson                       President, Chief Executive             June 2, 1999
                                          Officer and Director
                                          (principal executive officer)

/s/ Edward W. Buttner IV
-------------------------------
Edward W. Buttner IV                      Chief Accounting Officer               June 2, 1999



/s/ Seddon Goode, Jr.
-------------------------------
Seddon Goode, Jr.                         Director                               June 2, 1999



/s/ George E. Greene III
-------------------------------
George E. Greene III                      Director                               June 2, 1999



/s/ Walter L. Revell
-------------------------------
Walter L. Revell                          Director                               June 2, 1999
</TABLE>



                                       38
<PAGE>   41





                          Independent Auditors' Report



The Board of Directors and Shareholders
RISCORP, Inc.:

We have audited the consolidated financial statements of RISCORP, Inc. and
subsidiaries ("the Company") as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the related financial statement schedules listed in the accompanying index.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RISCORP, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.



/s/ KPMG LLP

Fort Lauderdale, Florida
March 5, 1999, except as to
Notes 1(b) and 20, which
are as of March 19, 1999


                                      F-1
<PAGE>   42




                         RISCORP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                 DECEMBER 31
                                                                           -----------------------
                                                                             1998          1997
                                                                           --------      --------
<S>                                                                        <C>           <C>
                                     ASSETS

Investments:
   Fixed maturities available for sale, at fair value (amortized cost
      $6,666 in 1998 and $142,876 in 1997)                                 $  6,716      $145,571
   Fixed maturities available for sale, at fair value (amortized cost
      $9,047 in 1998 and $53,437 in 1997)--restricted                         9,264        53,820
   Fixed maturities held to maturity, at amortized cost (fair value
     $24,347 in 1997)                                                            --        24,090
                                                                           --------      --------
      Total investments                                                      15,980       223,481



Cash and cash equivalents                                                     6,864        16,858
Cash and cash equivalents--restricted                                        14,842        13,295
Receivable from Zenith                                                       49,933            --
Premiums receivable, net                                                         --       100,183
Accounts receivable--other                                                    7,674        16,720
Recoverable from Florida Special Disability Trust Fund                           --        45,211
Reinsurance recoverables                                                         --       184,251
Prepaid reinsurance premiums                                                     --        29,982
Prepaid managed care fees                                                        --         8,420
Accrued reinsurance commissions                                                  --        37,188
Income taxes recoverable                                                     17,277            --
Deferred income taxes                                                         3,141        22,120
Property and equipment, net                                                     337        26,665
Goodwill                                                                         --        15,286
Other assets                                                                  7,345         9,990
                                                                           --------      --------

   Total assets                                                            $123,393      $749,650
                                                                           ========      ========
</TABLE>






See accompanying notes to consolidated financial statements.



                                      F-2
<PAGE>   43




                         RISCORP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                    DECEMBER 31
                                                                             -------------------------
                                                                               1998             1997
                                                                             ---------       ---------
<S>                                                                          <C>             <C>
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Losses and loss adjustment expenses                                       $      --       $ 437,038
   Unearned premiums                                                                --          56,324
   Notes payable of parent company                                                  --          15,000
   Notes payable of subsidiaries                                                    --             609
   Deposit balances payable                                                         --           5,512
   Accrued expenses and other liabilities                                       27,827          65,885
   Net assets in excess of cost of business acquired                                --           5,749
                                                                             ---------       ---------
                                                                                27,827         586,117
                                                                             ---------       ---------

Shareholders' equity:
   Class A Common Stock, $.01 par value, 100,000,000 shares authorized;
       shares issued:  14,258,671 and 11,855,917 in 1998 and 1997,
       respectively                                                                143             120
   Class B Common Stock, $.01 par value, 100,000,000 shares authorized;
       24,334,443 shares issued and outstanding                                    243             243
   Preferred Stock, $.01 par value, 10,000,000 shares authorized; none
       issued or outstanding                                                        --              --
   Additional paid-in capital                                                  140,688         135,974
   Retained earnings (deficit)                                                 (45,680)         25,195
   Treasury Class A Common Stock--at cost, 112,582 shares                           (1)             (1)
   Accumulated Other Comprehensive Income:
      Net unrealized gains on investments                                          173           2,002
                                                                             ---------       ---------
        Total shareholders' equity                                              95,566         163,533
                                                                             ---------       ---------

         Total liabilities and shareholders' equity                          $ 123,393       $ 749,650
                                                                             =========       =========
</TABLE>








See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   44



                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                             -----------------------------------------------
                                                                  1998              1997             1996
                                                             ------------       -----------      -----------
<S>                                                          <C>                <C>              <C>
Revenues:
    Premiums earned                                          $     25,819       $   179,729      $   173,557
    Fees and other income                                           5,906            20,369           31,733
    Net realized gains                                              4,280             1,546              105
    Net investment income                                           7,103            16,447           12,194
                                                             ------------       -----------      -----------
        Total revenues                                             43,108           218,091          217,589
                                                             ------------       -----------      -----------

Expenses:
    Losses and loss adjustment expenses                            24,016           104,052          114,093
    Unallocated loss adjustment expenses                            2,561            19,311           12,916
    Commissions and general and administrative expenses            34,191            70,800           65,685
    Interest                                                          676             1,919            2,795
    Depreciation and amortization                                   2,736             7,423           11,500
                                                             ------------       -----------      -----------
        Total expenses                                             64,180           203,505          206,989
                                                             ------------       -----------      -----------

Income (loss) from operations                                     (21,072)           14,586           10,600
Loss on sale of net assets to Zenith                              (47,747)               --               --
                                                             ------------       -----------      -----------

Income (loss) before income taxes                                 (68,819)           14,586           10,600
Income taxes                                                        2,056             7,300            8,202
                                                             ------------       -----------      -----------
        Net income (loss)                                    $    (70,875)      $     7,286      $     2,398
                                                             ============       ===========      ===========

Per share data:
    Net income (loss) per common share-basic                 $      (1.91)      $      0.20      $      0.07
                                                             ============       ===========      ===========

    Net income (loss) per common share-diluted               $      (1.91)      $      0.20      $      0.07
                                                             ============       ===========      ===========


Weighted average common shares outstanding                     37,011,864        36,891,864       34,647,986
                                                             ============       ===========      ===========

Weighted average common shares and common share
  equivalents outstanding                                      37,011,864        37,115,672       36,405,588
                                                             ============       ===========      ===========
</TABLE>









See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   45


                         RISCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                                      --------------------------------------------
                                                                       (IN THOUSANDS)

                                                                           NET
                                     CLASS A    CLASS B   ADDITIONAL   UNREALIZED                 RETAINED               TOTAL
                                      COMMON     COMMON     PAID-IN     GAINS ON     UNEARNED     EARNINGS    TREASURY SHAREHOLDERS'
                                      STOCK      STOCK     CAPITAL     INVESTMENTS COMPENSATION   (DEFICIT)    STOCK     EQUITY
                                    --------    -------   ----------  ------------ ------------   ---------   -------  ------------

<S>                                 <C>         <C>       <C>         <C>          <C>            <C>         <C>      <C>
Balance, January 1, 1996             $  --      $ 281      $     349      $   510      $(215)     $ 15,232      $--      $  16,157

Net income                              --         --             --           --         --         2,398       --          2,398

Issuance of common stock                72         --        125,789           --         --            --       --        125,861

Conversion of common stock              38        (38)            --           --         --            --       --             --

Stock options exercised                  2         --             63           --         --            --       --             65

Issuance of common stock for
   acquisitions                          8         --         10,891           --         --            --       --         10,899

Change in unearned compensation         --         --            721           --       (331)           --       --            390

Change in net unrealized gains
   on investments                       --         --             --        1,259         --            --       --          1,259

Other                                   --         --             --           --         --           279       --            279
                                     -----      -----      ---------      -------      -----      --------      ---      ---------

BALANCE, DECEMBER 31, 1996             120        243        137,813        1,769       (546)       17,909       --        157,308

Net income                              --         --             --           --         --         7,286       --          7,286

Purchase of treasury stock              --         --              1           --         --            --       (1)            --

Change in unearned compensation         --         --         (1,840)          --        546            --       --         (1,294)

Change in net unrealized gains on
   investments                          --         --             --          233         --            --       --            233
                                     -----      -----      ---------      -------      -----      --------      ---      ---------

BALANCE, DECEMBER 31, 1997             120        243        135,974        2,002         --        25,195       (1)       163,533

Net loss                                --         --             --           --         --       (70,875)      --        (70,875)

Issuance of common stock                26         --          4,714           --         --            --       --          4,740

Change in net unrealized gains
   on investments                       --         --             --       (1,829)        --            --       --         (1,829)

Other adjustments                       (3)        --             --           --         --            --       --             (3)
                                     -----      -----      ---------      -------      -----      --------      ---      ---------

BALANCE, DECEMBER 31, 1998           $ 143      $ 243      $ 140,688      $   173      $  --      $(45,680)     $(1)     $  95,566
                                     =====      =====      =========      =======      =====      ========      ===      =========
</TABLE>






See accompanying notes to consolidated financial statements.



                                      F-5
<PAGE>   46



                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31
                                                                       --------------------------------------
                                                                         1998           1997           1996
                                                                       --------      ---------      ---------
<S>                                                                    <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                                   $(70,875)     $   7,286      $   2,398
   Adjustments to reconcile net income (loss) to net cash from
      operating activities:
      Depreciation and amortization                                       2,736          7,423         11,500
      Loss on sale of net assets to Zenith                               47,747             --             --
      Loss (gain) on disposal of property and equipment                     (99)           291            294
      Net realized gain on sale of investments                           (4,280)        (1,545)          (140)
      Gain on sale of personal residence                                     (1)            --             --
      Net amortization of discounts on investments                          166             14            174
      Issuance of RISCORP, Inc. stock                                     4,740             --             --
      Other                                                               1,181             --             --
      Change in:
         Premiums receivable, net                                        16,627         22,026        (24,275)
         Accounts receivable--other                                      (1,558)        (5,104)       (11,676)
         Recoverable from Florida State Disability Trust Fund, net          659          4,295          2,331
         Reinsurance recoverables                                       (30,051)        (3,553)       (76,971)
         Prepaid reinsurance premiums                                     8,301         19,807        (27,908)
         Prepaid managed care fees                                        2,238         23,537        (15,589)
         Accrued reinsurance commissions                                 (1,481)       (16,770)       (12,870)
         Income taxes recoverable                                       (17,277)            --             --
         Deferred income taxes                                           20,181            431         (8,448)
         Other assets                                                       495         (3,249)        21,026
         Losses and loss adjustment expenses                             25,253        (21,502)       106,484
         Unearned premiums                                              (13,147)       (46,280)        30,891
         Accounts payable--related party                                     --         (1,171)           171
         Accounts and notes receivable--related party                        --             --         10,754
         Accrued expenses and other liabilities                         (29,140)        (8,880)        19,909
                                                                       --------      ---------      ---------
             Net cash provided by (used in) operating activities        (37,585)       (22,944)        28,055
                                                                       --------      ---------      ---------

Cash flows from investing activities:
   Proceeds from:
      Sale of fixed maturities--available for sale                       80,404        110,299         88,900
      Maturities of fixed maturities--available for sale                  6,129         20,243          6,295
      Maturities of fixed maturities--held to maturity                    6,000          1,885          4,400
      Sale of equity securities                                           1,324          4,284            732
      Sale of equipment                                                     255            158            532
      Sale of personal residence                                            436             --             --
   Purchase of:
      Fixed maturities--available for sale                              (69,215)      (100,499)      (191,153)
      Fixed maturities--held to maturity                                 (5,874)        (1,237)        (2,452)
      Equity securities                                                      --           (637)        (3,952)
      Property and equipment                                               (971)        (4,477)       (13,215)
      Personal residence                                                   (435)            --             --
      Cash received from Zenith for sale of net assets                   35,000             --             --
</TABLE>





                                      F-6
<PAGE>   47


                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31
                                                                                 -------------------------------------
                                                                                   1998          1997           1996
                                                                                 --------      --------      ---------
<S>                                                                              <C>           <C>           <C>
Cash flows from investing activities (continued):
  Purchase (net of cash acquired) of:
    Cash and investments not yet transferred to Zenith                              7,404            --             --
    CompSource and Insura                                                              --            --        (10,733)
    Atlas Insurance Company                                                            --            --         (5,573)
    NARM                                                                               --            --          2,717
    Virginia Funds                                                                     --            --          1,300
    IAA                                                                                --            --            282
    RISC                                                                               --            --           (538)
    Maryland NARM Fund                                                                 --           134             --
                                                                                 --------      --------      ---------
     Net cash provided by (used in) investing activities                           60,457        30,153       (122,458)
                                                                                 --------      --------      ---------

Cash flows from financing activities:
   Increase (decrease) in deposit balances payable                                 (1,598)          725            968
   Decrease (increase) in unearned compensation                                        --           546           (331)
   Transfer of cash and cash equivalents to restricted balances                   (30,856)      (13,295)            --
   Purchase of treasury stock subject to put options                                   --        (2,100)            --
   Principal repayments of notes payable                                             (412)         (694)       (30,202)
   Proceeds of initial offering of common stock                                        --            --        127,908
   Stock options exercised                                                             --            --             65
   Other, net                                                                          --        (1,840)        (1,046)
                                                                                 --------      --------      ---------
       Net cash provided by (used in) financing activities                        (32,866)      (16,658)        97,362
                                                                                 --------      --------      ---------


Net increase (decrease) in cash and cash equivalents                               (9,994)       (9,449)         2,959
Cash and cash equivalents, beginning of year                                       16,858        26,307         23,348
                                                                                 --------      --------      ---------
Cash and cash equivalents, end of year                                           $  6,864      $ 16,858      $  26,307
                                                                                 ========      ========      =========

Supplemental disclosures of cash flow information:

  Cash paid during the year for:
    Interest                                                                     $    493      $  1,928      $   3,689
                                                                                 ========      ========      =========
    Income taxes                                                                 $  2,341      $  6,566      $  15,127
                                                                                 ========      ========      =========

Supplemental schedule of noncash investing and financing activities:

  As of April 1, 1998, the Company sold substantially all of its insurance
  assets and transferred certain liabilities to Zenith. In conjunction with
  the sale and transfer, a $49,933 receivable from Zenith was recorded as of
  December 31, 1998 [see Note 1(b)]
</TABLE>








See accompanying notes to consolidated financial statements.



                                      F-7
<PAGE>   48



                         RISCORP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                   ---------------------------------
                                                                       1998         1997        1996
                                                                   --------      -------      ------

<S>                                                                <C>           <C>          <C>
Net income (loss)                                                  $(70,875)     $ 7,286      $2,398
                                                                   --------      -------      ------

Other comprehensive income (loss), before income taxes:
   Unrealized gains (losses) on securities available for sale:
     Unrealized holding gains (losses) arising during year              194       (2,392)      2,044
Income tax expense (benefit) related to items of other
  comprehensive income (loss)                                            68         (837)        696
                                                                   --------      -------      ------
Other comprehensive income (loss), net of income taxes                  126       (1,555)      1,348
                                                                   --------      -------      ------

Total comprehensive income (loss)                                  $(70,749)     $ 5,731      $3,746
                                                                   ========      =======      ======
</TABLE>





























See accompanying notes to consolidated financial statements.



                                      F-8
<PAGE>   49

                         RISCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   BACKGROUND AND SALE TO ZENITH INSURANCE COMPANY

      (A) BACKGROUND

          RISCORP, Inc. ("RISCORP") was formed on February 28, 1996 through the
reorganization and consolidation of several affiliated companies (collectively,
the "Company") which were under the common control of a majority shareholder,
who, at that time, was the Chairman of the Board and Chief Executive Officer of
RISCORP. The reorganization and consolidation qualified as a tax-free
reorganization of commonly controlled entities and was accounted for in a manner
similar to a "pooling of interests."

          On November 9, 1996, at a special meeting of the Board of Directors of
RISCORP, the Board voted to establish a Strategic Alternatives Committee to
evaluate alternatives to maximize shareholder value, including, without
limitation, potential acquisitions, joint ventures, mergers, strategic
alliances, and the sale of all or part of RISCORP and its subsidiaries. The
actions of the Strategic Alternatives Committee during the period from November
1996 through June 1997 culminated in the execution of the Asset Purchase
Agreement on June 17, 1997 [as more fully described in Note 1(b)] for the sale
and transfer of certain of RISCORP's and its subsidiaries' assets and
liabilities to another insurer for cash. In addition, the Florida Insurance
Department requested the purchaser to provide an interim reinsurance agreement
and cut-through endorsement on all inforce business as of June 17, 1997 and all
new and renewed business written after June 17, 1997. This reinsurance agreement
only provided coverage for Florida workers' compensation policyholders and was
approved by the Florida Insurance Department.

          Following RISCORP's inability to timely file its Annual Report on Form
10-K for the year ended December 31, 1996 or its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997, RISCORP's Class A Common Stock was
delisted on July 2, 1997 by the NASDAQ Stock Market's National Market, on which
its stock was traded. RISCORP filed its 1996 Form 10-K/A on October 28, 1997 and
amended that filing on February 27, 1998 in response to comments received from
the Securities and Exchange Commission ("SEC") in connection with the
preparation of RISCORP's special meeting proxy statement which was mailed to
shareholders on March 3, 1998. Despite RISCORP's timely filing of all periodic
reports for all periods subsequent to the third quarter of 1997, RISCORP's Class
A Common Stock has remained delisted, and RISCORP has no intention to seek
readmission for listing on NASDAQ or any national securities exchange.

       (B) SALE TO ZENITH INSURANCE COMPANY

          As of April 1, 1998, RISCORP and certain of its subsidiaries sold
substantially all of their assets and transferred certain liabilities to Zenith
Insurance Company ("Zenith"). In connection with the sale to Zenith, the Company
ceased substantially all of its former business operations, including its
insurance operations, effective April 1, 1998. Accordingly, after such date, the
Company's operations consisted principally of the administration of the
day-to-day activities of the surviving corporate entities, compliance with the
provisions of the Asset Purchase Agreement, and the investment, protection, and
maximization of the remaining assets of the Company. At the present time,
RISCORP has no plans to resume any operating activities.

          In connection with the closing of this transaction, Zenith paid
RISCORP $35 million in cash, of which $10 million was placed in escrow pursuant
to the terms of the Asset Purchase Agreement. The final purchase price to be
paid by Zenith will be the amount by which the book value of the transferred



                                      F-9
<PAGE>   50

assets exceeds the book value of the transferred liabilities assumed by Zenith
at closing. On June 9, 1998, RISCORP delivered to Zenith a balance sheet (the
"Proposed Business Balance Sheet"), representing the audited statement of
transferred assets and transferred liabilities as of Apri1 1, 1998. The Proposed
Business Balance Sheet indicated RISCORP's proposal as to the final purchase
price of approximately $141 million, less the $35 million previously paid by
Zenith.

          Subsequent to June 9, 1998, Zenith suggested adjustments to the
Proposed Business Balance Sheet that totaled approximately $211 million. Those
suggested adjustments principally related to differences in the estimation of
loss and loss adjustment expense reserves and the estimate of the allowance for
uncollectible receivables. The adjustments proposed by Zenith reflected its
position that the aggregate value of the liabilities assumed by Zenith exceeded
the value of the assets transferred by approximately $70 million.

          On July 10, 1998, RISCORP and Zenith engaged a nationally recognized
independent accounting firm to serve as neutral auditors and neutral actuaries
(the "Independent Expert") to resolve the items in dispute between the parties
and to determine the Final Business Balance Sheet, as that term is defined in
the Asset Purchase Agreement. On March 19, 1999, the Independent Expert
delivered its determination of the Final Business Balance Sheet and, as such,
its conclusion that the book value of the transferred assets exceeded the book
value of the transferred liabilities assumed by Zenith at closing by $92.3
million. Therefore, pursuant to the terms of the Asset Purchase Agreement and
given the $35 million previously paid by Zenith at closing, Zenith is required
to pay an additional $57.3 million in immediately available funds on or before
March 26, 1999, plus interest thereon of 6.13 percent from April 1, 1998 through
the final payment date. Of this amount, $53.5 million, plus the interest
component, is required to be paid to RISCORP, and $3.8 million is required to be
deposited into escrow to secure the Company's indemnification obligations to
Zenith. RISCORP has reported the results of the Independent Expert's
determinations in the accompanying 1998 consolidated financial statements;
however, RISCORP is in the process of analyzing the basis for the adjustments to
the Proposed Business Balance Sheet and is evaluating its alternatives related
thereto.

          In accordance with the terms of the Asset Purchase Agreement, 15
percent of the total purchase price is required to be held in escrow for a
period of two years from the Closing Date. The escrowed funds are to be used to
indemnify Zenith against any liabilities or obligations (other than those
transferred) arising out of or related to any misrepresentation, breach, or
nonfulfillment of any covenant or agreement by the Company. The escrowed funds
are to be invested in United States government debt obligations or in money
market funds secured by such debt obligations, with such funds to be disbursed
pursuant to the terms of the Escrow Agreement. Interest income on the escrowed
funds is to be paid to RISCORP at the end of each calendar quarter.

          In connection with the closing of this transaction, the parties
entered into a letter agreement dated April 1, 1998, pursuant to which RISCORP
retained certain assets necessary for each of its insurance subsidiaries to
maintain the minimum capital and surplus required by law to remain in good
standing in each state where each company is licensed (the "Definite
Exclusions"). In accordance with the provisions of this letter agreement,
RISCORP's insurance subsidiaries retained marketable securities with carrying
values of $11.4 million as of April 1, 1998. Zenith has subsequently disputed
RISCORP's determination of the amount of minimum capital and surplus required to
be retained pursuant to the letter agreement.

          In addition to the aforereferenced insurance company minimum capital
and surplus amounts, in the event that RISCORP is unable to transfer to Zenith
(i) certain certificates of deposit and securities held by regulatory
authorities, (ii) the stated capital of the selling entities other than the
insurance subsidiaries, or (iii) certain certificates of deposit and securities
held in trust under certain reinsurance



                                      F-10
<PAGE>   51

agreements prior to the date that Zenith is required to pay the final purchase
price, such assets, at Zenith's option and in its sole discretion, are to be
deemed not to be transferred to Zenith (the "Possible Exclusions"). As of
December 31, 1998, the amortized cost of such cash, certificates of deposit, and
securities that were identified as a transferred asset, but that had not been
physically transferred to Zenith, totaled $7.4 million. If the retention by
RISCORP of the Definite Exclusions or any of the Possible Exclusions results in
the value of the transferred liabilities to exceed the value of the transferred
assets, the minimum purchase price specified in the Asset Purchase Agreement is
to be reduced.

          Pursuant to various provisions of the Asset Purchase Agreement, Zenith
has provided notice to RISCORP of certain alleged breaches of the
representations, warranties, or covenants made by RISCORP. RISCORP has disputed
the allegations asserted by Zenith and has also provided notice to Zenith of the
occurrence of various indemnifiable events for which RISCORP believes it is
entitled to seek indemnification from Zenith. On October 16, 1998, RISCORP filed
suit against Zenith in federal court in Tampa, Florida (the "Florida
Litigation"). RISCORP's complaint was amended on January 25, 1999, and sets
forth numerous claims arising out of Zenith's failure to indemnify RISCORP in
accordance with the terms of the Asset Purchase Agreement, as well as for
Zenith's conversion of certain funds that RISCORP had on deposit with the South
Carolina Insurance Department.

        On or about January 11, 1999, Zenith filed a lawsuit against RISCORP and
certain of its subsidiaries in federal court in New York setting forth 14
separate causes of action arising out of the Asset Purchase Agreement and
certain ancillary agreements (the "New York Litigation"). The complaint seeks an
unspecified total amount of damages, but the amount of compensatory damages
sought is in excess of $30 million, together with an unspecified amount of
punitive damages and attorneys' fees. Zenith's claims include, among others,
that the Company (i) breached certain representations and warranties set forth
in the Asset Purchase Agreement, (ii) failed to transfer certain assets to
Zenith, (iii) failed to operate its business in the ordinary course, (iv) failed
to reimburse Zenith for certain payments, and (v) fraudulently induced Zenith to
execute the Asset Purchase Agreement due to certain alleged verbal
representations made with respect to RISCORP's Year 2000 compliance.

        While the Asset Purchase Agreement provides that the decision of the
Independent Expert is final, binding, and conclusive, given the litigation
between the parties currently pending in both Florida and New York, there can be
no assurance that Zenith will honor its obligations under the Asset Purchase
Agreement and deliver the balance of the purchase price due within the requisite
five business day period.

          In connection with the sale of RISCORP's insurance operations to
Zenith on April 1, 1998, RISCORP voluntarily consented to the Florida Insurance
Department's request to discontinue writing any new or renewal insurance
business for an indefinite period of time.





                                      F-11
<PAGE>   52


          The Proposed Business Balance Sheet, as of April 1, 1998, indicated
RISCORP's calculation of its proposal of the final purchase price to be
approximately $141 million, calculated as follows:

<TABLE>
       <S>                                                                                        <C>
       TRANSFERRED ASSETS
       Investments:
          Fixed maturities available for sale, at fair value
             (amortized cost $112,937,628)                                                        $115,535,609
          Fixed maturities available for sale, at fair value
             (amortized cost $59,447,736)--restricted                                               59,843,713
          Fixed maturities held to maturity, at amortized cost
             (fair value $14,602,160)                                                               14,437,092
                                                                                                  ------------
             Total investments                                                                     189,816,414

       Cash and cash equivalents                                                                    15,167,683
       Cash and cash equivalents--restricted                                                        14,141,010
       Premiums receivable, net                                                                     83,556,333
       Accounts receivable--other, net                                                              10,603,762
       Recoverable from Florida Special Disability Trust Fund                                       44,552,000
       Reinsurance recoverables                                                                    213,667,000
       Prepaid reinsurance premiums                                                                 21,680,084
       Prepaid managed care fees                                                                     6,182,364
       Accrued reinsurance commissions                                                              38,669,647
       Property and equipment, net                                                                  25,221,907
       Goodwill                                                                                     14,068,754
       Other assets                                                                                  2,134,412
                                                                                                  ------------

       Total assets transferred to Zenith Insurance Company                                       $679,461,370
                                                                                                  ============
       TRANSFERRED LIABILITIES
       Losses and loss adjustment expenses                                                         $461,656,421
       Unearned premiums                                                                             43,177,363
       Notes payable of parent company                                                               15,000,000
       Notes payable of subsidiaries                                                                    197,018
       Deposit balances payable                                                                       3,913,334
       Accrued expenses and other liabilities                                                         8,918,875
       Net assets in excess of cost of business acquired                                              5,543,563
          Total liabilities assumed by Zenith Insurance Company                                    $538,406,574
                                                                                                  ------------

       Excess of assets transferred over liabilities assumed                                       $141,054,796
                                                                                                   ============
</TABLE>

      The receivable from Zenith included in the accompanying December 31, 1998
consolidated balance sheet differs from the Proposed Business Balance Sheet due
primarily to the retention by RISCORP of certain cash, certificates of deposits,
and securities that were identified as transferred assets, but had not been
physically transferred to Zenith, certain adjustments to the Proposed Business
Balance Sheet



                                      F-12
<PAGE>   53


subsequently agreed to by RISCORP and Zenith, and the net adjustment determined
by the Independent Expert as follows:

<TABLE>
       <S>                                                                        <C>              <C>
       Excess of assets transferred over liabilities assumed at April 1, 1998                      $141,054,796
                                                                                                   ------------
       Less:    Payment of minimum purchase price made by Zenith on
                   April 2, 1998                                                  $35,000,000
                Cash and securities not yet transferred to Zenith                   7,403,679
                Subsequent agreed-upon adjustments                                    971,323
                Adjustment determined by the Independent Expert                    47,747,097        91,122,099
                                                                                  ------------     ------------
       Receivable from Zenith as of December 31, 1998                                              $ 49,932,697
                                                                                                   ============
</TABLE>


          The $49.9 million net receivable from Zenith is included in the
accompanying December 31, 1998 consolidated balance sheet. The $47.7 million
adjustment, as determined by the Independent Expert, is included in the
accompanying 1998 consolidated statement of operations. In addition, interest of
$1.8 million from the Closing Date through December 31, 1998 is included in
other assets in the accompanying December 31, 1998 consolidated balance sheet
and in net investment income in the accompanying 1998 consolidated statement of
operations.

       (C) INITIAL PUBLIC OFFERING OF COMMON STOCK

          On February 29, 1996, RISCORP completed an Initial Public Offering
("IPO") of common stock with the issuance of 10.935 million shares of Class A
Common Stock. Of the shares offered, 7.2 million shares were sold by RISCORP and
3.735 million shares were sold by the majority shareholder of RISCORP. The
following table summarizes certain IPO information:

<TABLE>
<CAPTION>
                                                        PRICE             UNDERWRITING
                                        NUMBER        PER SHARE           DISCOUNTS AND               NET
            SHARES SOLD BY            OF SHARES       TO PUBLIC            COMMISSIONS              PROCEEDS
            --------------           -----------      ----------          -------------           ------------
            <S>                      <C>              <C>                 <C>                     <C>

              RISCORP                 7,200,000           $19              $ 8,892,000            $127,908,000
              Shareholder             3,735,000           $19                4,612,725              66,352,275
                                     ----------                            -----------            ------------
              Total                  10,935,000                            $13,504,725            $194,260,275
                                     ==========                            ===========            ============
</TABLE>

          The foregoing net proceeds are before deducting other expenses of $2
million incurred in conjunction with the IPO.

          RISCORP used the proceeds from the IPO to repay outstanding debt, fund
acquisitions, increase the capital and surplus of RISCORP's insurance
subsidiaries, and fund general corporate matters.

          RISCORP did not receive any proceeds from the sale of Class A Common
Stock by the majority shareholder; however, a portion of the majority
shareholder's proceeds was used to repay $9.8 million in his then outstanding
indebtedness to RISCORP.




                                      F-13
<PAGE>   54



      (D) BUSINESS

          Prior to April 1, 1998, RISCORP, through its wholly-owned insurance
subsidiaries, was principally engaged in providing workers' compensation
insurance under a managed care philosophy. RISCORP provided managed care
workers' compensation products and services to clients throughout the Southeast
and other select markets. In addition, RISCORP, through its wholly-owned
non-insurance subsidiaries, provided reinsurance, risk management advisory
services, and insurance managerial services.

          As more fully described in Note 1(b), RISCORP and certain of its
subsidiaries entered into an Asset Purchase Agreement with Zenith for the sale
of substantially all of their assets and the transfer of certain liabilities in
exchange for cash. The Company's computer systems and proprietary computer
software, including the policy issue, management system, and claims systems,
were included in the assets sold to Zenith. Management believes the computer
programs retained by the Company to support the current operations are presently
Year 2000 compliant.


(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (A) BASIS OF PRESENTATION

          The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires the use of assumptions and estimates in reporting certain assets and
liabilities and related disclosures. Actual results could differ from those
estimates.

      (B) RECOGNITION OF REVENUES

          Workers' compensation and employer liability insurance premiums
consisted of deposit premiums and installment premiums billed under the terms of
the policy, and estimates of retrospectively-rated premiums based on experience
incurred under those contracts. Unbilled installment premiums and audit premiums
were recognized as revenue on the accrual basis. Premiums were primarily
recognized as revenue over the period to which the premiums related using the
daily pro rata basis with a liability for unearned premiums recorded for the
excess of premiums billed over the premiums earned.

          Service fee revenue was recorded as a percentage of standard earned
premiums of the underlying insurance policies of the facilities managed, in
accordance with the specific contractual provisions.

          Reinsurance premiums were recognized as revenue on a pro rata basis
over the contract terms with a liability for unearned premiums established for
the unexpired portion of the contracts.

          As more fully described in Note 1(b), the Company transferred the
unearned premium reserve to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.

      (C) FLORIDA SPECIAL DISABILITY TRUST FUND

          The State of Florida operates a Special Disability Trust Fund ("SDTF")
for the purpose of providing benefits to workers who have a pre-existing
condition and incur a second or subsequent injury.



                                      F-14
<PAGE>   55

          The SDTF is financed through annual assessments imposed on workers'
compensation insurers, which assessments are based on a percentage of net
workers' compensation premiums written. The Company submitted claims to the SDTF
for recovery of applicable claims paid on behalf of the Company's insureds. The
Company estimated such recoveries based on industry statistics applied to
ultimate projected claims. At December 31, 1997, the Company's actuarially
estimated recoverable amount exceeded the amount of the estimated recoveries on
its reported claims to the SDTF.

          As more fully described in Note 1(b), the Company transferred the SDTF
recoverable to Zenith on April 1, 1998, in accordance with the terms of the
Asset Purchase Agreement.

      (D) INVESTMENTS

          Fixed maturity investments are securities that mature at a specified
future date more than one year after being acquired. Fixed maturity securities
that the Company intends to hold until maturity are classified as "fixed
maturities held to maturity" and are carried at amortized cost. Amortized cost
is based on the purchase price and is adjusted periodically so the carrying
value of the security will equal the face or par value at maturity. Fixed
maturity securities that may be sold prior to maturity due to changes in
interest rates, prepayment risks, liquidity needs, tax planning purposes, or
other similar factors, are classified as "available for sale" and are carried at
fair value as determined using values from independent pricing services.

          Equity securities (common and nonredeemable preferred stocks) are
carried at fair value. If the current market value of equity securities is
higher than the original cost, the excess is an unrealized gain, and if lower
than the original cost, the difference is an unrealized loss. The net unrealized
gains or losses on equity securities, net of the related deferred income taxes,
are reported as a separate component of shareholders' equity, along with the net
unrealized gains or losses on fixed maturity securities available for sale.

          Realized gains and losses on sales of investments are recognized as
income or loss on the specific identification basis, as of the trade date.
Impairment losses, if any, resulting from other-than-temporary declines in fair
value are included in net investment income.

          As more fully described in Note 1(b), the Company transferred the
major portion of its investment portfolio, including restricted investments, to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.

      (E) LOSSES AND LOSS ADJUSTMENT EXPENSES

          The liabilities for losses and loss adjustment expenses were based on
an actuarial determination and represent management's best estimate of the
ultimate cost of losses and loss adjustment expenses that were unpaid at the
balance sheet date, including incurred but not reported claims. Although the
liabilities were supported by actuarial projections and other data, such
liabilities were ultimately based on management's reasoned expectations of
future events. The liabilities for losses and loss adjustment expenses were
continually reviewed and, as adjustments become necessary, such adjustments were
included in current operations. Management believes that the liabilities for
losses and loss adjustment expenses at December 31, 1997 were adequate to cover
the ultimate liability. However, the ultimate settlement of losses and the
related loss adjustment expenses may vary from the amounts reported in the
accompanying financial statements.

          The Company recognized reinsurance recoveries, estimated recoveries
from the SDTF, and subrogation from third parties as reductions to losses
incurred.



                                      F-15
<PAGE>   56

          As more fully described in Note 1(b), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.

      (F) REINSURANCE

          Premiums and losses and loss adjustment expenses ceded by the Company
under reinsurance contracts in which the Company was provided indemnification
against loss or liability relating to specified insurance risks were reported as
reductions to premiums earned and losses and loss adjustment expenses,
respectively. Amounts recoverable for ceded losses and loss adjustment expenses
and ceded unearned premiums under reinsurance agreements were reported as assets
in the accompanying consolidated balance sheets. Reinsurance contracts that did
not transfer risk were accounted for as deposits in the accompanying
consolidated balance sheets.

          As more fully described in Note 1(b), the Company transferred the
reinsurance assets and liabilities to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.

      (G) INCOME TAXES

          The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets
and deferred tax liabilities are established for temporary differences between
the financial reporting basis and tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
recovered or settled. Such temporary differences are principally related to the
deferral of policy acquisition costs, tax-basis discount on reserves for unpaid
losses and loss adjustment expenses, the deductibility of unearned premiums, the
allowance for uncollectible premiums receivable, and the amortization of
goodwill. A valuation allowance has been established to reduce the net deferred
tax asset to an amount that, in the opinion of management, is more likely than
not to be realized.

      (H) POLICY ACQUISITION COSTS

          The costs of acquiring and renewing business, principally commissions,
premium taxes, and other underwriting expenses, were deferred to the extent
recoverable and amortized over the terms of the related policies. Anticipated
investment income was considered in the determination of recoverability.
Unearned ceding commissions were reported as a reduction to deferred policy
acquisition costs. The policy acquisition costs deferred in 1998, 1997, and 1996
totaled $8.9 million, $41 million, and $31.8 million, respectively. The 1998,
1997, and 1996 policy acquisition costs amortized totaled $11.4 million, $49.2
million, and $33.7 million, respectively. The deferred policy acquisition costs
were included in other assets in the accompanying December 31, 1997 consolidated
balance sheet. The amortization of policy acquisition costs was included in
commissions and general and administrative expenses in the accompanying
consolidated statements of operations.

          As more fully described in Note 1(b), the Company transferred the
deferred policy acquisition cost asset to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.

      (I) GOODWILL

          The costs in excess of net assets acquired, or goodwill, represent the
unamortized excess of the cost over the underlying net assets of companies
acquired. The goodwill has been amortized on a straight-line basis over periods
ranging from five to 15 years. The amortization expense for 1998, 1997,




                                      F-16
<PAGE>   57

and 1996 totaled $0.9 million, $3.3 million, and $7.9 million, respectively, and
accumulated amortization as of December 31, 1997 was $11.3 million.

          The Company periodically reviews its assets subject to Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") and,
when events or changes in circumstances indicate that the carrying amount of an
asset may no longer be fully recoverable, the Company tests the recoverability
of the asset principally by estimating the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying value of the asset, the Company recognizes an impairment loss.
The measurement of an impairment loss is based on the carrying amount and
estimated fair value of the asset.

          During 1996, using the criteria contained in SFAS 121, the Company
recognized an impairment loss of $3.2 million and reduced goodwill that was
recorded in 1995 in conjunction with the purchase of RISCORP West, formerly
known as the Self Insurers Service Bureau, Inc. ("SISB"). The Company's
impairment assessment was primarily based on the closing of former SISB offices
in certain states and the Company's then current focus on at-risk business. The
impairment loss was recorded as a component of depreciation and amortization in
the accompanying 1996 consolidated statement of operations. The unamortized
goodwill related to the SISB purchase was $0 and $432,000 at December 31, 1998
and 1997, respectively.

          In 1996, the Company recorded an impairment loss of $2.8 million in
connection with the acquisition of Independent Association Administrators, Inc.
The remaining unamortized goodwill relating to that acquisition was $0 and $7.9
million at December 31, 1998 and 1997, respectively.

          The net assets acquired in excess of cost, or "negative" goodwill,
have been amortized on a straight-line basis over 10 years. The income from
amortization of negative goodwill totaled $0.2 million, $0.8 million, and $0.9
million for 1998, 1997, and 1996, respectively. The accumulated amortization as
of December 31, 1997 was $2.5 million.

          As more fully described in Note 1(b), the Company transferred the
goodwill, including "negative" goodwill, to Zenith on April 1, 1998, in
accordance with the terms of the Asset Purchase Agreement.

      (J) PROPERTY AND EQUIPMENT

          Property and equipment have been recorded at cost less accumulated
depreciation. Depreciation was computed using the straight-line method over the
useful lives of the related assets. Property and equipment recorded under
capital lease arrangements was being amortized over the shorter of the asset's
useful life or the lease term.

          The Company capitalized incremental internal and external costs
directly related to internally developed software to meet the Company's needs.
Those software development projects represented major system enhancements or
replacements of existing operating management information systems.
Capitalization commenced when management had committed to funding the software
project and it was probable that upon completion the software would perform its
intended function. The capitalized costs were recorded as property and equipment
and amortized using the straight-line method over three years. In 1998 and 1997,
the Company capitalized costs of $0.3 million and $1.3 million, respectively,
and recorded amortization expense for internally developed software costs of
$0.1 million, $0.3 million, and $0.4 million for 1998, 1997, and 1996,
respectively.



                                      F-17
<PAGE>   58

          As more fully described in Note 1(b), the Company transferred the
major portion of the property and equipment, including the internally developed
software, to Zenith on April 1, 1998, in accordance with the terms of the Asset
Purchase Agreement.

       (K) INVESTMENT IN JOINT VENTURE

          The Company accounted for its 50 percent investment in a joint venture
arrangement on the equity basis of accounting whereby the Company's recorded
investment was adjusted for its proportionate share of earnings or losses of the
joint venture.

      (L) CASH AND CASH EQUIVALENTS

          The Company considered all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

          The Company had restricted cash at December 31, 1998 of $14.8 million,
consisting of $10 million held in escrow in connection with the sale to Zenith,
$3.8 million on deposit with various governmental agencies, $0.6 million held in
escrow in connection with the acquisition of RISCORP National Insurance Company
(this escrow arrangement expires in March 1999 and the Company expects that
these funds held in escrow will be released by March 31, 1999), $0.3 million
pledged to secure a letter of credit, and $0.1 million held in trust in
connection with a fronting agreement between Virginia Surety Insurance Company,
Inc. and RISCORP Management Services, Inc.

      (M) BAD DEBT ALLOWANCE

          The bad debt allowance was based on the Company's experience with
uncollectible premiums receivable and represents the Company's best estimate of
the ultimate uncollectible amounts incurred through the balance sheet date. The
premiums receivable reported in the accompanying consolidated balance sheets
have been shown net of this valuation allowance.

          As more fully described in Note 1(b), the Company transferred the
premiums receivable balance and related allowance for uncollectible amounts to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.

      (N) EARNINGS PER SHARE

          In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the presentation of two earnings per share ("EPS")
calculations, basic EPS and diluted EPS, in the consolidated statements of
operations; SFAS 128 also requires restatement of all prior-period EPS data that
is presented in the financial statements. Basic EPS is computed by dividing net
income or loss by the weighted average number of shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of shares outstanding for the period plus the shares for the dilutive
effect of stock options, contingent shares, and other common stock equivalents.

          The components of the weighted average shares used in the EPS
calculations are summarized as follows:

<TABLE>
<CAPTION>
                                                          1998           1997           1996
                                                      ----------     ----------     ----------
              <S>                                    <C>            <C>            <C>
              Average outstanding shares used for
                  calculating basic EPS               37,011,864     36,891,864     34,647,986
              Effect of stock options                         --        223,808      1,757,602
                                                      ----------     ----------     ----------
              Average outstanding shares used for
                  calculating diluted EPS             37,011,864     37,115,672     36,405,588
                                                      ==========     ==========     ==========
</TABLE>



                                      F-18
<PAGE>   59

      (O) STOCK-BASED COMPENSATION

          In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock options and
similar instruments and encourages, but does not require, adoption of that
method. The Company has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measuring
compensation cost. However, as required by SFAS 123, the Company has disclosed
pro forma net income or loss per share for 1998, 1997, and 1996, as if the
provisions of SFAS 123 had been adopted.

      (P) YEAR 2000

          As more fully described in Note 1(b), the Company transferred the
computer systems and proprietary computer software, including the policy issue
and management system and the claims systems, to Zenith on April 1, 1998, in
accordance with the terms of the Asset Purchase Agreement.

          Management believes the computer programs retained by RISCORP to
support its current operations are presently Year 2000 compliant.






                                      F-19
<PAGE>   60



      (Q) CONCENTRATIONS OF RISK

          A description of significant risks that faced RISCORP and its property
and casualty insurance subsidiaries and how those risks were minimized is as
follows:

               Legal/Regulatory Risk is the risk that changes in the legal or
          regulatory environment in which an insurer operates that can create
          additional loss costs or expenses not anticipated by the insurer in
          pricing its products. That is, regulatory initiatives designed to
          reduce insurer profits or new legal theories may create costs for the
          insurer beyond those currently reported in the financial statements.
          The Company minimized this risk by reviewing legislative and other
          regulatory changes and adjusting rates whenever possible. All of the
          Company's premiums were derived from products offered to customers
          located in the United States. Accordingly, an insurer could be
          adversely affected by economic downturns, significant unemployment,
          and other conditions that may occur from time to time.

               Credit Risk is the risk that issuers of securities owned by the
          Company will default, or other parties, including reinsurers, the
          SDTF, agents, and insureds that may owe the Company money, will not
          pay. The Company minimized this risk by, among other means, adhering
          to a conservative investment strategy, by placing reinsurance with
          highly rated reinsurers, and by actively monitoring collections of the
          SDTF recoverable and premiums receivable.

               Interest Rate Risk is the risk that interest rates will change
          and cause a decrease in the value of the Company's investments. The
          Company mitigated this risk by attempting to match the maturity
          schedule of its assets with the expected payout of its liabilities. To
          the extent that liabilities come due more quickly than assets mature,
          an insurer would have to sell assets prior to maturity and recognize
          potential gains or losses.

               Liquidity Risk is the risk that the liquidity of the Company
          could be materially adversely affected if Zenith should prevail in the
          dispute resolution process with respect to the determination of the
          final purchase price or if there is a material delay in the Company's
          receipt of the final payment determined to be payable by Zenith. See
          Note 1(b) for further discussion of this issue.

      (R) RESTRUCTURING CHARGES

          In June 1997, the Company implemented a workforce reduction and a
consolidation of the Company's management team, field offices, and products. The
reduction in the work force resulted in the termination of 128 employees. The
Company also announced in June 1997 its intention to focus solely on its core
workers' compensation insurance business and to close all field offices, except
Charlotte and Birmingham, by the end of 1997. The Company recorded $5.8 million
in non-recurring expenses during the second quarter of 1997 in connection with
the workforce reduction and consolidation of the field offices and products.
Those non-recurring expenses consisted principally of severance expenses of $5.1
million and occupancy costs of $0.7 million, of which $0.4 million and $0.2
million, respectively, were unpaid as of December 31, 1998, and $3.2 million and
$0.4 million were unpaid as of December 31, 1997. Those non-recurring expenses
were included in commissions and underwriting and administrative expenses in the
accompanying 1997 consolidated statement of operations.

      (S) PARTICIPATING INSURANCE POLICIES

          The Company offered participating insurance policies in connection
with custom plans, flexible retention plans, and preferred account dividend
plans. Policyholder dividends were approved quarterly by



                                      F-20
<PAGE>   61

the Board of Directors and were based on the actual loss experience of each of
the policies. Participating policies represented 20 percent, 16 percent, and 17
percent of written premiums as of March 31, 1998 (just prior to the sale to
Zenith), and December 31, 1997 and 1996, respectively. The Company paid
dividends to participating policyholders of $8.5 million and $9.2 million during
1997 and 1996, respectively. No policyholder dividends were paid in 1998;
however, the policyholder dividends expected to be paid after 1997 were reduced
by $0.5 million during the quarter ended March 31, 1998 due to loss experience.

          As more fully described in Note 1(b), the Company transferred the
liability for policyholder dividends to Zenith on April 1, 1998, in accordance
with the terms of the Asset Purchase Agreement.

      (T) DETERMINATION OF FAIR VALUES OF FINANCIAL INSTRUMENTS

          In the accompanying financial statements, cash and cash equivalents,
fixed maturities and equity securities, receivables, and other liabilities have
been identified as financial instruments. The fair values of fixed maturities
and equity securities are presented in Note 5. For the remaining financial
instruments, management believes the carrying values approximate fair value due
to the short maturity, terms, and fluctuations in market conditions of those
instruments. The estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates reported herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies could have a material effect
on the estimated fair value amounts.

      (U) COMPREHENSIVE INCOME

          As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this standard had no impact
on the Company's net income or shareholders' equity. In addition to certain
other adjustments, SFAS 130 requires unrealized gains or losses on the Company's
available for sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.

      (V) RECLASSIFICATIONS

         For comparative purposes, certain amounts in the accompanying 1997 and
1996 financial statements have been reclassified from amounts previously
reported. Those reclassifications had no effect on previously reported
shareholders' equity or net income.





                                      F-21
<PAGE>   62




(3)      MANAGEMENT AND OUTSOURCING AGREEMENTS

      Following the consummation of the sale to Zenith on April 1, 1998, the
Company has had no employees. Therefore, as more fully described below, the
Company entered into a management agreement and certain outsourcing service
agreements to provide the Company with the necessary resources to conduct its
day-to-day activities.

      In February 1998, the Company entered into a Management Agreement (the
"Management Agreement") with The Phoenix Management Company, Ltd. ("Phoenix")
for the provision of various management services to the Company immediately
following the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith. Mr. Frederick M. Dawson owns a majority interest
in Phoenix, a Florida limited partnership, and controls its operations as
President of the General Partner. Mr. Walter E. Riehemann owns a minority
interest in Phoenix and serves as Vice President and Secretary of the General
Partner. Although neither Mr. Dawson nor Mr. Riehemann have been employees of
the Company since the consummation of the transactions contemplated by the Asset
Purchase Agreement with Zenith, the Management Agreement specifically provides
that Mr. Dawson is to hold the titles of President and Chief Executive Officer
of the Company and Mr. Riehemann is to hold the titles of Chief Investment
Officer, Treasurer, and Secretary of the Company.

         Pursuant to the terms of the Management Agreement, the Company is to
pay Phoenix $0.1 million per month, plus expenses, and has granted Phoenix a
restricted stock award for 1,725,000 shares of RISCORP's Class A Common Stock
(subject to certain vesting provisions) in consideration for its management
services. The Management Agreement has an initial term of three years which
commenced immediately following the consummation of the transactions
contemplated by the Asset Purchase Agreement with Zenith, and the Company has
the right to extend the term for an additional year. The Company paid Phoenix a
retainer of $0.6 million, which retainer is to be applied by Phoenix against the
fees payable by the Company during the final six months of the initial term.
That retainer is included in other assets in the accompanying December 31, 1998
consolidated financial statement. The restricted stock grant vests monthly over
the initial term of the Management Agreement, and Phoenix is entitled to all
rights applicable to holders of shares of RISCORP's Class A Common Stock with
respect to all such shares from the date of grant, including, without
limitation, the right to receive any dividends or distributions payable on the
restricted stock. Pursuant to the terms of the Management Agreement, the Company
paid Phoenix $2.8 million to reimburse the partners of the Management Company,
on an after-tax basis, for all taxes (exclusive of state taxes) incurred in
connection with the Section 83(b) election filed with respect to the restricted
stock grant. In the event that the Management Agreement is terminated by the
Company prior to the expiration of its initial term due to (i) the complete
liquidation, dissolution, and winding up of all of the business and affairs of
the Company, including, without limitation, the final distribution to all
RISCORP shareholders or (ii) the final distribution to the holders of RISCORP's
Series A Common Stock, the vesting under the restricted stock grant will
accelerate immediately prior to such event and the Company will make a lump sum
payment to Phoenix equal to the unpaid balance of the amount that Phoenix would
have received in monthly management fees during the initial term of the
Management Agreement.

      The fair market value of the restricted stock grant to Phoenix on its
effective date was $4.1 million. In October 1998, the Company paid Phoenix $2.8
million in connection with the income taxes incurred by the partners of Phoenix
on the restricted stock grant. Those amounts have been included in commissions
and general and administrative expenses in the accompanying 1998 consolidated
statement of operations.



                                      F-22
<PAGE>   63

      Pursuant to the terms of the Management Agreement, Phoenix provides, among
other things, the following services to the Company: (i) management of the
day-to-day operations of the Company and its subsidiaries, (ii) management of
the preparation, negotiation, and defense of the Final Business Balance Sheet
(as defined in the Asset Purchase Agreement), (iii) assistance in the overall
planning and coordination of the business of the Company, (iv) assistance in the
resolution of all claims and contingencies pending or subsequently asserted
against the Company, (v) coordination of the finance, accounting, and tax
requirements of the Company with the specific duties to be delegated, at the
expense of the Company, to competent professionals approved by the Board of
Directors of the Company, (vi) preparation of the investment policy for the
Company and coordination of the investment transactions through one or more
investment advisors, and (vii) performance of such other duties as may from time
to time be requested by the Board of Directors of the Company not inconsistent
with the terms of the Management Agreement.

      In May 1997, subject to shareholder approval, RISCORP granted to Mr.
Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
RISCORP's Class A Common Stock. Pursuant to the terms of the Management
Agreement, immediately following the consummation of the transactions
contemplated by the Asset Purchase Agreement with Zenith and the receipt of the
applicable cash payments under his employment agreement, the Company and Mr.
Dawson entered into a Termination Agreement evidencing the termination of each
party's rights, duties, and obligations under Mr. Dawson's employment agreement,
including the termination of the stock option grants and Mr. Dawson's right to
receive any of the shares thereunder.

      Effective April 1, 1998, the Company entered into an accounting
outsourcing agreement with Buttner Hammock & Company, P.A. ("BHC"). Under the
terms of the agreement, BHC is to provide monthly accounting, financial
reporting, tax return preparation, and certain financial and tax consulting
services. Under that agreement, Mr. Buttner has been designated as the chief
accounting officer for RISCORP and each of its subsidiaries. The agreement with
BHC is for a period of 36 months. In consideration for the services provided by
BHC, the Company is to pay BHC a monthly fee of approximately $0.1 million
during 1998, 1999, and 2000, plus reasonable out-of-pocket costs. In addition,
as defined in the agreement, BHC may also provide certain services to the
Company that are to be billed on an hourly rate basis. The Company paid BHC a
retainer of $0.5 million against the fees due for the final six months of the
initial term of the agreement. That retainer is included in other assets in the
accompanying December 31, 1998 consolidated balance sheet.

      Effective April 1, 1998, the Company entered into a computer outsourcing
agreement. Under the terms of that agreement, the vendor is to provide the
Company with computer configuration, software installation, network
configuration and maintenance, telecommunication coordination, computer
maintenance, and other computer-related services. The agreement is for a period
of 36 months. In consideration of the services provided, the Company is to pay a
fee of $100 per hour plus reasonable out-of-pocket costs with a minimum
commitment of 1,020 hours for year one of the contract and a minimum commitment
of 900 hours for years two and three of the contract.





                                      F-23
<PAGE>   64



      During 1998, the Company expensed $3.4 million in fees, excluding
restricted stock grants, and tax payments previously discussed, in connection
with the services provided under the foregoing management and outsourcing
agreements. Those expenses are included in commissions and general and
administrative expenses in the accompanying 1998 consolidated statement of
operations.


(4)   ACQUISITIONS AND JOINT VENTURE

ACQUISITIONS

      As more fully described below, RISCORP acquired RISCORP National Insurance
Company ("RNIC") and two workers' compensation management services companies in
1996. Each of those transactions was accounted for under the purchase method of
accounting under which the aggregate purchase price paid for the entity was
allocated to the assets acquired and liabilities assumed based on the estimated
fair value of such assets and liabilities at the dates of acquisition. The
excess of the purchase prices over the fair value of the net assets acquired has
been reported as costs in excess of net assets acquired and has been amortized
over periods ranging from five to 15 years. For acquisitions in which net assets
acquired exceeded the purchase price, a liability for net assets acquired in
excess of costs has been recorded and has been accreted over 10 years.

      The operating results of the acquired entities have been included in the
consolidated financial statements from their dates of acquisition. The following
schedule summarizes certain pro forma consolidated results of operations for
1996, as if the acquisitions took place on January 1, 1996 (in thousands, except
the per share amount):

<TABLE>
                    <S>                                 <C>
                    Total revenues                      $  275,410
                    Income before income taxes              18,503
                    Net income                               6,860
                    Earnings per share                        0.19
</TABLE>

ACQUISITION OF COMPSOURCE

      In March 1996, RISCORP purchased all of the outstanding stock of
CompSource, Inc. and Insura, Inc. (collectively, "CompSource") in exchange for
$12.1 million in cash and 112,582 shares of RISCORP's Class A Common Stock
valued at $2.1 million on the date of acquisition. On the acquisition date, the
excess of the purchase price over the fair value of the net assets acquired was
$12.6 million and was recorded as goodwill. CompSource is a workers'
compensation management services company offering its services in North
Carolina. Pursuant to a stock redemption agreement entered into as part of this
transaction, the former shareholders of CompSource elected to have RISCORP
repurchase the 112,582 shares on March 8, 1997, and RISCORP repurchased those
shares from the former shareholders for $2.1 million in accordance with the
terms of the redemption agreement.

ACQUISITION OF INDEPENDENT ASSOCIATION ADMINISTRATORS, INC. ("IAA") AND RISK
INSPECTION SERVICES AND CONSULTING, INC. ("RISC")

      In September 1996, RISCORP purchased all of the outstanding stock of IAA
and RISC in exchange for $11.5 million, consisting principally of 790,336 shares
of RISCORP's Class A Common Stock valued at $10.9 million on the date of
acquisition. IAA and RISC are workers' compensation management services
companies offering services in Alabama. On the acquisition date, the excess of
the purchase price over the fair value of the net assets acquired was $11.4
million and was recorded as goodwill.


                                      F-24
<PAGE>   65

      During the first quarter of 1997, the Company determined that the goodwill
recorded when IAA and RISC were acquired could not be fully recovered from the
profitability of the workers' compensation business that was then under
contract. Therefore, as of December 31, 1996, $2.8 million of goodwill was
written off and was reported as amortization expense. The remaining unamortized
goodwill relating to those acquisitions was $7.8 million and $7.9 million at
March 31, 1998 (just prior to the transfer of the goodwill to Zenith on April 1,
1998) and December 31, 1997, respectively.

      Due to a decrease in the market value of RISCORP's Class A Common Stock,
790,336 additional shares of RISCORP's Class A Common Stock valued at $0.6
million were issued on January 9, 1998 to the former shareholders of IAA.

ACQUISITION OF ATLAS INSURANCE COMPANY

      In March 1996, a wholly-owned subsidiary of RISCORP acquired 100 percent
of the outstanding capital stock of Atlas Insurance Company for $5 million in
cash. Following the acquisition, the name was changed from Atlas Insurance
Company to RISCORP National Insurance Company ("RNIC"). RNIC, which primarily
provided workers' compensation insurance, is licensed to do business in 19
states and is authorized to operate on an excess and surplus lines basis in five
additional states. On the acquisition date, the excess of the purchase price
over the fair value of the net assets acquired was $2.6 million and was recorded
as goodwill.

JOINT VENTURE ARRANGEMENT

      In January 1996, RISCORP, through one of its wholly-owned subsidiaries,
entered into a joint venture arrangement with Health Care Service Corporation
("HCSC"), a subsidiary of Blue Cross and Blue Shield of Illinois, to underwrite
and sell managed care workers' compensation insurance in Illinois. RISCORP and
HCSC each held 50 percent ownership in the joint venture known as Third Coast
Holding Company ("Third Coast"). RISCORP contributed the use of its expertise,
insurance systems, and intellectual property, while HCSC contributed cash of $10
million. RISCORP's contributed property in Third Coast was valued at $10
million; however, RISCORP's cost basis in the contributed property was $0 and,
as of December 31, 1996, RISCORP recorded its initial investment in Third Coast
at $0. The carrying value of RISCORP's investment in Third Coast at December 31,
1997 was $0.

      Initially, RISCORP accounted for its 50 percent investment in Third Coast
on the equity basis of accounting, whereby RISCORP's recorded investment was
adjusted for its proportionate share of earnings or losses of Third Coast.
RISCORP discontinued the use of the equity method of accounting for Third Coast
in the first quarter of 1997 when the cumulative losses reduced RISCORP's
investment in Third Coast to $0. RISCORP has not made any financial guarantees
relating to Third Coast and has not made any financial commitments to provide
any future funding to Third Coast.

      Effective January 1, 1998, RISCORP entered into an agreement with HCSC to
sell RISCORP's 50 percent interest in Third Coast for $1.3 million. The $1.3
million gain on the sale of Third Coast was included in the 1998 net realized
gains. RISCORP received the funds due in connection with this transaction in
April 1998. In connection with the closing of the sale to Zenith, RISCORP
received notice that Zenith believes that it is entitled to the proceeds from
the sale of Third Coast. RISCORP disputes Zenith's entitlement to these proceeds
and intends to vigorously defend any claim asserted by Zenith related to the
Third Coast transaction.

      As more fully described in Note 1(b), the Company transferred the
unamortized balance of goodwill to Zenith on April 1, 1998, in accordance with
the terms of the Asset Purchase Agreement.



                                      F-25
<PAGE>   66

(5)   INVESTMENTS

      Investments (including restricted investments) included in the
accompanying consolidated balance sheets as of December 31, 1998 and 1997 are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                  COST OR       GROSS        GROSS
                                                AMORTIZED     UNREALIZED   UNREALIZED    ESTIMATED
                                                   COST         GAINS       LOSSES       FAIR VALUE
                                                ---------     ----------   ----------    ---------
<S>                                             <C>           <C>          <C>           <C>
DECEMBER 31, 1998:
   Available for sale:
      Fixed maturity securities:
         U.S. government obligations             $ 13,681        $  219        $--        $ 13,900
         Corporate obligations                      2,032            48         --           2,080
                                                 --------        ------        ---        --------
               Total investments                 $ 15,713        $  267        $--        $ 15,980
                                                 ========        ======        ===        ========

   Available for sale:
      Unrestricted                               $  6,666        $   50        $--        $  6,716
      Restricted                                    9,047           217         --           9,264
                                                 --------        ------        ---        --------
               Total                             $ 15,713        $  267        $--        $ 15,980
                                                 ========        ======        ===        ========

DECEMBER 31, 1997:
   Available for sale:
      Fixed maturity securities:
         Municipal government obligations        $ 58,294        $  718        $ 2        $ 59,010
         U.S. government obligations               38,065         1,193         10          39,248
         Corporate obligations                     88,102         1,119         22          89,199
         Mortgage backed securities                 1,932            36         --           1,968
         Asset backed securities                    9,920            49          3           9,966
                                                 --------        ------        ---        --------
               Total available for sale           196,313         3,115         37         199,391
                                                 --------        ------        ---        --------

   Held to maturity:
      Fixed maturity securities:
         U.S. government obligations               18,434           204          9          18,629
         Municipal government obligations           4,186            62         --           4,248
         Certificates of deposit                    1,470            --         --           1,470
                                                 --------        ------        ---        --------
               Total held to maturity              24,090           266          9          24,347
                                                 --------        ------        ---        --------
               Total investments                 $220,403        $3,381        $46        $223,738
                                                 ========        ======        ===        ========

   Available for sale:
      Unrestricted                               $142,876        $2,732        $37        $145,571
      Restricted                                   53,437           383         --          53,820
                                                 --------        ------        ---        --------
               Total                             $196,313        $3,115        $37        $199,391
                                                 ========        ======        ===        ========
</TABLE>


         The fair values of investments (including restricted investments) at
December 31, 1998 and 1997 were determined using independent pricing services.

         The amortized cost and estimated fair value of fixed maturities
(including restricted investments) by contractual maturity, as of December 31,
1998, are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                         AVAILABLE FOR SALE
                                                      -------------------------
                                                      AMORTIZED      ESTIMATED
                                                         COST        FAIR VALUE
                                                      ---------      ----------
             <S>                                      <C>            <C>
             Due in 1999                               $  8,195       $  8,227
             Due in 2000 to 2003                          7,020          7,205
             Due in 2004 to 2008                            498            548
                                                       --------       --------

             Total                                     $ 15,713       $ 15,980
                                                       ========       ========
</TABLE>



                                      F-26
<PAGE>   67

         The actual maturities may differ from the contractual maturities
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.

         During 1998, 1997, and 1996, proceeds from sales of fixed maturities
available for sale totaled $80.4 million, $110.3 million, and $88.9 million,
respectively.

         Gross realized gains and gross realized losses from the sale of
investments for 1998, 1997, and 1996 are summarized in the following table and
were reported in net investment income in the accompanying consolidated
statements of operations (in thousands):

<TABLE>
<CAPTION>
                                        1998            1997          1996
                                      -------         -------         -----
         <S>                          <C>             <C>             <C>
         Gross realized gains         $ 4,348         $ 1,770         $ 178
         Gross realized losses            (68)           (224)          (73)
                                      -------         -------         -----
         Net realized gains           $ 4,280         $ 1,546         $ 105
                                      =======         =======         =====
</TABLE>

         As more fully described in Note 1(b), a gross realized gain of $2.9
million and a gross realized loss of $0.1 million relating to securities that
were transferred to Zenith in connection with the Asset Purchase Agreement were
included in the foregoing 1998 net realized gains.

         The following table summarizes the components of net investment income
for 1998, 1997, and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                        1998             1997             1996
                                                     --------         --------         --------

         <S>                                         <C>              <C>              <C>
         Fixed maturities                            $  3,733         $ 13,815         $ 10,444
         Equity securities                               (166)             469              547
         Cash and cash equivalents                      1,633            2,516            1,700
         Zenith receivable and other accounts
            receivable                                  2,080               --               --
                                                     --------         --------         --------
                                                        7,280           16,800           12,691
         Investment expenses                             (177)            (353)            (497)
                                                     --------         --------         --------

         Net investment income                       $  7,103         $ 16,447         $ 12,194
                                                     ========         ========         ========
</TABLE>

         Although the Company has credit risk in the investment portfolio, no
fixed maturity security had a Standard & Poor's rating of less than A at
December 31, 1998. The carrying value of securities on deposit with various
governmental agencies was $11.6 million and $23.8 million at December 31, 1998
and 1997, respectively. In addition, the carrying value of securities held in
trust in connection with a fronting agreement between Virginia Surety Company,
Inc. and RISCORP Management Services, Inc. was $1.6 and $1.5 at December 31,
1998 and 1997, respectively. Such securities are included in fixed maturities
available for sale-restricted classification at December 31, 1998 and in fixed
maturities held to maturity-restricted classification at December 31, 1997 in
the accompanying consolidated balance sheets.

         The carrying value of the Company's investments in excess of 10 percent
of RISCORP's shareholders' equity at December 31, 1998 and 1997, aggregated by
issuer and excluding investments issued or guaranteed by the United States,
consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                            1998                 1997
                                                        -------------          ---------

             <S>                                        <C>                    <C>
             Fixed maturities - State of Florida        $           -          $ 20,980
                                                        =============          ========
</TABLE>


(6)   LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES



                                      F-27
<PAGE>   68

         The Company established an estimated liability for losses and loss
adjustment expenses with respect to reported claims and claims incurred but not
yet reported as of the end of each accounting period. The Company established
that liability based on facts then known, estimates of future claims trends, and
other factors, including the Company's experience with similar cases and
historical Company and industry trends, such as reserving patterns, loss payment
patterns, claim closure and reporting patterns, and product mix.

         The activity in the liability for losses and loss adjustment expenses
for 1998, 1997, and 1996, is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                            1998              1997              1996
                                                                         ---------         ---------         ---------

         <S>                                                             <C>              <C>                <C>
         Gross liability for losses and loss adjustment expenses,
           beginning of year                                             $ 437,038         $ 458,239         $ 261,700
         Reinsurance recoverables                                         (184,251)         (180,698)         (100,675)
         SDTF recoverables                                                 (45,211)          (49,505)          (51,836)
         Prepaid managed care fees                                          (8,420)          (31,958)          (16,369)
                                                                         ---------         ---------         ---------
         Net balance at January 1                                          199,156           196,078            92,820
                                                                         ---------         ---------         ---------

         Assumed during the year from loss portfolio transfers
           and acquisitions                                                     --                --            88,212
                                                                         ---------         ---------         ---------

         Incurred losses and loss adjustment expenses related to:
           Current year                                                     14,860           125,764           123,986
           Prior years                                                      11,717            (2,401)            3,023
                                                                         ---------         ---------         ---------
           Total incurred losses and loss adjustment expenses               26,577           123,363           127,009
                                                                         ---------         ---------         ---------


         Paid related to:
           Current year                                                      1,717            45,646            56,088
           Prior years                                                      26,760            74,639            55,875
                                                                         ---------         ---------         ---------
           Total paid                                                       28,477           120,285           111,963
                                                                         ---------         ---------         ---------
         Net balance at December 31                                        197,256           199,156           196,078
</TABLE>




                                      F-28
<PAGE>   69




<TABLE>
<CAPTION>
                                                                            1998             1997            1996
                                                                         ---------         --------        --------

         <S>                                                             <C>              <C>             <C>
         Plus reinsurance recoverables                                     214,302          184,251         180,698
         Plus SDTF recoverables                                             44,552           45,211          49,505
         Plus prepaid managed care fees                                      6,182            8,420          31,958
                                                                         ---------         --------        --------
         Gross liability at December 31                                    462,292          437,038         458,239

         Gross liability for losses and loss adjustment expenses
           transferred to Zenith [see Note 1(b)]                          (462,292)              --              --
                                                                         ---------         --------        --------

         Gross liability for losses and loss adjustment expenses,
           at December 31                                                $      --         $437,038        $458,239
                                                                         =========         ========        ========
</TABLE>


         The 1998 adverse loss development was primarily related to increases in
the actuarial estimates of remaining loss liabilities pertaining to the Florida
business offset somewhat by decreases in the actuarial estimates of remaining
loss liabilities pertaining to the Alabama and North Carolina business. The 1996
adverse development occurred due to deterioration in pre-1994 accident years
offset in part by improved expenses for the 1995 accident year.

         The Company recognized recoveries from the SDTF and subrogation from
third parties as a reduction of incurred losses. In determining the best
estimate of the effect of these recoveries on the ultimate cost of all unpaid
losses and loss adjustment expenses, the Company utilized historical and
industry statistics. The estimated amount of recoveries from the SDTF included
as a reduction to the liability for losses and loss adjustment expenses was $0,
$45.2 million, and $49.5 million at December 31, 1998, 1997, and 1996,
respectively.

         As more fully described in Note 1(b), the Company transferred the
liabilities for losses and loss adjustment expenses to Zenith on April 1, 1998,
in accordance with the terms of the Asset Purchase Agreement.


(7)      FLORIDA SPECIAL DISABILITY TRUST FUND ("SDTF")

         Florida operates the SDTF that reimburses insurance carriers,
self-insurance funds, and self-insured employers in Florida for certain workers'
compensation benefits paid to injured employees. The SDTF reimburses claim
payments made to a claimant whose injury merges with, aggravates, or accelerates
a pre-existing permanent physical impairment. The SDTF is managed by the State
of Florida and is funded through assessments against insurers and self-insurers
providing workers' compensation coverage in Florida. The Company's pro-rata
amount of the SDTF assessment is based on their written premiums compared to the
total workers' compensation premiums written by all Florida insurers and
self-insurance funds. Should a carrier stop writing business, it has no
obligation for future assessments. The SDTF's assessment formula has
historically yielded sufficient revenues for annual reimbursement payments and
for costs associated with administering the SDTF. The SDTF has not prefunded its
claims liability and no reserves currently exist. The Company has been informed
that, as of September 30, 1996, the SDTF had an actuarially projected
undiscounted liability of $4 billion based on a study performed for the SDTF by
independent actuarial consultants. The SDTF actuarial study also indicated that,
at the current assessment rates, the payment of the existing liability would
take numerous years.

         Under Florida's sunset laws applicable to some state-sponsored funds,
the SDTF would have expired in November 1996 unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature, the SDTF
was continued and not scheduled for further review under Florida sunset laws



                                      F-29
<PAGE>   70

until the year 2000. However, in early 1997, the Florida legislature passed a
bill substantially changing the SDTF. Under that 1997 bill, the SDTF is not to
accept claims with accident dates after December 31, 1997; as such, certain SDTF
claims may have to be refiled for reimbursement and any such filing may require
a refiling fee. Additionally, companies accruing SDTF recoveries may be
statutorily limited in the level of recoverables they may be allowed to carry.
The bill provides for a funding mechanism through which companies writing
workers' compensation insurance in Florida will be assessed an annual charge to
cover payments made by the SDTF. The Company believes that, even in the event of
default by the SDTF, the existing reimbursements of the SDTF would become
general obligations of the State of Florida.

         For 1998, 1997, and 1996, the Company's cash recoveries from the SDTF
were $1.8 million, $5.9 million, and $2.5 million, respectively. The Company's
SDTF assessments were $2 million, $6.8 million, and $11.7 million for 1998,
1997, and 1996, respectively.

         As more fully described in Note 1(b), the Company transferred the
recoverable from the SDTF to Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.


(8)      REINSURANCE

         The Company was involved in the cession of insurance to certain
unaffiliated insurance and reinsurance companies under specific excess-of-loss
and quota-share reinsurance contracts. The amounts by which certain financial
statement balances have been reduced as a result of these reinsurance contracts
as of and for the years ended December 31, 1998, 1997, and 1996 are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                      1998            1997            1996
                                                                    --------        --------        --------

         <S>                                                        <C>             <C>             <C>
         Premiums written                                           $ 16,785        $143,983        $192,528
         Premiums earned                                              24,420         167,274         165,022
         Ceded losses and loss adjustment expenses                    47,667          73,868         153,200
         Liabilities for losses and loss adjustment expenses         645,892         183,150         180,698
         Unearned premiums                                            61,384          25,842          49,788
</TABLE>

         Effective April 1, 1998, the Company entered into an assumption and
indemnity reinsurance agreement with Zenith in connection with the sale to
Zenith [see Note 1(b)]. Under the terms of the assumption and indemnity
reinsurance agreement, the Company ceded to Zenith 100 percent of the
outstanding liabilities for losses and loss adjustment expenses (including
incurred but not reported losses) and 100 percent of the unearned premiums as of
April 1, 1998. Zenith issued assumption certificates to all the Company's former
policyholders. The liabilities for losses and loss adjustment expenses and
unearned premiums that were transferred to Zenith on April 1, 1998 were $462.3
million and $43.2 million, respectively. In accordance with the terms of the
Asset Purchase Agreement, Zenith assumed all of the Company's obligations under
its then current and prior insurance and reinsurance contracts. The terms of the
Asset Purchase Agreement, including the assumption and indemnity reinsurance
agreement, was approved by the Florida and Missouri Insurance Departments on
March 31, 1998 and April 1, 1998, respectively.

         Effective January 1, 1995, RISCORP Insurance Company ("RIC") and
RISCORP Property & Casualty Insurance Company ("RPC") entered into quota-share
reinsurance agreements with American Re-Insurance Company ("AmRe"), whereby RIC
and RPC ceded 50 percent of new and renewal premiums written and losses
incurred. These agreements provided for the payment of a ceding commission at
rates that varied from 27.5 percent to 60 percent based on the loss ratio of the
business ceded, excluding unallocated loss adjustment expenses. The provisional
ceding commission provided for



                                      F-30
<PAGE>   71

in the agreements was 33 percent. The agreements were to remain in force for an
unlimited period of time, but could be terminated by either party at any
December 31. RISCORP and AmRe were parties to a senior subordinated note
agreement in the principal amount of $15 million due 2002. Under the terms of
the note agreement, the Company was to maintain the quota-share treaty or other
comparable reinsurance agreements with AmRe for a minimum period of five years
beginning January 1, 1995. Ceding commissions earned under the AmRe reinsurance
agreements were $7.7 million, $50 million, and $58.2 million during 1998, 1997,
and 1996, respectively. At December 31, 1998 and 1997, the Company may be
contingently liable for the return of ceding commissions to AmRe of $0 and $9.3
million, respectively.

         Effective September 1, 1996, RIC entered into a retrocessional
reinsurance agreement with Chartwell Reinsurance Company ("Chartwell"), whereby
Chartwell was to retrocede to the Company 50 percent of workers' compensation
business written by RISCORP Management Services, Inc. (an affiliate of the
Company) as underwriting manager for Virginia Surety Company, Inc. The agreement
provided for a profit commission in addition to the 30 percent ceding commission
based on the loss ratio and other expenses incurred under the contract. The
initial profit commission calculation was scheduled to occur as of September 1,
2000. This agreement was terminated on December 31, 1997.

         On April 18, 1997, RIC entered into a trust agreement with Chartwell
whereby RIC agreed to maintain in trust for the benefit of Chartwell 102 percent
of RIC's portion of the outstanding loss liabilities and unearned premiums. The
balance in this trust account was generally adjusted on a monthly basis, one
month in arrears.

         Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate Insurance Company ("Allstate"), Chartwell, Signet Star
Reinsurance Company ("Signet"), and San Francisco Reinsurance Company ("San Fran
Re"), whereby RPC ceded 90 percent of its inforce, and its new or renewal 1996
gross written premiums, for commercial umbrella coverage. The maximum limit
under this agreement was $5 million per insured, per occurrence. The agreement
provided for the payment of a ceding commission of 30 percent of the ceded
premiums. This agreement was to remain in force for an unlimited period of time,
but could be terminated by either party at any December 31. During 1997,
Allstate and San Fran Re were replaced on this agreement by Scor Reinsurance
Company ("Scor") and Hartford Fire Insurance Company ("Hartford"), respectively.
All other terms and conditions of the agreement were unchanged. This agreement
was terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.

         Effective January 1, 1996, RPC entered into a quota-share reinsurance
agreement with Allstate, Chartwell, Signet, San Fran Re, and Great Lakes
American Reinsurance Company, whereby RPC ceded 90 percent of its inforce, and
its 1996 new or renewal gross written premiums, for commercial property
coverage. The limit of coverage under this agreement was 90 percent of $2.5
million per risk, subject to an occurrence limitation of not less than $10
million nor greater than $15 million. The agreement provided for the payment of
a ceding commission of 30 percent of ceded premiums. This agreement was to
remain in force for an unlimited period of time, but could be terminated by
either party at any December 31. During 1997, Allstate and San Fran Re were
replaced on this agreement by Scor and Hartford, respectively. All other terms
and conditions of the agreement were unchanged. This agreement was terminated as
of December 31, 1997; however, the reinsurers continue to be responsible for
their portion of all losses incurred on policies effective before the
termination date.

         Effective January 1, 1996, RPC entered into a commercial casualty
excess-of-loss reinsurance agreement with Allstate, Chartwell, Signet, and San
Fran Re, whereby RPC ceded 100 percent of all losses incurred on business
inforce, written or renewed during the term of this agreement, per occurrence,
in excess of $0.25 million to $1 million. RPC was required to pay 11.5 percent
of earned premiums,



                                      F-31
<PAGE>   72

subject to a minimum premium of $0.5 million under the agreement. This agreement
was to remain in force for an unlimited period of time, but could be terminated
by either party at any December 31. During 1997, Allstate and San Fran Re were
replaced on this agreement by Scor and Hartford, respectively. All other terms
and conditions of the agreement were unchanged. This agreement was terminated as
of December 31, 1997; however, the reinsurers continue to be responsible for
their portion of all losses incurred on policies effective before the
termination date.

         Effective September 1, 1995, RPC entered into a medical excess-of-loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby RPC ceded
100 percent of all losses incurred per insured, per agreement year, in excess of
$0.15 million up to $1 million. RPC paid $6.79 per certificate of insurance per
month for this coverage. The agreement was to be continuous, but could be
canceled by either party at any September 1. The agreement was transferred to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.

         Effective January 1, 1997, RIC, RNIC, and RPC ceded losses in excess of
$0.5 million to Continental Casualty Company ("CNA") under an excess-of-loss
reinsurance treaty. This treaty contained a corridor deductible of $1.25 million
which is applicable in the aggregate to claims in the $0.5 million excess of
$0.5 million corridor for the Company. RIC and RPC had a similar contract with
CNA effective January 1, 1996 with a corridor deductible of $1 million. Although
the contract contained provisions for minimum and deposit premiums, the premiums
for 1997, based on earned premiums, exceeded the minimum premium provisions
specified under the contract.

         Beginning in 1996, RNIC ceded losses in excess of $0.5 million to CNA
under three separate excess-of-loss reinsurance treaties. Those treaties
provided for the payment of premiums to CNA based on earned premiums. Although
the contracts contained provisions for minimum premiums, the premiums for 1996
exceeded the minimum premium provisions specified under these contracts. Each of
those treaties with CNA expired on January 1, 1997.

         Effective October 1, 1996, RNIC entered into a quota-share reinsurance
agreement with Chartwell, Swiss Reinsurance America Corporation, and Trenwick
America Reinsurance Corporation (collectively the "Reinsurers"), whereby RNIC
ceded 65 percent of its net unearned premiums as of October 1, 1996 and 65
percent of net written workers' compensation and employers liability premiums,
new or renewal, for the last four months of 1996. Effective January 1, 1997,
RNIC reduced the ceded quota-share amount to 60 percent. The agreement provided
for the payment of a ceding commission at rates which varied from 27 percent to
49 percent based on the loss ratio of the business ceded. The provisional ceding
commission contained in the agreement was 33 percent. This agreement was
terminated as of December 31, 1997; however, the reinsurers continue to be
responsible for their portion of all losses incurred on policies effective
before the termination date.

         Effective January 1, 1997, RNIC entered into an agreement with the
Insurance Company of New York ("INSCORP") and Chartwell to issue
assumption-of-liability endorsements ("ALE") to certain policyholders of RNIC.
This agreement expired on December 31, 1997 and was not renewed. In connection
with this agreement, RNIC was required to provide INSCORP and Chartwell with
letters of credit in amounts equal to 29.2 percent of the gross written premiums
on all ALE policies plus $1.25 million in fixed maturities. The agreement also
required RNIC to pay a fee of .5 percent of gross premiums subject to a minimum
fee of $50 and a maximum fee of $1,000 per ALE. As of December 31, 1998 and
1997, based on the gross premiums subject to ALE's, RNIC provided letters of
credit of $0 and $3.7 million, respectively, under this agreement. These letters
of credit were secured by certificates of deposits and were reported in the
accompanying consolidated balance sheets under the caption "Cash and short-term
investments--restricted." RNIC incurred fees of $0 and $38,797 during 1998 and
1997, respectively, under this agreement.



                                      F-32
<PAGE>   73

         RNIC also maintained specific excess-of-loss coverage with Allstate on
the run-off of the book of business acquired by RNIC in March 1996.

         In connection with the sale to Zenith [as more fully described in Note
1(b)], RIC and RPC entered into an interim reinsurance agreement and cut-through
endorsement with Zenith covering all inforce business as of June 17, 1997 and
all new and renewal business written after June 17, 1997 on Florida workers'
compensation policies. In connection with this agreement, Zenith required that
33 percent of the direct written premiums and 33 percent of the initial unearned
premiums subject to this agreement were to be deposited into a trust account for
the benefit of Zenith. In addition, the agreement required the Company to pay a
fee to Zenith of one percent of the subject premiums. The agreement with Zenith
was terminated on April 1, 1998. As of December 31, 1998 and 1997, the market
value of the securities in the trust account was $0 and $52.4 million,
respectively, and the required trust account balance was $0 and $51.6 million,
respectively, based on the direct written premiums for the period June 18, 1997
through March 31, 1998 and the unearned premiums at June 17, 1997. The balance
in the trust account was to be adjusted on a monthly basis, one month in
arrears. The Company incurred fees to Zenith of $0.1 million and $1.4 million
during 1998 and 1997, respectively, under this agreement.

         All of the reinsurance contracts described in this note and in force on
April 1, 1998 were assumed by Zenith on April 1, 1998, in accordance with the
terms of the Asset Purchase Agreement.

         The Company had no combined reinsurance recoverables and ceded unearned
premiums in excess of three percent of shareholders' equity as of December 31,
1998.

         At December 31, 1997, reinsurance recoverables consisted of $184.3
million of recoverables for unpaid losses and loss adjustment expenses. At
December 31, 1997, $89.4 million of the reinsurance recoverable balance related
to RIC's and RPC's quota-share agreement with one reinsurer. The remaining
recoverable balance of $94.9 million at December 31, 1997 represented estimated
recoveries from 17 unaffiliated reinsurers that provided quota-share and
specific and aggregate excess-of-loss coverage.

         To the extent that the reinsurers, including Zenith, are unable to meet
their contractual obligations, the Company may be contingently liable for any
losses and loss adjustment expenses ceded.


(9)      MANAGED CARE AGREEMENTS

         RIC and RPC were parties to arrangements with both Humana Medical
Plans, Inc. ("Humana"), an unaffiliated health maintenance organization ("HMO"),
and RISCORP Health Plans, Inc. ("RHP"), an affiliated HMO, whereby, upon
policyholder election to participate, RIC's and RPC's medical claim costs were
capped for the first three years of each claim. In May 1996, RIC and RPC
terminated those arrangements with RHP; however, injured individuals were
covered for three years following any accident that occurred during policy
periods in effect prior to termination. The Humana arrangement, which commenced
July 1, 1995, was renewed for one additional year at the anniversary date. Under
the Humana arrangement, injured individuals were covered for three years
following any accident occurring within the policy periods. In October 1997, RIC
and RPC entered into loss portfolio transfer agreements under which RHP
transferred its liability to RIC and RPC under the managed care agreements; at
that date, RHP's remaining liability under the managed care agreement was
determined by an independent consulting actuarial firm to be $8 million and, in
November 1997, RHP transferred that amount to RIC and RPC in full satisfaction
of RHP's liability.



                                      F-33
<PAGE>   74

         The fees paid to Humana and RHP have been reported as prepaid assets
and losses and loss adjustment expenses in the accompanying consolidated balance
sheets. Included in losses and loss adjustment expenses were $0.3 million, $6.1
million, and $30.6 million of such fees for 1998, 1997, and 1996, respectively.

         To the extent that Humana was unable to meet its contractual
obligations under its agreement with RIC, RIC may be contingently liable for any
unpaid losses and loss adjustment expenses. At December 31, 1997, the estimated
unpaid losses and loss adjustment expenses to be covered by Humana were $4.8
million.

         As described in Note 1(b), RISCORP transferred the Humana and RHP
contractual obligations, in accordance with the terms of the Asset Purchase
Agreement.


(10)     INCOME TAXES

         The components of income taxes for 1998, 1997, and 1996 are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
                                              1998           1997            1996
                                            --------         ------        --------
         <S>                                <C>              <C>           <C>
         Current:
              Federal                       $(19,165)        $6,197        $ 17,919
              State                            1,040            798           2,280
                                            --------         ------        --------
                  Total current              (18,125)         6,995          20,199
                                            --------         ------        --------
         Deferred:
              Federal                         20,181            305         (12,126)
              State                               --             --             129
                                                             ------        --------
                  Total deferred              20,181            305         (11,997)
                                            --------         ------        --------
                  Total income taxes        $  2,056         $7,300        $  8,202
                                            ========         ======        ========
</TABLE>

      The differences between taxes computed at the statutory rates and recorded
income tax expense for 1998, 1997, and 1996 are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                            1998            1997            1996
                                                          --------         -------         -------

         <S>                                              <C>              <C>             <C>
         Computed "expected" tax expense (benefit)        $(24,087)        $ 5,105         $ 3,710
         State taxes in excess of federal benefit              807             519           1,336
         Non-taxable income                                   (231)         (1,188)           (982)
         Goodwill and other amortization                     3,339             801           2,437
         Valuation allowance                                21,168             412              --
         Fines and penalties                                     6              64             543
         Amounts related to prior years                         --              --             980
         Other                                               1,054           1,587             178
                                                          --------         -------         -------
            Income tax expense                            $  2,056         $ 7,300         $ 8,202
                                                          ========         =======         =======
</TABLE>

         The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities December 31,
1998 and 1997 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31
                                                                              ----------------------
                                                                               1998           1997
                                                                              -------        -------
         <S>                                                                  <C>            <C>
         Deferred tax assets:
           Net operating losses                                               $17,479        $    --
           Accrued litigation settlement costs                                  5,415          4,550
           Accrued employee benefits                                              224            575
           Unearned premiums                                                       --          2,132
           Discount on reserve for losses and loss adjustment expenses             --         14,160
           Bad debts                                                               --          2,450
           Deferred policy acquisition costs                                       --            422
           Other                                                                1,603            811
                                                                              -------        -------
              Gross deferred tax assets                                        24,721         25,100
                                                                              -------        -------

         Deferred tax liabilities:
           Unrealized gains on investments                                         --          1,077
           Depreciation                                                            --            645
           Other                                                                   --            846
           Gross deferred tax liabilities                                          --          2,568

                                                                              -------        -------
              Net deferred tax assets before valuation allowance               24,721         22,532
              Valuation allowance                                              21,580            412
                                                                              -------        -------
              Net deferred tax asset                                          $ 3,141        $22,120
                                                                              =======        =======
</TABLE>


                                      F-34
<PAGE>   75

      The Company estimated that approximately $3.1 million of its December 31,
1998 net deferred tax asset could be realized through the carryback of future
tax losses to prior years or the generation of future taxable income, and it is
more likely than not that the tax benefits of the deferred tax assets will be
realized. Accordingly, a valuation allowance of $21.6 million relating to the
December 31, 1998 deferred tax balance has been established.

      The Company has filed refund claims of $19.7 million related to the 1998
loss. The Company received $11.9 million of these refunds in March 1999 and the
remaining balance is expected to be received prior to the end of 1999.


(11)  NOTES PAYABLE

<TABLE>
      <S>                                                                                    <C>
      A December 31, 1997, notes payable are summarized as follows (in thousands):

           Subordinated notes to AmRe, a quota-share reinsurer, bearing interest
                at 12%; matures December 31, 2002                                              $ 15,000

           Note payable from acquisition of subsidiary, with implicit interest rate
                of 9.76% computed on the payment stream; matured November 9, 1998                   330

           Term loan, implicit interest rate of 12% computed on the payment stream;
                matured January 1, 1999                                                             279
                                                                                               --------

            Total                                                                              $ 15,609
                                                                                               ========
</TABLE>

         As more fully described in Note 1(b), the Company transferred the $15
million liability in connection with the AmRe note agreement to Zenith on April
1, 1998, in accordance with the terms of the Asset Purchase Agreement. The other
note payable amounts were paid in full during 1998.


(12)     SHAREHOLDERS' EQUITY

         RISCORP has 100 million shares of $.01 par value Class A Common Stock
authorized and 14,258,671 and 11,855,917 issued shares at December 31, 1998 and
1997, respectively. RISCORP's



                                      F-35
<PAGE>   76

Class B Common Stock, par value $.01, consists of 100 million shares authorized
and 24,334,443 million shares issued and outstanding at December 31, 1998 and
1997. Ten million shares of preferred stock are authorized, but no shares are
issued or outstanding. The characteristics of the Class B Common Stock are
identical to those of the Class A Common Stock, except that each holder of the
Class B Common Stock is entitled to 10 votes for each share held. The Class B
Common Stock may be converted into Class A Common Stock at any time at the
election of the holders on a one-for-one basis. RISCORP did not declare any
shareholder dividends during 1998, 1997, or 1996. At December 31, 1998 and 1997,
there were 112,582 shares of RISCORP's Class A Common Stock in treasury.

         RISCORP's insurance subsidiaries are limited by statute in their
ability to distribute unassigned surplus without the approval of their
respective domiciliary insurance department. Dividends or distributions to
shareholders that are made under these statutes and that do not require the
prior approval of the Florida or the Missouri Insurance Departments are
determined based on a consideration of an insurer's net income, realized and
unrealized capital gains, percentages of dividends and distribution of surplus,
and the relationship of surplus after the dividend or distribution is made to
the minimum required statutory surplus. In December 1997, RPC paid a $2.2
million dividend to its parent. During 1999, RISCORP's insurance subsidiaries
have the ability to dividend $6.4 million to their parents without the prior
approval of the Florida or Missouri Insurance Departments, consisting of $2.4
million from RPC, $3.1 million from RNIC, and $0.9 million from RIC.

         The combined statutory surplus as of December 31, 1998 and 1997, and
the combined statutory net income for 1998, 1997, and 1996, for RISCORP's
insurance subsidiaries, were as follows (in thousands):

<TABLE>
<CAPTION>
                             1998           1997           1996
                           --------        -------        -------

         <S>               <C>             <C>            <C>
         Surplus           $156,480        $96,280        $90,639
         Net income          14,672         11,042         13,980
</TABLE>

      To facilitate the regulators' responsibility to monitor insurer solvency,
the National Association of Insurance Commissioners issued a model law in
January 1995 to implement risk-based capital ("RBC") reporting requirements for
property and casualty insurance companies. The model law is designed to assess
capital adequacy and the level of protection that statutory surplus provides for
policyholder obligations. The RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; (ii) credit risk, which evaluates the
declines in asset values; (iii) investment risk, which evaluates declines in
asset values; and (iv) off balance sheet risk. Pursuant to the model law,
insurers having less statutory surplus than required by the RBC calculation are
subject to varying degrees of regulatory action, depending on the level of
capital inadequacy. RPC and RIC are domiciled in the State of Florida, which has
yet to adopt the provisions of the RBC model law; however, these insurance
companies monitor their RBC results in anticipation of future filings. The other
RISCORP insurance subsidiary, RNIC, is domiciled in Missouri and RBC information
is filed with state regulators. RBC is calculated on an annual basis. At
December 31, 1998 and 1997, RISCORP's insurance subsidiaries had statutory
surplus in excess of any action level requirements.


 (13)  STOCK OPTIONS

      In conjunction with the reorganization discussed in Note 1(a), stock
options of RISCORP were substituted for options previously granted to certain
officers and employees of RISCORP's affiliates. The options granted in 1997 were
exercisable for 10 years after the date and the options vested over periods
ranging from immediately to two years. The options granted in 1996 were
exercisable over a 12 year period after the date of the grant and the options
vested over periods ranging from two to nine years.



                                      F-36
<PAGE>   77

         At December 31, 1998, the Company had no stock options outstanding. A
summary of the status of RISCORP's stock option plan as of and for the years
ended December 31, 1998, 1997, and 1996 is as follows:

<TABLE>
<CAPTION>
                                                   1998                           1997                        1996
                                        --------------------------     -------------------------    ------------------------
                                                       WEIGHTED                     WEIGHTED                    WEIGHTED
                                                       AVERAGE                       AVERAGE                     AVERAGE
         OPTIONS                        SHARES      EXERCISE PRICE     SHARES     EXERCISE PRICE     SHARES   EXERCISE PRICE
         -------                        ------      --------------     ------     --------------     ------   --------------

   <S>                                  <C>         <C>               <C>         <C>             <C>         <C>
   Outstanding, beginning of year        2,533,326     $ 4.43          3,078,779     $3.67         2,556,557     $3.96
   Granted                                       -          -          2,533,326      4.43         1,572,538      6.84
   Exercised                                     -          -                  -         -           (17,999)     3.61
   Canceled                             (2,533,326)      4.43         (3,078,779)     3.67        (1,032,317)     9.22
                                        ----------     ------         ----------     -----        ----------     -----

     Outstanding, end of year                    -     $    -          2,533,326     $4.43         3,078,779     $3.67
                                        ==========     ======         ==========     =====        ==========     =====

     Options exercisable at end of year          -          -          1,085,711     $6.67           731,849     $2.08
                                        ==========     ======         ==========     =====        ==========     =====
     Weighted average fair value of
         options granted during
         the year                                $      -                       $1.92                      $5.44
                                                 ========                       =====                      =====
</TABLE>


      The fair value of each option was estimated on the date that the option
was granted. The exercise prices of options of options granted were determined
to be not less than the fair market value of RISCORP's Class A Common Stock on
the dates that the options were granted, with the exception of options for
387,314 and 2,604 shares made to two employees at exercise prices of $0.72 and
$4.50, respectively, and fair values of $22.78 and $12.54, respectively.
Compensation expense recognized for options with exercise prices below fair
market value totaled $0 for 1998 and 1997 and $0.3 million for 1996. This
compensation expense was reversed in the fourth quarter of 1997 following the
cancellation of those options.

      In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 established a method of accounting for
stock-based compensation that is based on the fair value of stock options and
similar instruments. The adoption of SFAS 123 is not required and the Company
has elected to continue following Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for measuring compensation cost. Had
the Company adopted SFAS 123, the pro forma net income or loss per share for
1998, 1997, and 1996 would have been as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>

                                                                       1998          1997          1996
                                                                   ------------  ------------  ------------
           <S>                                                     <C>           <C>           <C>
           Net income (loss)             - as reported             $ (70,875)     $ 7,286        $ 2,398
                                         - pro forma                 (70,875)       5,286          1,933
           Net income (loss) per
              common share-diluted       - as reported                (1.91)         0.20           0.07
                                         - pro forma                  (1.91)         0.14           0.06
</TABLE>


(14)  PROPERTY AND EQUIPMENT

      The components of the property and equipment at December 31, 1998 and 1997
are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                        DECEMBER 31
                                                                 ESTIMATED     ---------------------------
                                                                USEFUL LIFE       1998             1997
                                                                -----------    -----------    -------------
           <S>                                                  <C>            <C>            <C>
           Furniture and equipment                               3-7 years     $      358        $ 16,542
</TABLE>

                                      F-37

<PAGE>   78
<TABLE>

           <S>                                                  <C>            <C>               <C>
           Building                                               39 years              -           8,084
           Leasehold improvements                               5-10 years              9           4,810
           Software                                                3 years             81           6,758
           Land                                                                         -           1,200
                                                                               ----------        --------
                                                                                      448          37,394
           Less accumulated depreciation and
              amortization                                                            111          10,729
                                                                               ----------        --------

           Net carrying amount                                                 $      337        $ 26,665
                                                                               ==========        ========
</TABLE>


                                      F-38
<PAGE>   79



      Depreciation and amortization expense related to property and equipment
totaled $1.8 million, $4.9 million, and $3.6 million for 1998, 1997, and 1996,
respectively. Included in those amounts is amortization expense of $0.4 million,
$1.4 million, and $0.8 million for 1998, 1997, and 1996, respectively, related
to both purchased and capitalized internally developed software costs. As more
fully described in Note 1(b), the Company transferred the major portion of the
Company's property and equipment, including computer software, to Zenith on
April 1, 1998, in accordance with the terms of the Asset Purchase Agreement.


(15)  LEASES

      The Company leases space for some of its office facilities under
non-cancelable operating leases expiring through 2001, with renewal options
available for certain leases. Total rental expense for 1998, 1997, and 1996 was
$0.2 million, $1.7 million, and $1.3 million, respectively. At December 31,
1998, the Company was obligated under aggregate minimum annual rentals as
follows (in thousands):
<TABLE>
<CAPTION>

                  YEAR                                             ANNUAL RENTAL
                  ----                                             -------------
                  <S>                                              <C>
                  1999                                                $  218
                  2000                                                   184
                  2001                                                     8
                                                                      ------

                  Total                                               $  410
                                                                      ======
</TABLE>


 (16) EMPLOYEE HEALTH BENEFITS

      The Company self-insured its employees' health benefits and purchased
excess insurance that limits its exposure to $1.1 million in the aggregate and
$50,000 per occurrence. The Company estimated its liability for unpaid claims
based on aggregate limits for health insurance payments less actual payments
made. Those estimates were continually reviewed and adjustments, if any, were
reported in current operations. Included in accrued expenses at December 31,
1998 and 1997 is a liability for self-insured health benefits of $0.6 million
and $0.9 million, respectively. The expense incurred for self-insured health
benefits was $0.6 million, $3.3 million, and $2.6 million for 1998, 1997, and
1996, respectively.


(17)  RELATED PARTY TRANSACTIONS

      The Company had accounts receivable of $0.5 million and $0.8 million from
companies owned by RISCORP's majority shareholder ("affiliates or affiliated
entity") that are included in accounts and notes receivable-other in the
accompanying consolidated balance sheets at December 31, 1998 and 1997,
respectively.

      The Company contracted with affiliated entities for transportation,
facilities management, and custodial and maintenance services. The Company also
leased parking facilities from affiliated entities. Expenses relating to these
services totaled $0, $0.1 million, and $1.6 million for 1998, 1997, and 1996,
respectively. These expenses are included in commissions and general and
administrative expenses in the accompanying consolidated statements of
operations.

      In 1996, the Company paid $0.9 million of brokerage fees to an affiliated
entity for the negotiation and placement of reinsurance under several specific
excess-of-loss coverages. The Company terminated its agreement with the
affiliated entity during 1997.

                                      F-39
<PAGE>   80

      The Company provided administrative and support services to three
affiliated entities. Under these arrangements, one of which was terminated in
1996, the Company received $0.2 million, $0.6 million, and $0.8 million during
1998, 1997, and 1996, respectively.

      As described in Note 9, RIC was party to a managed care arrangement with
RHP, an affiliated HMO, until May 1996. Fees paid by RIC to RHP during 1998,
1997, and 1996 totaled $0, $3.7 million, and $17.1 million, respectively. The
managed care arrangement with RHP was terminated in October 1997 following the
sale of RHP to an unaffiliated entity. RIC assumed the outstanding liability for
unpaid losses and loss adjustment expenses that totaled $8 million in November
1997.

      During 1998, all of the foregoing contracts with the related parties were
cancelled and the Company has no further obligations under any of the contracts
as of December 31, 1998. See Note 3 for a discussion of the agreements between
the Company and Phoenix and BHC.


(18)  BAD DEBT ALLOWANCE

      The following table summarizes activity in the bad debt allowance account
for premiums receivable for 1998, 1997, and 1996 (in thousands):

<TABLE>
<CAPTION>

                                                              1998         1997         1996
                                                            -------     --------     --------
           <S>                                              <C>         <C>          <C>
           Balance at beginning of year                     $ 7,000     $ 17,000     $  5,899
           Allowance acquired from acquisition                   --           --          782
           Addition (reduction) to allowance                 (1,100)       4,374       31,424
           Recoveries (write-offs) against allowance            100      (14,374)     (21,105)
           Balance transferred to Zenith [see Note 1(b)]     (6,000)          --           --
                                                            -------     --------     --------
           Balance at end of year                           $    --     $  7,000     $ 17,000
                                                            =======     ========     ========
</TABLE>

       Premiums receivable included in the accompanying December 31, 1997
consolidated balance sheet are summarized as follows (in thousands):

<TABLE>
<S>                                     <C>
Commercial accounts, including final
    premium audit adjustments           $  29,612
Loss sensitive contracts                   68,804
NCCI pool accounts                          6,987
Other                                       1,780
                                        ---------
                                          107,183
Less bad debt allowance                    (7,000)

Premiums receivable, net                $ 100,183
                                        =========
</TABLE>

      As more fully described in Note 1(b), the Company transferred the
outstanding premiums receivable balance, net of the allowance for bad debts, to
Zenith on April 1, 1998, in accordance with the terms of the Asset Purchase
Agreement.

(19)  CONCENTRATION IN A SINGLE STATE

      Although the Company had expanded its operations into additional states,
75 percent, 70 percent, and 74 percent of its premium revenues for 1998, 1997,
and 1996, respectively, were derived from products and services offered to
customers located in Florida. Accordingly, the Company previously could have
been adversely affected by economic downturns, significant unemployment, and
other


                                      F-40
<PAGE>   81


conditions that could have occurred from time to time in Florida, which
conditions may not have significantly affected its more geographically
diversified competitors.


(20)  COMMITMENTS AND CONTINGENCIES

                 On or about January 11, 1999, Zenith filed a lawsuit against
RISCORP and certain of its subsidiaries in federal court in New York setting
forth 14 separate causes of action arising out of the Asset Purchase Agreement
and certain ancillary agreements. The complaint seeks an unspecified total
amount of damages, but the amount of compensatory damages sought is in excess of
$30 million, together with an unspecified amount of punitive damages and
attorneys' fees. Zenith's claims include, among others, that the Company (i)
breached certain representations and warranties set forth in the Asset Purchase
Agreement, (ii) failed to transfer certain assets to Zenith, (iii) failed to
operate its business in the ordinary course, (iv) failed to reimburse Zenith for
certain payments, and (v) fraudulently induced Zenith to execute the Asset
Purchase Agreement due to certain alleged verbal representations made with
respect to RISCORP's Year 2000 compliance.

On October 16, 1998, RISCORP and certain of its subsidiaries filed an action
against Zenith in federal court in Tampa, Florida a breach of the Asset Purchase
Agreement. The Company amended its complaint in Florida on January 25, 1999, and
added ten additional claims arising out of Zenith's failure to indemnify the
Company for certain claims of third parties. The Company also added two other
claims, one for breach of contract and one for conversion, related to Zenith's
taking of $4.1 million the Company had on deposit with the South Carolina
Insurance Department.

The Company intends to vigorously defend those claims asserted by Zenith and to
vigorously prosecute the Company's claims; however, there can be no assurance as
to the ultimate outcome of this litigation.

      Between November 20, 1996 and January 31, 1997, nine shareholder
class-action lawsuits were filed against RISCORP and other defendants in the
United States District Court for the Middle District of Florida (the "Securities
Litigation"). In March 1997, the court consolidated these lawsuits and appointed
co-lead plaintiffs and co-lead counsel. The plaintiffs subsequently filed a
consolidated complaint. The consolidated complaint named as defendants RISCORP,
three of its executive officers, one non-officer director, and three of the
underwriters for RISCORP's initial public offering. The plaintiffs in the
consolidated complaint purport to represent the class of shareholders who
purchased RISCORP's Class A Common Stock between February 28, 1996 and November
14, 1996. The consolidated complaint alleges that RISCORP's Registration
Statement and Prospectus of February 28, 1996, as well as subsequent statements,
contained false and misleading statements of material fact and omissions, in
violation of Sections 11 and 15 of the Securities Act of 1993, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. The consolidated complaint seeks unspecified compensatory damages.

      In July 1998, the parties executed a stipulation and agreement of
settlement in which the Company agreed to pay $21 million in cash to a
settlement fund to settle this litigation. The Company has paid $0.5 million as
an advance to the settlement fund. The remainder of the settlement fund is to be
paid from the proceeds of the second payment due under the Asset Purchase
Agreement with Zenith. On July 29, 1998, the court issued a preliminary approval
order in which it certified the purported class for settlement purposes. The
court held a settlement fairness hearing on December 15, 1998. At that hearing,
the court


                                      F-41
<PAGE>   82


announced its opinion that the settlement was fair and reasonable and should be
approved. The parties have executed several amendments to the settlement
agreement extending the deadline after which plaintiffs may terminate the
settlement agreement and resume litigation. Under the most recent amendment, the
Company has until March 24, 1999 in which to fully fund the settlement agreement
from the proceeds of the Zenith transaction. If the settlement fund is not fully
funded by that date, plaintiffs have the right to terminate the settlement
agreement pursuant to procedures specified in the agreement.

      The Company estimates that $8 million of insurance proceeds will be
available for contribution to the settlement amount, as well as related costs
and expenses. The Company recognized the $21 million proposed settlement and the
related insurance proceeds in the accompanying 1997 consolidated statement of
operations. Because the settlement agreement is contingent upon the timely and
adequate payment from the Zenith transaction, there can be no assurance that
this litigation will be ultimately settled on the terms described herein.

      On August 20, 1997, the Occupational Safety Association of Alabama
Workers' Compensation Fund (the "Fund"), an Alabama self-insured workers'
compensation fund, filed a breach of contract and fraud action against the
Company and others. The Fund entered into a Loss Portfolio Transfer and
Assumption Reinsurance Agreement dated August 26, 1996 and effective September
1, 1996 with RNIC. Under the terms of the agreement, RNIC assumed 100 percent of
the outstanding loss reserves (including incurred but not reported losses) as of
September 1, 1996. Co-defendant Peter D. Norman ("Norman") was a principal and
officer of IAA prior to its acquisition by RISCORP in September 1996. The
complaint alleges that Norman and IAA breached certain fiduciary duties owed to
the Fund in connection with the subject agreement and transfer. The complaint
alleges that RISCORP has breached certain provisions of the agreement and owes
the Fund monies under the terms of the agreement. The Fund claims, per a Loss
Portfolio Evaluation dated February 26, 1998, that the Fund overpaid RNIC by $6
million in the subject transaction. The court has granted RNIC's Motion to
Compel Arbitration per the terms and provisions of the agreement. RNIC has
appealed the trial court's ruling which prevents the American Arbitration
Association from administering the arbitration between RNIC and the Fund. The
Alabama Supreme Court has stayed the current arbitration. The dispute between
the Fund and RNIC is expected to be resolved through arbitration. The other
defendants, including IAA, have appealed to the Supreme Court of Alabama the
trial court's denial of their motions to compel arbitration. RNIC intends to
vigorously defend the Fund's claim.

      On March 13, 1998, RIC and RPC were added as defendants in a purported
class action filed in the United States District Court for the Southern District
of Florida, styled Bristol Hotel Management Corporation, et. al., v. Aetna
Casualty & Surety Company, a/k/a Aetna Group, et. al. Case No.
97-2240-CIV-MORENO. The plaintiffs purport to bring this action on behalf of
themselves and a class consisting of all employers in the State of Florida who
purchased or renewed retrospectively rated or adjusted workers' compensation
policies in the voluntary market since 1985. The suit was originally filed on
July 17, 1997 against approximately 174 workers' compensation insurers as
defendants. The complaint was subsequently amended to add the RISCORP
defendants. The amended complaint named a total of approximately 161 insurer
defendants. The suit claims that the defendant insurance companies violated the
Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act
("RICO"), and the Florida Antitrust Act, committed breach of contract and civil
conspiracy, and were unjustly enriched by unlawfully adding improper and illegal
charges and fees onto retrospectively rated premiums and otherwise charging more
for those policies than allowed by law. The suit seeks compensatory and punitive
damages, treble damages under the Antitrust and RICO claims, and equitable
relief. RIC and RPC moved to dismiss the amended complaint and have also filed
certain motions to dismiss the amended complaint filed by various other
defendants.

                                      F-42
<PAGE>   83

      On August 26, 1998, the district court issued an order dismissing the
entire suit against all defendants. On September 13, 1998, the plaintiffs filed
a Notice of Appeal. On February 9, 1999, the district court issued, sua sponte,
an Order of Reconsideration in which the court indicated its desire to vacate
the dismissal of the RICO claims and pendant state claims based on a recent
decision of the United States Supreme Court. Although the Plaintiffs have
indicated that they will seek to have the appeal terminated and the case
remanded to the district court, no formal motion has been filed with the Court
of Appeals. Management will continue to monitor the progress of the appeals
process as necessary and intends to defend the case vigorously if it is returned
to the district court for further proceedings.

      In June 1997, the Company terminated a number of employees in connection
with a workforce reduction. As a result of the workforce reduction, a number of
former employees have initiated proceedings, including arbitration, against the
Company for certain severance benefits. The Company intends to vigorously defend
these suits; however, there can be no assurance that it will prevail in these
proceedings.

      The Company, in the ordinary course of business, is party to various
lawsuits. Based on information presently available, and in the light of legal
and other defenses available to the Company, contingent liabilities arising from
such threatened and pending litigation in the ordinary course of business are
not presently considered by management to be material.

      Other than as noted herein, no provision had been made in the accompanying
consolidated financial statements for the foregoing matters. Certain of the
related legal expenses may be covered under directors and officers' insurance
coverage maintained by the Company.

      The Company has historically met its cash requirements and financed its
growth through cash flow generated from the sale of stock, operations, and
borrowings. The Company's primary sources of cash flow from operations were
premiums and investment income, and its cash requirements consisted principally
of payment of losses and loss adjustment expenses, support of its operating
activities including various reinsurance agreements and managed care programs
and services, capital surplus needs for the insurance companies, and other
general and administrative expenses.

      As discussed more fully in Note 1(b), RISCORP and certain of its
subsidiaries sold substantially all of their assets and transferred certain
liabilities to Zenith on April 1, 1998. In connection with the consummation of
that transaction, RISCORP received $35 million in cash, of which $10 million was
placed in escrow, with the balance of the purchase price, if any, to be the
amount by which the book value of the transferred assets exceeds the book value
of the transferred liabilities as of the closing date, determined in accordance
with GAAP and generally accepted actuarial principles, consistently applied.
Pursuant to the terms of the Asset Purchase Agreement, Zenith is required to pay
the remaining purchase price to RISCORP, plus interest thereon of 6.13 percent
from the Closing Date through the final payment date, in cash, less the
additional amount required to be deposited into escrow, not later than five
business days after receipt of the Final Business Balance Sheet, as determined
by the Independent Expert.

      On March 19, 1999, the Independent Expert delivered its determination of
the Final Business Balance Sheet [see Note 1(b) for a detailed discussion].

      As a result of this sale, the Company and its subsidiaries ceased
substantially all of their former business operations and, accordingly, since
April 1, 1998, the Company's cash requirements have been, and are expected to
continue to be, satisfied through investment income, the liquidation of
investments and other assets, and the receipt of certain federal income tax
claims.


                                      F-43
<PAGE>   84


                      SCHEDULE I - SUMMARY OF INVESTMENTS -
                    OTHER THAN INVESTMENTS IN RELATED PARTIES

                         RISCORP, INC. AND SUBSIDIARIES

                                DECEMBER 31, 1998
                                 (in thousands)

<TABLE>
<CAPTION>

                                                  MARKET
TYPE OF INVESTMENT                       COST      VALUE
------------------                     -------    -------
<S>                                    <C>        <C>
Available for sale:
     Fixed maturity securities:
        U.S. government obligations    $13,681    $13,900
        Corporate obligations            2,032      2,080
                                       -------    -------
           Total available for sale    $15,713    $15,980
                                       =======    =======

Available for sale:
     Unrestricted                      $ 6,666    $ 6,716
     Restricted                          9,047      9,264
                                       -------    -------
           Total                       $15,713    $15,980
                                       =======    =======
</TABLE>






See accompanying Auditors' Report.


                                      F-44
<PAGE>   85



           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                 BALANCE SHEETS

                       RISCORP, INC. (PARENT COMPANY ONLY)
                                 (in thousands)


<TABLE>
<CAPTION>


                                                             DECEMBER 31
                                                      -----------------------
                                                         1998          1997
                                                      ---------     ---------
                             ASSETS

<S>                                                   <C>           <C>
Investments at fair value (cost $4,635 and $1,000)    $   4,636     $   1,000
Cash and cash equivalents                                 1,140        (1,152)
Cash and cash equivalents - restricted                   10,000          --
Investment in wholly-owned subsidiaries                 148,357       172,463
Surplus note receivable from subsidiary                  13,000        13,000
Other assets                                             18,840        28,145
                                                      ---------     ---------
     Total assets                                     $ 195,973     $ 213,456
                                                      =========     =========

              LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
  Notes payable                                       $      --     $  15,000
  Accrued expenses and other liabilities                 38,572        34,923
  Payable to affiliates                                  61,835            --
                                                      ---------     ---------
    Total liabilities                                   100,407        49,923
                                                      ---------     ---------

Shareholders' equity:
  Common stock                                              386           362
  Additional paid-in capital                            140,688       135,975
  Net unrealized gains on investments                       173         2,002
  Retained earnings (deficit)                           (45,680)       25,195
  Treasury stock at cost                                     (1)           (1)
                                                      ---------     ---------
      Total shareholders' equity                         95,566       163,533
                                                      ---------     ---------

      Total liabilities and shareholders' equity      $ 195,973     $ 213,456
                                                      =========     =========
</TABLE>


See accompanying Auditors' Report.


                                      F-45
<PAGE>   86




           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                            STATEMENTS OF OPERATIONS

                       RISCORP, INC. (PARENT COMPANY ONLY)
                                 (in thousands)

<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31
                                                 ----------------------------------
                                                   1998         1997        1996
                                                 --------     --------     --------
<S>                                              <C>          <C>          <C>
Revenues:
      Net investment income                      $  2,681     $    517     $  2,590
      Dividend income                                  --        3,446       18,335
      Other income                                    146           --            3
                                                 --------     --------     --------
          Total revenue                             2,827        3,963       20,928
                                                 --------     --------     --------

Expenses:
      General and administrative expenses          10,871       16,421        1,995
      Interest expense                                641        1,800        2,234
      Depreciation and amortization                   359          857        3,830
                                                 --------     --------     --------
          Total expenses                           11,871       19,078        8,059
                                                 --------     --------     --------

Income (loss) from operations                      (9,044)     (15,115)      12,869

Loss on sale of net assets to Zenith              (47,747)          --           --
                                                 --------     --------     --------

Income (loss) before equity in income or loss
  of subsidiaries and income taxes                (56,791)     (15,115)      12,869

Equity in income (loss) of subsidiaries           (20,322)      20,935      (11,428)
                                                 --------     --------     --------

Income (loss) before income taxes                 (77,113)       5,820        1,441
Income tax benefit                                 (6,238)      (1,466)        (957)
                                                 --------     --------     --------

      Net income (loss)                          $(70,875)    $  7,286     $  2,398
                                                 ========     ========     ========
</TABLE>




See accompanying Auditors' Report.


                                      F-46
<PAGE>   87


           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                             STATEMENTS OF CASH FLOW

                       RISCORP, INC. (PARENT COMPANY ONLY)
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                 YEAR ENDED DECEMBER 31
                                                                          -----------------------------------
                                                                            1998         1997          1996
                                                                          --------     --------     ---------
<S>                                                                       <C>          <C>          <C>
Cash flows from operating activities:
   Net income (loss)                                                      $(70,875)    $  7,286     $   2,398
   Adjustments to reconcile net income (loss) to net cash provided
      by operating activities:
      Equity in net loss (income) of subsidiaries                           20,322      (18,344)        5,967
      Depreciation and amortization                                            359          857         3,830
      Net amortization of discounts on investments                              --           --            80
      Net realized loss (gain) on sale of investments                           --           35            (4)
      Loss on sale of net assets to Zenith                                  47,747           --            --
      Issuance of RISCORP, Inc. stock                                        4,740           --            --
      Decrease (increase) in other assets                                    4,166      (20,555)        2,750
      Increase in accrued expenses and other liabilities                     3,751       26,934         3,421
                                                                          --------     --------     ---------
          Net cash provided by (used in) operating activities               10,210       (3,787)       18,442
                                                                          --------     --------     ---------

Cash flows from investing activities:
      Proceeds from sale of fixed maturities--available for sale            68,617        4,206        44,124
      Proceeds from maturities of fixed maturities--available for sale       1,000        1,000         1,000
      Proceeds from the sale of equity securities                               --        1,548           353
      Cash received from Zenith for sale of net assets                       9,345           --            --
      Cash due to Zenith                                                       388           --            --
      Purchase of fixed maturities--available for sale                     (73,252)          --       (48,438)
      Purchase of equity securities                                             --           --        (1,905)
      Capital contributions to subsidiaries                                 (1,000)      (1,000)     (114,375)
      Purchase of property and equipment                                      (448)          --            --
      Purchase of IAA, net of cash acquired                                     --           --           282
      Purchase of RISC, net of cash acquired                                    --           --          (538)
                                                                          --------     --------     ---------
          Net cash provided by (used in) investing activities                4,650        5,754      (119,497)
                                                                          --------     --------     ---------

Cash flows from financing activities:
      Purchase of treasury stock subject to put option                          --       (2,100)           --
      Transfer of cash and cash equivalents to restricted balances         (12,568)          --            --
      Principal repayment of notes payable                                      --           --       (27,000)
      Exercise of stock options                                                 --           --            65
      Proceeds of initial offering of common stock                              --           --       127,908
      Other, net                                                                --       (1,293)          709
                                                                          --------     --------     ---------
          Net cash provided by (used in) financing activities              (12,568)      (3,393)      101,682
                                                                          --------     --------     ---------

Net increase (decrease) in cash and cash equivalents                         2,292       (1,426)          627
Cash and cash equivalents, beginning of year                                (1,152)         274          (353)
                                                                          --------     --------     ---------
Cash and cash equivalents, end of year                                    $  1,140     $ (1,152)    $     274
                                                                          ========     ========     =========

Supplemental disclosures of cash flow information:
   Cash paid during the year for:
      Interest                                                            $    450     $  1,800     $   2,684
                                                                          ========     ========     =========
      Income taxes                                                        $     --     $  6,556     $  15,127
                                                                          ========     ========     =========
</TABLE>

See accompanying Auditors' Report.


                                      F-47
<PAGE>   88




                            SCHEDULE IV - REINSURANCE

                         RISCORP, INC. AND SUBSIDIARIES
                                 (in thousands)

<TABLE>
<CAPTION>


                    Premiums Earned
                   --------------------------------------------------------------------------------------------
                                       CEDED TO            ASSUMED                               PERCENTAGE
YEAR ENDED            GROSS             OTHER             FROM OTHER             NET              OF AMOUNT
DECEMBER 31          AMOUNT           COMPANIES            COMPANIES            AMOUNT           ASSUMED TO NET
-----------        -----------        -----------        ------------        -----------        ---------------


<S>                <C>                <C>                <C>                 <C>                <C>
1998               $    48,416*       $    22,676*       $         79*       $    25,819*                   --*
                   ===========        ===========        ============        ===========        ==============


1997               $   328,191        $   167,274        $     18,812        $   179,729                    10%
                   ===========        ===========        ============        ===========        ==============


1996               $   326,875        $   165,022        $     11,704        $   173,557                     7%
                   ===========        ===========        ============        ===========        ==============
</TABLE>




These amounts represent the first three months of 1998.


See accompanying Auditors' Report.


                                      F-48
<PAGE>   89


                     SCHEDULE VI - SUPPLEMENTAL INFORMATION

                         RISCORP, INC. AND SUBSIDIARIES
                                 (in thousands)

<TABLE>
<CAPTION>

                      DECEMBER 31                                              YEAR ENDED DECEMBER 31
-------------------------------------------------------    -----------------------------------------------------------
                                                                                      Losses and Loss
                  Reserves for   Discount,                                          Adjustment Expenses   Amortization
        Deferred  Unpaid Losses   if any,                                          Incurred Related to:    of Deferred
         Policy     and Loss     deducted                    Net          Net      ---------------------      Policy
      Acquisition  Adjustment   in Previous    Unearned     Earned    Investment   Current       Prior     Acquisition
Year     Costs      Expenses      Column       Premiums    Premiums      Income      Year        Years        Costs
----  ----------- ------------- -----------    --------    --------   ----------   --------     --------  ------------

1998    $  --       $   --      $      --      $   --      $ 25,819*    $ 7,103    $ 14,860*    $ 11,717*     $ 3,681*

1997    $(2,053)    $437,038    $      --      $ 56,324    $179,729     $16,447    $125,764     $ (2,401)     $49,221

1996    $   446     $458,239    $      --      $102,562    $173,557     $12,194    $123,986     $  3,023      $33,716

<CAPTION>


         YEAR ENDED DECEMBER 31
       -------------------------
           Net
       Paid Losses
        and Loss         Net
       Acquisition     Premiums
Year    Expenses       Written
----   -----------     --------

<S>     <C>            <C>
1998    $ 28,501       $ 20,209

1997    $120,285       $157,495

1996    $111,963       $179,706
</TABLE>





* These amounts represent the first three months of 1998.






See accompanying Auditors' Report


                                      F-49