<PAGE>   1

    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                             ---------------------

                                   FORM 10-Q

(MARK ONE)

    [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
             EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                       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 0-22585

                          HEALTHCARE RECOVERIES, INC.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      61-1141758
       (State or Other Jurisdiction of                       (I.R.S. Employer
       Incorporation or Organization)                       Identification No.)

 1400 WATTERSON TOWER, LOUISVILLE, KENTUCKY                        40218
  (Address of Principal Executive Offices)                      (Zip Code)
</TABLE>

                                 (502) 454-1340
              (Registrant's Telephone Number, Including Area Code)

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

     As of August 12, 1999, 11,208,707 shares of the Registrant's Common Stock,
$0.001 par value were outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                          HEALTHCARE RECOVERIES, INC.

                                   FORM 10-Q
                                 JUNE 30, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I:  FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
  Condensed Consolidated Balance Sheets as of June 30, 1999
     and December 31, 1998..................................    1
  Condensed Consolidated Statements of Income for the three
     and six months ended June 30, 1999 and 1998............    2
  Condensed Consolidated Statements of Cash Flows for the
     six months ended June 30, 1999 and 1998................    3
  Notes to Condensed Consolidated Financial Statements......    4
Item 2. Management's Discussion and Analysis of Financial
  Condition and Results of Operations.......................    7
Item 3. Quantitative and Qualitative Disclosures About
  Market Risk...............................................   15

PART II:  OTHER INFORMATION
Item 1. Legal Proceedings...................................   16
Item 4. Submission of Matters to a Vote of Security
  Holders...................................................   16
Item 6. Exhibits and Reports on Form 8-K....................   17
Signatures..................................................   20
</TABLE>

     THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS
WHICH MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2
AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF HEALTHCARE RECOVERIES, INC. AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-
LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS
AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY
KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE
STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM
10-Q, AND ARE HEREBY INCORPORATED BY REFERENCE HEREIN. HEALTHCARE RECOVERIES,
INC. UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.
<PAGE>   3

                                     PART I

                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                          HEALTHCARE RECOVERIES, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              JUNE 30,   DECEMBER 31,
                                                                1999         1998
                                                              --------   ------------
<S>                                                           <C>        <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 2,112      $31,133
  Restricted cash...........................................   25,685       16,927
  Accounts receivable, less allowance for doubtful accounts
    of $369 in 1999 and $307 in 1998........................    4,966        3,607
  Other current assets......................................    1,585        1,583
                                                              -------      -------
         Total current assets...............................   34,348       53,250
                                                              -------      -------
Property and equipment, at cost:
  Buildings and land........................................    5,867           --
  Furniture and fixtures....................................    2,965        2,527
  Office equipment..........................................    1,922        1,783
  Computer equipment........................................    9,840        7,991
  Leasehold improvements....................................    1,030          845
                                                              -------      -------
                                                               21,624       13,146
  Accumulated depreciation and amortization.................   (8,390)      (6,962)
                                                              -------      -------
         Property and equipment, net........................   13,234        6,184
Cost in excess of net assets acquired.......................   22,424           --
Identifiable intangibles....................................    5,776           --
Other assets................................................    1,380        1,569
                                                              -------      -------
         Total assets.......................................  $77,162      $61,003
                                                              =======      =======

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable....................................  $ 1,517      $ 1,234
  Accrued expenses..........................................    6,319        5,516
  Funds due clients.........................................   13,073       13,118
  Income taxes payable......................................    1,405        2,484
                                                              -------      -------
         Total current liabilities..........................   22,314       22,352
Other liabilities...........................................    1,680        1,458
Long-term borrowings........................................   14,300           --
                                                              -------      -------
         Total liabilities..................................   38,294       23,810
                                                              -------      -------
Contingencies
Stockholders' equity:
  Preferred stock, $.001 par value; 2,000 shares authorized;
    no shares issued or outstanding.........................       --           --
  Common stock, $.001 par value; 20,000 shares authorized;
    11,198 and 11,503 shares issued and outstanding as of
    June 30, 1999 and December 31, 1998, respectively.......       12           12
  Capital in excess of par value............................   22,665       22,428
  Treasury stock at cost, 305 shares........................   (1,373)          --
  Retained earnings.........................................   17,564       14,753
                                                              -------      -------
         Total stockholders' equity.........................   38,868       37,193
                                                              -------      -------
         Total liabilities and stockholders' equity.........  $77,162      $61,003
                                                              =======      =======
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
   financial statements.
                                        1
<PAGE>   4

                          HEALTHCARE RECOVERIES, INC.

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)
           FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED    SIX MONTHS ENDED
                                                                 JUNE 30,             JUNE 30,
                                                            -------------------   -----------------
                                                              1999       1998      1999      1998
                                                            --------   --------   -------   -------
<S>                                                         <C>        <C>        <C>       <C>
Claims revenues...........................................  $15,793    $12,025    $29,654   $23,221
Cost of services..........................................    7,991      5,612     14,987    10,871
                                                            -------    -------    -------   -------
          Gross profit....................................    7,802      6,413     14,667    12,350
Support expenses..........................................    4,091      2,524      7,691     4,764
Depreciation and amortization.............................    1,292        580      2,286     1,089
                                                            -------    -------    -------   -------
          Operating income................................    2,419      3,309      4,690     6,497
Interest income...........................................      275        435        535       879
Interest expense..........................................     (277)       (40)      (419)      (64)
                                                            -------    -------    -------   -------
          Income before income taxes......................    2,417      3,704      4,806     7,312
Provision for income taxes................................    1,002      1,533      1,994     3,048
                                                            -------    -------    -------   -------
Net income................................................  $ 1,415    $ 2,171    $ 2,812   $ 4,264
                                                            =======    =======    =======   =======
Earnings per common share (basic and diluted).............  $  0.13    $  0.19    $  0.25   $  0.37
                                                            =======    =======    =======   =======
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
   financial statements.

                                        2
<PAGE>   5

                          HEALTHCARE RECOVERIES, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                                1999      1998
                                                              --------   -------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net income................................................  $  2,812   $ 4,264
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................     2,286     1,089
     Deferred income taxes..................................       162        35
     Other..................................................       180        --
     Changes in operating assets and liabilities:
       Restricted cash......................................     1,054    (2,865)
       Accounts receivable..................................      (248)     (211)
       Other current assets.................................       138      (457)
       Other assets.........................................       179      (316)
       Trade accounts payable...............................       175      (290)
       Accrued expenses.....................................       115      (158)
       Funds due clients....................................      (956)    1,711
       Income taxes payable.................................    (1,079)   (1,362)
       Other liabilities....................................        29       218
                                                              --------   -------
          Net cash provided by operating activities.........     4,847     1,658
                                                              --------   -------
Cash flows from investing activities:
  Acquisitions, net of cash acquired........................   (44,599)       --
  Purchases of property and equipment.......................    (2,253)   (2,416)
                                                              --------   -------
          Net cash used in investing activities.............   (46,852)   (2,416)
                                                              --------   -------
Cash flows from financing activities:
  Line of credit proceeds, net..............................    14,300        --
  Repurchase of common stock................................    (1,373)       --
  Contributed capital.......................................       (57)       --
                                                              --------   -------
          Net cash provided by financing activities.........    12,984        --
                                                              --------   -------
Net decrease in cash and cash equivalents...................   (29,021)     (758)
Cash and cash equivalents, beginning of period..............    31,133    24,674
                                                              --------   -------
Cash and cash equivalents, end of period....................  $  2,112   $23,916
                                                              ========   =======
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
   financial statements.

                                        3
<PAGE>   6

                          HEALTHCARE RECOVERIES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.  BASIS OF PRESENTATION

     Healthcare Recoveries, Inc. (hereinafter referred to as "HCRI" or the
"Company") was incorporated on June 30, 1988 under the laws of the State of
Delaware. The Company provides complete outsourcing of certain medical cost
containment services to the private healthcare payor industry. Its primary
service is subrogation recovery, which entails the identification, investigation
and recovery of accident-related medical benefits incurred by its clients on
behalf of their insureds, but for which other persons or entities have primary
responsibility. The Company's clients' rights to recover the value of these
medical benefits, arising by law or contract, are generally known as the right
of subrogation and paid from the proceeds of liability or workers' compensation
insurance. The Company's other cost containment services include hospital bill
auditing, contract compliance review and cost management consulting and related
recovery services.

     The Company operated as an independent entity until August 28, 1995, when
it was merged with and into a subsidiary of Medaphis Corporation ("Medaphis"),
in a transaction accounted for as a pooling of interests (the "Merger"). Prior
to the Merger, the Company's then issued and outstanding redeemable convertible
preferred stock was converted to common stock of the Company ("Common Stock").
As of the effective time of the Merger, each share of the then issued and
outstanding Common Stock was exchanged for Medaphis common stock. Employee stock
options of the Company outstanding at the effective time of the Merger were also
substituted with similar options on Medaphis common stock. Subsequent to the
Merger, Medaphis recapitalized the Company effectively canceling all but 100
shares of Common Stock used as collateral for Medaphis' bank debt, and made the
Company a guarantor for Medaphis' bank debt.

     On May 21, 1997, the Company completed its initial public offering (the
"Offering") of 9,800,000 shares of Common Stock, excluding 200,000 shares issued
in connection with a non-recurring compensation charge. Medaphis sold all the
shares. As a result, the Company received no proceeds from the sale of shares in
the Offering. On June 9, 1997, the Company sold 1,470,000 shares of Common Stock
to the underwriters of the Offering in satisfaction of the exercise of an
over-allotment option, resulting in proceeds to the Company of approximately
$19.2 million.

     The accompanying financial statements are presented in a condensed format
and consequently do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made in the Company's
annual consolidated financial statements. Accordingly, for further information,
the reader of this Form 10-Q may wish to refer to the Company's audited
consolidated financial statements as of and for the year ended December 31,
1998, contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, filed with the Securities and Exchange Commission on
March 26, 1999.

     The consolidated financial information has been prepared in accordance with
the Company's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.

2.  CONTINGENCIES

     The Company engages in the identification and recovery of subrogation and
related claims of its clients, many of which arise in the context of personal
injury lawsuits. As such, the Company operates in a litigation-intensive
environment. The Company, from time to time, has been, and in the future expects
to be, named as a party in litigation incidental to its business operations. To
date, the Company has not been involved in any litigation which has had a
material adverse effect upon the Company, but there can be no assurance that
pending litigation or future litigation will not have a material adverse effect
on the Company's business, results of operations or financial condition.

                                        4
<PAGE>   7
                          HEALTHCARE RECOVERIES, INC.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  CREDIT FACILITY

     In February 1998, the Company entered into a $50 million senior secured
revolving credit facility (the "Credit Facility") with National City Bank of
Kentucky and the other lenders named therein, replacing the Company's $10
million line of credit. The principal amount outstanding under the Credit
Facility will mature on January 31, 2001 and bears interest at the Company's
option, at either: (i) the Prime Rate plus the applicable margin in effect or
(ii) the Eurodollar Rate plus the applicable margin in effect. The applicable
margin is determined in accordance with a Pricing Grid based on the Company's
ratio of consolidated total indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization. The agreement contains usual and
customary covenants including, but not limited to, financial tests for interest
coverage, net worth levels and leverage that may limit the Company's ability to
pay dividends. The Company's obligations under the Credit Facility are secured
by substantially all of the Company's assets, subject to certain permitted
exceptions. As of June 30, 1999, the Company was in compliance with the
covenants and a total of $14.3 million was drawn under the Credit Facility and
used for the Acquisitions and stock repurchases. The Credit Facility was amended
in May 1998 and March 1999 to enable the Company to acquire entities that do not
maintain audited financial statements and to use proceeds from the Credit
Facility to repurchase outstanding stock, respectively.

4.  STOCK REPURCHASE PLAN

     HCRI's Board authorized a stock repurchase plan on March 12, 1999 under
which the Company may repurchase up to $10 million of HCRI Common Stock in the
open market, from time to time, at prices per share deemed favorable by the
Company. Shares will be repurchased using cash from operations and borrowed
funds and will continue until such time as the Company has repurchased $10
million of HCRI Common Stock or until it otherwise determines to terminate the
stock repurchase plan. During the three month period ended June 30, 1999, the
Company repurchased 305,000 shares of its stock at an average price of $4.50 per
share and currently holds the shares as treasury stock. No additional shares
have been repurchased since June 30, 1999.

5.  EARNINGS PER COMMON SHARE

     Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," specifies the computation, presentation, and disclosure requirements for
earnings per share and requires presentation of both basic and fully diluted
earnings per share for both interim and annual periods. Reconciliations of the
average number of common shares outstanding used in the calculation of earnings
per common share and earnings per common share, assuming dilution, are as
follows (dollars and shares in thousands, except per share results):

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED    SIX MONTHS ENDED
                                                         JUNE 30,             JUNE 30,
                                                    -------------------   -----------------
                                                      1999       1998      1999      1998
                                                    --------   --------   -------   -------
<S>                                                 <C>        <C>        <C>       <C>
Weighted average number of common shares
  outstanding.....................................   11,234     11,470     11,368    11,470
Add: Dilutive stock options.......................        1        112         51       136
                                                    -------    -------    -------   -------
Number of common shares outstanding
  (diluted).......................................   11,235     11,582     11,419    11,606
                                                    =======    =======    =======   =======
Net earnings for earnings per common share
  (basic and diluted).............................  $ 1,415    $ 2,171    $ 2,812   $ 4,264
                                                    =======    =======    =======   =======
Earnings per common share:
  Basic...........................................  $  0.13    $  0.19    $  0.25   $  0.37
                                                    =======    =======    =======   =======
  Diluted.........................................  $  0.13    $  0.19    $  0.25   $  0.37
                                                    =======    =======    =======   =======
</TABLE>

                                        5
<PAGE>   8
                          HEALTHCARE RECOVERIES, INC.

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  EARNINGS PER COMMON SHARE -- (CONTINUED)

     Basic earnings per common share were computed based on the weighted-average
number of shares outstanding during the period. The dilutive effect of stock
options was calculated using the treasury stock method. Options to purchase
1,540,194 and 1,160,580 shares for the three and six month periods ended June
30, 1999, respectively, and 314,600 and 181,050 shares for the comparable
periods in 1998, respectively, were not included in the computation of diluted
earnings per common share as the options' exercise prices exceeded the average
market price of the common shares during the respective periods.

6.  ACQUISITIONS

     On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin general partnership ("ODL" and, together
with SAI, "Subro-Audit"), for approximately $24.4 million, using available
unrestricted cash, and may pay up to $7.0 million over the next two years
pursuant to an earn-out arrangement (the "Subro-Audit Acquisition"). An escrowed
amount of $8.5 million for the potential earn-out in connection with the
Subro-Audit Acquisition is included in restricted cash at June 30, 1999. SAI is
based in Wisconsin and provides subrogation recovery services to an installed
base of lives, which are covered by insurers, HMOs and employer-funded plans,
throughout the United States. The Subro-Audit Acquisition was accounted for
using the purchase method of accounting. Subro-Audit operates as a division of
HCRI.

     On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds,
and may pay up to 50% of the gross profits of the MedCap business for each of
the twelve month periods ending December 31, 1999 and 2000 pursuant to an
earn-out arrangement (the "MedCap Acquisition" and, together with the
Subro-Audit Acquisition, the "Acquisitions"). MedCap provides a variety of
medical cost management services to health insurers and HMOs primarily in
California. These services include hospital bill auditing, contract compliance
review, identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting. MedCap operates as a division of HCRI.

     If the Acquisitions had taken place on January 1, 1999, revenues, net
income and earnings per share for the quarter ended June 30, 1999 would have
been $15.8 million, $1.4 million and $0.13 per share, respectively, and
revenues, net income and earnings per share for the six months ended June 30,
1999, would have been $31.1 million, $2.7 million and $0.24 per share,
respectively. If the Acquisitions had taken place on January 1, 1998, revenues,
net income and earnings per share for the six months ended June 30, 1998, would
have been $28.9 million, $4.4 million and $0.38 per share, respectively. The
cost in excess of net tangible and intangible assets acquired recorded in
connection with the Acquisitions was approximately $22.9 million and is being
amortized over a 20 year period. These results may not necessarily reflect
future results of operations or what the results of operations would have been
had the Acquisitions actually been consummated at the beginning of the periods
presented.

                                        6
<PAGE>   9

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

     Healthcare Recoveries, Inc. (hereinafter referred to as "HCRI" or the
"Company") provides complete outsourcing of certain medical cost containment
services to the private healthcare payor industry. Its primary service is
subrogation recovery, which entails the identification, investigation and
recovery of accident-related medical benefits incurred by its clients on behalf
of their insureds, but for which other persons or entities have primary
responsibility. The Company's clients' rights to recover the value of these
medical benefits, arising by law or contract, are generally known as the right
of subrogation and paid from the proceeds of liability or workers' compensation
insurance. The Company's other cost containment services include the provision
of hospital bill auditing, contract compliance review and cost management
consulting and related recovery services.

     On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro-Audit, Inc., a Wisconsin corporation ("SAI"), and a related entity,
O'Donnell Leasing Co., LLP, a Wisconsin general partnership ("ODL" and, together
with SAI, "Subro-Audit"), for approximately $24.4 million, using available
unrestricted cash, and may pay up to $7.0 million over the next two years
pursuant to an earn-out arrangement (the "Subro-Audit Acquisition"). SAI is
based in Wisconsin and provides subrogation recovery services to an installed
base of lives, which are covered by insurers, HMOs and employer-funded plans,
throughout the United States. The Subro-Audit Acquisition was accounted for
using the purchase method of accounting. Subro-Audit operates as a division of
HCRI.

     On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap Medical Cost Management, Inc., a California corporation ("MedCap"), for
approximately $10 million, using available unrestricted cash and borrowed funds,
and may pay up to 50% of the gross profits of the MedCap business for each of
the twelve month periods ending December 31, 1999 and 2000 pursuant to an
earn-out arrangement (the "MedCap Acquisition" and, together with the
Subro-Audit Acquisition, the "Acquisitions"). MedCap provides a variety of
medical cost management services to health insurers and HMOs primarily in
California. These services include hospital bill auditing, contract compliance
review, identification of certain other payments, and cost management consulting
services. The MedCap Acquisition was accounted for using the purchase method of
accounting. MedCap operates as a division of HCRI.

     For a typical new client, it takes up to six months from the contract
signing (when the lives are "sold") to complete the construction of electronic
data interfaces necessary for the Company to begin service. At this point, the
client is considered "installed". During the installation period, the Company
must also hire and train quality staff necessary to provide contractual
services. After installation, HCRI receives files and data from the client from
which it creates an inventory of backlog.

     "Backlog" is the total dollar amount of potentially recoverable claims that
the Company is pursuing or auditing on behalf of its clients at a given point in
time. These claims are gross figures, prior to estimates of claim settlements
and rejections. Backlog increases when the Company opens new files of
potentially recoverable claims and decreases when files are recovered, completed
or, after further investigation, determined to be nonrecoverable. Backlog for a
client will range from newly identified potential recoveries to potential
recoveries that are in the late stages of the recovery process.

     Historically, recoveries (the amount actually recovered for its clients
prior to the Company's fee) have been produced from the backlog in a generally
predictable cycle. This is because any group of potential recoveries that has
been sufficiently large in number to display statistically significant
characteristics and that originates from a defined time period, tended to
produce recovery results that have been comparable to other groups having
similar characteristics.

     For the most part, the Company is paid contingency fees from the amount of
claims recoveries it makes or recoveries it identifies through other cost
containment and related recovery services from backlog on behalf of its clients.
The Company's revenues are a function of recoveries and effective fee rates.
Effective fee rates vary depending on the mix between services provided and
client fee schedules. The fee schedules for each client are separately
negotiated and reflect the Company's standard fee rates, the services to be
provided and

                                        7
<PAGE>   10

OVERVIEW -- (CONTINUED)

anticipated volume of services. The Company grants volume discounts and, for its
recovery services, negotiates a lower fee when it assumes backlog from a client
because the client will have already completed some of the recovery work.
Because the Company records expenses as costs are incurred and records revenues
only when a file is settled, there is a lag between the recording of expenses
and revenue recognition.

     The Company's expenses are determined primarily by the number of employees
directly engaged in operations ("cost of services") and by the number of
employees engaged in a variety of support activities ("support expenses").
Recovery-related employees must be hired and trained in advance of the
realization of recoveries and revenues. The number of employees accounted for in
support expenses generally grows less rapidly than revenue due to economies of
scale.

RECENT OPERATING ISSUES

     During the first quarter of 1999, HCRI encountered operating difficulties
that involved a lower than historical level of yield from the backlog of
subrogation claims. As used here, yield, referred to as "throughput," means
recoveries for the period stated as a percentage of the average backlog for the
period. The deterioration in throughput of subrogation claims was the
consequence of a shortfall in first and second quarter recoveries, which appear
to have resulted from certain changes that HCRI made in its operations during
the second half of 1998 and the first quarter of 1999. The changes in operations
entailed a series of modifications to work processes and systems improvements,
the purpose of which was to enable the Company to significantly increase the
number of files assigned to each examiner, with anticipated corresponding
increases in average recoveries per examiner. Contrary to management's
expectations, increasing the average number of files assigned to each examiner
resulted in the unforeseen decrease in throughput.

     In response to the decline in throughput, the Company instituted a plan to
hire 50 new examiners (25 net new examiners, after attrition and terminations).
During the second quarter of 1999, the Company added 4 net new examiners and
year to date has hired 40 examiner trainees (25 examiner trainees during the
second quarter), who, upon successful completion of their training, will be
placed in operations as examiners during the third and fourth quarters of 1999.
Management believes that this additional headcount will allow the Company to
resume historic levels of throughput in subrogation by the end of 1999.

     Also during the second quarter, the Company's backlog declined
approximately $16 million from the end of the first quarter of 1999. Compared to
the second quarter of 1998, backlog increased by $316 million, primarily as a
result of the Acquisitions. A decline in subrogation backlog, excluding that of
SAI, primarily accounts for this decline in backlog. Management believes that
this decline in backlog is related to, among other things, a slower rate of
installation of new lives for subrogation services than in previous quarters,
the occasional interruption in the transmission of claims data by clients, and a
decrease in the average size of the files of which backlog is composed. About
half of the decrease in average file size is, management believes, attributable
to the run-off (i.e., the closing, with or without recovery) of "retrospective
files" and "pending files" that are larger on average than the other files in
backlog. When these larger-than-average (measured by dollar amount) files are
not replaced by files of like dollar size, the average size of files in backlog
declines. "Retrospective files" are those identified by HCRI, as part of an
ancillary service that the Company sells from time to time, in a client's past
claims history data. "Pending files" are those taken over by the Company from a
client in connection with the signing of the service contract.

                                        8
<PAGE>   11

RESULTS OF OPERATIONS

     The following tables present certain key operating indicators and results
of operations data for the Company for the periods indicated:

                            KEY OPERATING INDICATORS
              (IN MILLIONS, EXCEPT FOR PERCENTAGES AND EMPLOYEES)

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED    SIX MONTHS ENDED
                                                      JUNE 30,             JUNE 30,
                                                 ------------------   ------------------
                                                   1999       1998      1999       1998
                                                 --------    ------   --------    ------
<S>                                              <C>         <C>      <C>         <C>
Cumulative lives sold, beginning of period.....      59.4      38.8       40.5      38.5
  Lives from acquisitions(1)...................        --        --       18.6        --
  Lives from existing client growth (loss).....      (0.6)     (2.6)      (1.8)(2)  (3.0)
  Lives added from contracts with existing
     clients...................................       0.2       0.2        0.2       0.9
  Lives added from contracts with new
     clients...................................       0.3       1.9        1.8       1.9
                                                 --------    ------   --------    ------
Cumulative lives sold, end of period...........      59.3      38.3       59.3      38.3
                                                 ========    ======   ========    ======
Lives installed................................      53.5(1)   35.7       53.5(1)   35.7
Backlog........................................  $1,053.6(3) $737.3   $1,053.6(3) $737.3
Claims recoveries..............................  $   57.9    $ 43.7   $  109.1    $ 84.8
Throughput(4)..................................       5.5%      6.1%      10.2%     12.1%
Effective fee rate.............................      27.3%     27.5%      27.2%     27.4%
Employees
  Direct operations............................       556       404        556       404
  Support......................................       158        98        158        98
                                                 --------    ------   --------    ------
          Total employees......................       714(5)    502        714(5)    502
                                                 ========    ======   ========    ======
</TABLE>

---------------

(1) Includes approximately 8.1 million lives sold and 8.0 million lives
    installed from the Subro-Audit Acquisition and 10.5 million lives sold and
    8.0 million lives installed from the MedCap Acquisition. During the second
    quarter, the Company received notice that CIGNA HealthCare ("CIGNA")
    intended to terminate its agreement with SAI, effective July 31, 1999. The
    CIGNA contract covers approximately 2.8 million installed lives. See
    "-- Recent Developments -- Loss of Client".
(2) Reflects the loss of 900,000 lives from Blue Shield of California, a
    terminated client.
(3) Backlog is the total dollar amount of potentially recoverable claims that
    the Company is pursuing or auditing on behalf of clients at any point in
    time. Backlog at June 30, 1999 includes $303 million of backlog from the
    Acquisitions.
(4) Throughput equals recoveries for the period divided by the average of
    backlog at the beginning and end of the period. The variation from historic
    throughput levels in the current quarter and year-to-date (e.g., from that
    for the three months ended and six months ended June 30, 1998) is in part an
    effect of the timing of the Acquisitions on the amount of backlog in the
    calculation of throughput and certain operational changes in the second half
    of 1998 and during 1999. See "-- Recent Operating Issues".
(5) Includes the addition of SAI and MedCap direct operations and support staff
    employees.

                                        9
<PAGE>   12
RESULTS OF OPERATIONS -- (CONTINUED)


     The following table presents, for the periods indicated, certain items in
the income statements as a percentage of revenue:

                STATEMENTS OF INCOME AS A PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED     SIX MONTHS ENDED
                                                     JUNE 30,              JUNE 30,
                                                -------------------    -----------------
                                                 1999         1998     1999        1998
                                                ------       ------    -----       -----
<S>                                             <C>          <C>       <C>         <C>
Claims revenues...............................  100.0%       100.0%    100.0%      100.0%
Cost of services..............................   50.6         46.7      50.5        46.8
Support expenses..............................   25.9         21.0      25.9        20.5
Depreciation and amortization.................    8.2          4.8       7.7         4.7
Operating income..............................   15.3         27.5      15.8        28.0
Income before income taxes....................   15.3         30.8      16.2        31.5
Net income....................................    9.0         18.1       9.5        18.4
</TABLE>

  Three and six months ended June 30, 1999 compared to three and six months
ended June 30, 1998

     Claims Revenues.  Total claims revenues for the three-month period ended
June 30, 1999 increased 32%, to $15.8 million from $12.0 million in 1998 and
increased 28% to $29.7 million in the six month period ended June 30, 1999 as
compared with $23.2 million in the comparable period in 1998. Claims recoveries
for the three months ended June 30, 1999 increased 32% to $57.9 million from
$43.7 million in 1998 and 29% to $109.1 million for the six months ended June
30, 1999 from $84.8 million for the comparable period in 1998. The effective fee
rate decreased slightly to 27.3% from 27.5% for the quarter ended June 30, 1999
as compared with the same period in 1998. This decline is a function of the
recoveries mix and of the consummation of the Acquisitions. Effective fee rates
can vary from period to period, depending on the mix of services provided and
fee schedules. Furthermore, SAI and MedCap, taken together, have historically
had lower fee rates than HCRI prior to the Acquisitions. Claims revenues and
recoveries for the three month period ended June 30, 1999 include revenues from
medical cost management and subrogation services attributable to the
Acquisitions. Before giving effect to the Acquisitions, HCRI claims revenues
were $12.3 million and recoveries were $44.5 million for the three months ended
June 30, 1999 and $24.2 million and $87.8 million for the six months ended June
30, 1999.

     Backlog at June 30, 1999 increased by $316 million, or 43%, compared to
June 30, 1998. This net growth in backlog was the result of the installation of
new lives, the processing of lives already installed, the addition of $136
million from the Subro-Audit Acquisition and the addition of $167 million from
the MedCap Acquisition. The Company obtained claims recoveries at a rate of
approximately 5.5% of average backlog during the 1999 second quarter. Lives
installed remained at 53.5 million from first quarter to second quarter of 1999.
Compared to the same quarter in 1998, lives installed increased 50%, primarily
due to the lives that were added as a result of the Acquisitions.

     Cost of Services.  Cost of services for the second quarter of 1999 was $8.0
million, an increase of 42% from $5.6 million in the three months ended June 30,
1998 and was $15.0 million for the six months ended June 30, 1999, an increase
of 38% from $10.9 million for the comparable period in 1998. The increase
resulted primarily from costs associated with the operations of the
Acquisitions. Excluding the Acquisitions, HCRI's cost of services for the three
months ended June 30, 1999 was $6.1 million, an increase of 9% over the
comparable period in 1998 and for the six months ended June 30, 1999 was $12.0
million, an increase of 11% over the comparable period in 1998. As a percentage
of claims revenues, cost of services increased to 51% for the six months ended
June 30, 1999 from 47% in 1998. The increase in cost of services as a percentage
of claims revenues resulted primarily from the Acquisitions and a lower growth
rate in revenues than in cost of services.

     As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expense in an effort to
generate revenue, a significant portion of which will be

                                       10
<PAGE>   13

RESULTS OF OPERATIONS -- (CONTINUED)

recorded in future periods. Because relatively little revenue is earned during
the first year following the installation of new lives (unless the Company
assumes responsibility for the new client's existing backlog) the growth rate
for lives installed exceeds the revenue growth rate.

     Support Expenses.  Support expenses increased 62% to $4.1 million for the
three months ended June 30, 1999 from $2.5 million for the comparable period in
1998 and was $7.7 million for the six months ended June 30, 1999, an increase of
61% from $4.8 million for the comparable period in 1998. The increase was due to
combining the operations of the Acquisitions and the hiring of additional
support staff for the upgrade of HCRI's information management system (the
"SubroSystem"). Support expenses increased as a percentage of claims revenues
from 21% for the six months ended June 30, 1998 to 26% for the six months ended
June 30, 1999. The increase in support expenses as a percentage of claims
revenues resulted from the Acquisitions and a lower growth rate in revenues than
in support expenses.

     Depreciation and Amortization.  Depreciation and amortization expenses
increased 123%, to $1.3 million for the three months ended June 30, 1999 from
approximately $0.6 million for the three months ended June 30, 1998 and
increased 110% to $2.3 million for the six months ended June 30, 1999 from $1.1
million for the comparable period in 1998. The increase in depreciation expense
was mainly attributable to capital expenditures for operations and system
upgrades. The increase in amortization expense is attributable to the addition
of intangible assets resulting from the Acquisitions.

     Interest Income.  Interest income totaled $0.3 million and approximately
$0.4 million for the three months ended June 30, 1999 and 1998, respectively,
and $0.5 million and $0.9 million for the six months ended June 30, 1999 and
1998, respectively. The decrease in interest income, for both periods, was a
result of using available cash for the Acquisitions and repaying borrowed funds.

     Interest Expense.  Interest expense totaled $278,000 and $40,000 for the
three months ended June 30, 1999 and 1998, respectively, and $420,000 and
$64,000 for the six months ended June 30, 1999 and 1998, respectively. The
increase in interest expense, for both periods, resulted from an increase in
borrowed funds for the Acquisitions and stock repurchases.

     Tax.  Provision for income taxes was approximately 41.5% of pre-tax income
for the three months ended June 30, 1999 and 41.4% for the three months ended
June 30, 1998 and 41.5% and 41.7% for the six months ended June 30, 1999 and
1998, respectively. The effective tax rate exceeded the Federal statutory tax
rate as a consequence of state and local taxes and non-deductible expenses.

     Net Income.  Net income for the three months ended June 30, 1999 decreased
$0.8 million, or 35%, to $1.4 million or $0.13 per diluted common share, from
$2.2 million or $0.19 per diluted common share for the comparable period ended
June 30, 1998, and for the six months ended June 30, 1999 decreased $1.5
million, or 34%, to $2.8 million, or $.25 per diluted common share from $4.3
million, or $0.37 per diluted common share. Management believes that the
deterioration in year to date operating results resulted primarily from changes
made in HCRI's operations in the second half of 1998 and first quarter of 1999.
See "-- Recent Operating Issues".

                                       11
<PAGE>   14

LIQUIDITY AND CAPITAL RESOURCES

     The Company's statements of cash flows for the six months ended June 30,
1999 and 1998 are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                              -----------------
                                                                1999      1998
                                                              --------   ------
<S>                                                           <C>        <C>
Net cash provided by operations.............................  $  4,847   $1,658
Net cash used in investing activities.......................   (46,852)  (2,416)
Net cash provided by financing activities...................    12,984       --
                                                              --------   ------
Net decrease in cash and cash equivalents...................  $(29,021)  $ (758)
                                                              ========   ======
</TABLE>

     The Company had working capital of $12.0 million at June 30, 1999,
including cash and cash equivalents of $2.1 million, compared with working
capital of $30.9 million at December 31, 1998. The decrease is attributable to
using available cash for the Acquisitions in January and February 1999.

     Net cash provided by operations increased $3.2 million for the six month
period ended June 30, 1999 compared to June 30, 1998, primarily as a result of
the timing of recurring cash receipts and disbursements related to accrued
expenses and claims recoveries.

     Net cash used in investing activities primarily reflects the Company's cost
of the Acquisitions of $34.4 million, $8.5 million escrowed for earn-out
potential and additional costs for purchased net working capital plus ongoing
capital expenditures for facility expansion and system enhancements. Capital
expenditures for the six months ended June 30, 1999 were approximately $2.3
million. Excluding the cost of the Acquisitions, the Company anticipates capital
expenditures totaling approximately $4.1 million for 1999.

     Net cash provided by financing activities for the six month period ended
June 30, 1999 reflects $14.3 million in net cash borrowings from the Company's
credit facility as discussed below and $1.4 million as a reduction in
stockholders' equity, resulting from the stock repurchase program. See
"-- Recent Developments -- Stock Repurchase Plan".

     In February 1998, the Company entered into a $50 million senior secured
revolving credit facility (the "Credit Facility") with National City Bank of
Kentucky and the other lenders named therein, replacing the Company's $10
million line of credit. The principal amount outstanding under the Credit
Facility will mature on January 31, 2001 and bears interest at the Company's
option, at either: (i) the Prime Rate plus the applicable margin in effect or
(ii) the Eurodollar Rate plus the applicable margin in effect. The applicable
margin is determined in accordance with a Pricing Grid based on the Company's
ratio of consolidated total indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization. The agreement contains usual and
customary covenants including, but not limited to, financial tests for interest
coverage, net worth levels and leverage that may limit the Company's ability to
pay dividends. The Company's obligations under the Credit Facility are secured
by substantially all of the Company's assets, subject to certain permitted
exceptions. As of June 30, 1999, the Company was in compliance with the
covenants and a total of $14.3 million was drawn under the Credit Facility and
used for the Acquisitions and stock repurchases. The Credit Facility was amended
in May 1998 and March 1999 to enable the Company to acquire entities that do not
maintain audited financial statements and to use proceeds from the Credit
Facility to repurchase outstanding stock, respectively.

     At June 30, 1999 and December 31, 1998, the Company reported on its balance
sheet, as a current asset, restricted cash of $25.7 million and $16.9 million,
respectively. Restricted cash represented claims recoveries effected by HCRI for
its clients and the June 30, 1999 amount also included an escrowed amount of
$8.5 million for a potential earn-out in connection with the Subro-Audit
Acquisition. At June 30, 1999 and December 31, 1998, HCRI reported on its
balance sheet, as a current liability, funds due clients of $13.1 million and
$13.1 million, respectively, representing claims recoveries to be distributed to
clients, net of the fee earned on such recoveries.

                                       12
<PAGE>   15

LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)

     The Company believes that its available cash resources, together with the
borrowings available under the Credit Facility, will be sufficient to meet its
1999 operating requirements, acquisitions and internal development initiatives.

EXTERNAL FACTORS

     The business of recovering subrogation and related claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare payment, fault-based
liability or workers' compensation systems. Several of these factors could be
the non-availability of property and casualty and workers' compensation
coverages as sources of recovery, changes in laws that would limit or bar either
the access to or use of claims data and medical records, or the ability of
healthcare payors to recover subrogation and related claims or to audit medical
records. Because the Company's profitability depends in large measure upon
obtaining and using claims data and medical records, the non-availability or
decrease in their availability could have a material adverse effect on the
Company.

     Moreover, because the Company's revenues derive from the recovery of the
costs of medical treatment, material changes in such costs will tend to affect
the Company's backlog or its rate of backlog growth, as well as its revenue or
its rate of revenue growth. The healthcare industry, and particularly the
business of healthcare payors, is subject to various external factors that may
have the effect of significantly altering the costs of healthcare and the
environment for the sale or delivery of recovery and cost containment services.
The Company is unable to predict which of these factors, if any, could have a
potentially material impact on healthcare payors and through them, the
healthcare recovery and cost containment industry.

CONCENTRATION OF CLIENTS

     The Company provides services to healthcare plans that as of June 30, 1999
covered approximately 59.3 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. On June 30, 1999, HCRI had backlog of $1,053.6 million. HCRI's
revenues are earned under written contracts with its clients that generally
provide for contingency fees from recoveries under a variety of pricing regimes.
The pricing arrangements offered by HCRI to its clients include a fixed fee
percentage, a fee percentage that declines as the number of lives covered by the
client and subject to HCRI's service increases and a fee percentage that varies
with HCRI's recovery performance.

     For the six months ended June 30, 1999 and 1998, the Company's largest
client, UnitedHealth Group, contributed 23% and 28%, respectively, of the
Company's total revenues. The Company's second and third largest clients
respectively represented 7% and 7% during the six months ended June 30, 1999 and
9% and 8% of the Company's revenues during the six months ended June 30, 1998.
The loss of one or more of the Company's large clients could have a material
adverse effect on the Company's results of operations, financial position and
cash flows.

     HCRI performs its services and does not obligate itself to deliver any
specific result. Contracts with its customers are generally terminable on 60 to
180 days' notice by either party, although in a few cases the contracts extend
over a period of years. Pursuant to the terms of its client contracts, HCRI is
generally entitled to continue to make recoveries for the client and earn a fee
on the backlog existing at the time of termination.

YEAR 2000 ISSUES

     The year 2000 presents a problem for computer systems (software and
hardware) that were not designed to handle any dates beyond the year 1999. The
problem is pervasive and complex because virtually every computer operation will
be affected in some way by the rollover of the last two digits of the year "00".
In consequence, any such software and hardware will need to be modified some
time prior to December 31, 1999 in order to remain functional. Computer systems
that do not properly handle this rollover could generate erroneous data or fail
to function.

                                       13
<PAGE>   16

YEAR 2000 ISSUES -- (CONTINUED)

     The Company has initiated a company-wide program to identify and address
the modifications to or replacements of computer code (including data received
from clients), hardware and office equipment, as well as the testing and
implementation procedures necessary to achieve year 2000 readiness ("Y2K
Readiness" or, descriptively, "Y2K Ready"). As a result of this program, all
functions within the Company have been surveyed in order to first, identify
software and hardware that are not presently Y2K Ready, and second, to establish
a schedule for remediation or replacement of the items of software and hardware
that are not Y2K Ready.

     The Company has completed its identification of the elements of its
software and hardware that are not Y2K Ready. Included among these elements are
certain fields contained in the SubroSystem, the Company's on-line subrogation
system. The first date of potential failure for all of these items of software
and hardware, including the SubroSystem, is January 1, 2000. The completion date
for replacement or remediation of all elements of Company software, including
the SubroSystem, and hardware which are not already Y2K Ready, is September 30,
1999. Although the Company had previously estimated a June 30, 1999 completion
date, the Company directed certain resources during the fourth quarter of 1998
to facilitate the Acquisitions and certain other matters, which caused the
delay. To date, the costs of the Company's efforts to achieve Y2K Readiness have
not exceeded $85,000, and are not expected to exceed $150,000 in total.

     Management believes that the greatest risk posed to the Company's Y2K
Readiness lies in the possible failure of its clients and other members of the
healthcare payor industry to achieve Y2K Readiness. The Company relies on its
clients to provide electronic claims data, through electronic data interfaces,
as the source of information from which the Company identifies potentially
recoverable claims. If clients are unable to provide such data because they are
not Y2K Ready, the Company could suffer a slow-down in its recovery efforts,
impairing its ability to make the recoveries from which it derives its revenue.
Moreover, to the extent that payors, which are potential clients, fail to
achieve Y2K Readiness, HCRI's ability to sell to and to install such payors may
also be impaired. With respect to current clients, HCRI has undertaken a survey
of each client's state of Y2K Readiness. The Company has received notifications
from 85% of its client base, representing more than 95% of its installed lives.
All notifications indicated that clients have Y2K efforts underway. The Company
is attempting to obtain surveys from its remaining client base. However, as the
Company is relying upon representations of client Y2K Readiness in response to
the surveys, the Company is closely monitoring progress through available means,
and preparing for contingencies, as necessary.

     The Company's contingency planning calls for, among other things, early
identification of alternative means of obtaining electronic claims data should
the existing electronic data interfaces with clients fail. Contingency plans are
being developed on an as-needed, client-specific basis.

RECENT DEVELOPMENTS

  Stock Repurchase Plan

     HCRI's Board authorized a stock repurchase plan on March 12, 1999 under
which the Company may repurchase up to $10 million of HCRI Common Stock in the
open market, from time to time, at prices per share deemed favorable by the
Company. Shares will be repurchased using cash from operations and borrowed
funds and will continue until such time as the Company has repurchased $10
million of HCRI Common Stock or until it otherwise determines to terminate the
stock repurchase plan. During the three month period ended June 30, 1999, the
Company repurchased 305,000 shares of its stock at an average price of $4.50 per
share and currently holds the shares as treasury stock. No additional shares
have been repurchased since June 30, 1999.

  Loss of Client

     On May 17, 1999, the Company announced that it received a notice of
termination from CIGNA HealthCare concerning subrogation services provided by
the Company's SAI division. CIGNA stated in the notice that it had selected a
different vendor to be its sole provider of subrogation services. The
termination

                                       14
<PAGE>   17

RECENT DEVELOPMENTS -- (CONTINUED)

was effective July 31, 1999, at which time HCRI, through its SAI division,
stopped providing subrogation recovery services to CIGNA on a prospective basis.
Under the terms of its contract, SAI retains the right to provide recovery
services with respect to the backlog on hand as of the termination date. The
CIGNA termination covers approximately 2.8 million installed lives (i.e., being
serviced), which is 6% of the 45.5 million lives that HCRI reported were
installed for subrogation recovery services at June 30, 1999.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk from changes in interest rates
related to its Credit Facility, which matures January 31, 2001. The impact on
earnings and value of any debt under its Credit Facility is subject to change as
a result of movements in market rates and prices. The Credit Facility is subject
to variable interest rates. As of June 30, 1999, the Company had $14.3 million
outstanding under its Credit Facility with interest rates ranging from 6.74% to
7.04%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".

                                       15
<PAGE>   18

                                    PART II

                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On March 15, 1994, a class action complaint ("Complaint") was filed against
HCRI in the United States District Court for the Northern District of West
Virginia, Michael L. DeGarmo, et al. v. Healthcare Recoveries, Inc. The
plaintiffs assert that HCRI's subrogation recovery efforts on behalf of its
clients violate a number of state and federal laws, including the Fair Debt
Collection Practices Act and the Racketeering Influenced and Corrupt
Organizations Act ("RICO"). The Complaint also seeks judgment, under the federal
Declaratory Judgment Act, that HCRI as the subrogation agent for various
healthcare payors be limited, in recovering from persons who caused accidents or
from the healthcare payors' injured insureds, to the actual costs of the medical
treatment provided to such injured insureds by such healthcare payors,
notwithstanding provisions in the applicable healthcare policies or agreements,
which generally allow recovery by the healthcare payors of the "reasonable
value" of such treatments. The Complaint alleges that HCRI made fraudulent
representations to recover sums in excess of those actually expended by the
applicable healthcare payor to pay for medical treatment. On March 30, 1999, the
Court entered an order certifying a class of all members of one HCRI client
health plan located in Wheeling, West Virginia (The Health Plan of the Upper
Ohio Valley) who have been subject to subrogation and/or reimbursement
collection practices by HCRI. Plaintiffs, on behalf of the class as certified,
demand compensatory damages, punitive damages, treble damages under RICO, costs
and reasonable attorneys' fees. The DeGarmo case remains in discovery.

     This lawsuit, if successful, could prevent the Company from recovering the
"reasonable value" of medical treatment under discounted fee for service
("DFS"), capitation and other payment arrangements. By the end of 1993, at the
direction of certain clients, HCRI had ceased the practice of recovering on
their behalf the "reasonable value" of medical treatment provided by medical
providers under DFS arrangements with those clients. It is the Company's current
policy not to recover the "reasonable value" of medical treatment in DFS
arrangements. However, HCRI historically and currently recovers the "reasonable
value" of medical treatment provided under capitation arrangements and other
payment arrangements with medical providers on behalf of those clients that
compensate medical providers under these payment mechanisms, to the extent that
these benefits are related to treatment of the injuries as to which clients have
recovery rights. The Company believes that its clients' contracts, including the
contracts that provide for recovery under DFS, capitation and other payment
arrangements are enforceable under the laws of the states potentially applicable
in this case and that, as a result, this litigation will not have a material
adverse effect upon its business, results of operation or financial condition.
Nevertheless, if this lawsuit or another lawsuit seeking relief under similar
theories were to be successful, it could have a material adverse effect on the
Company's business, results of operations and financial condition.

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

     The Company held its Annual Meeting of Stockholders on May 3, 1999. Of the
11,502,987 shares of Common Stock outstanding as of the record date, March 17,
1999, and entitled to vote at this meeting, 10,571,887 were represented at the
meeting in person or by proxy. The following matters were voted upon.

     (a) The following members were elected to the Board of Directors to hold
office for a three year term:

<TABLE>
<CAPTION>
NOMINEE                                             SHARES VOTED FOR   SHARES ABSTAINED   TERM
-------                                             ----------------   ----------------   ----
<S>                                                 <C>                <C>                <C>
William C. Ballard, Jr............................     9,045,211          1,526,676       2002
Elaine J. Robinson................................     9,045,170          1,526,717       2002
</TABLE>

     The Company's other directors continuing after the Annual Meeting are as
follows:
        Jill L. Force
        Patrick B. McGinnis
        John H. Newman
        Chris B. Van Arsdel

                                       16
<PAGE>   19

     (b) To approve and adopt an amendment to the Company's 1997 Stock Option
Plan for Eligible Participants (the "Stock Option Plan") to increase the number
of shares of Common Stock reserved for issuance under such Stock Option Plan
from 860,000 to 1,760,000. The result of the vote was 5,749,852 shares favor,
3,383,914 shares opposed and 1,988 shares abstained. Accordingly, the amendment
to the Company's 1997 Stock Option Plan for Eligible Participants was approved
and adopted.

     (c) The ratification of the appointment of PricewaterhouseCoopers LLP as
independent public accountants of the Company to serve for 1999. The result of
the vote was 10,571,887 shares favor, none opposed or abstained. Accordingly,
the appointment of PricewaterhouseCoopers LLP was ratified.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     The following list of Exhibits includes both exhibits submitted with this
Form 10-Q as filed with the Commission and those incorporated by reference to
other filings:

<TABLE>
<C>   <C>  <S>
 2.1   --  Asset Purchase Agreement, dated as of December 4, 1998, by
           and among the Registrant, MedCap Medical Cost Management,
           Inc. and Marcia Deutsch (incorporated by reference to
           Exhibit 2.1 of Registrant's Current Report on Form 8-K,
           filed December 11, 1998, File No. 000-22585.)
 2.2   --  Asset Purchase Agreement, dated as of January 3, 1999, by
           and among the Registrant, Subro-Audit, Inc., O'Donnell
           Leasing Co., LLP, Kevin M. O'Donnell and Leah Lampone
           (incorporated by reference to Exhibit 2.1 of Registrant's
           Current Report on Form 8-K, filed January 11, 1999, File No.
           000-22585).
 2.3   --  Amendment to Asset Purchase Agreement by and among
           Healthcare Recoveries, Inc., Subro-Audit, Inc., O'Donnell
           Leasing Co., LLP, Kevin O'Donnell and Leah Lampone, dated as
           of January 25, 1999 (incorporated by reference to Exhibit
           2.2 of Registrant's Current Report on Form 8-K, filed
           February 3, 1999, File No. 000-22585).
 3.1   --  Amended and Restated Certificate of Incorporation of the
           Registrant (incorporated by reference to Exhibit 3.1 of
           Registrant's Amendment No. 2 to Registration Statement on
           Form S-1, File No. 333-23287).
 3.2   --  Amended and Restated Bylaws of the Registrant (incorporated
           by reference to Exhibit 3.2 of Registrant's Amendment No. 2
           to Registration Statement on Form S-1, File No. 333-23287).
 4.1   --  Specimen Common Stock Certificate (incorporated by reference
           to Exhibit 4.1 of Registrant's Amendment No. 1 to
           Registration Statement on Form S-1, File No. 333-23287).
 4.2   --  Rights Agreement, dated February 12, 1999, between the
           Registrant and National City Bank, as Rights Agent, which
           includes as Exhibit A the Form of Certificate of
           Designations of the Preferred Stock, as Exhibit B the Form
           of Right Certificate and as Exhibit C the Summary of Rights
           to Purchase Preferred Stock (incorporated by reference to
           Exhibit 4.1 of Registrant's Form 8-A, filed February 16,
           1999).
10.1   --  Amendment to Healthcare Recoveries, Inc. 1997 Stock Option
           Plan for Eligible Participants (incorporated by reference to
           Exhibit A of Registrant's Proxy Statement for the Annual
           Meeting, filed April 1, 1999).
27.1   --  Financial Data Schedule. (for SEC use only).
99.1   --  Healthcare Recoveries, Inc. Private Securities Litigation
           Reform Act of 1995 Safe Harbor Compliance Statement for
           Forward-Looking Statements (incorporated by reference to
           Exhibit 99.1 of Registrant's Annual Report on Form 10-K, for
           the year ended December 31, 1998, filed March 26, 1999).
</TABLE>

                                       17
<PAGE>   20

     (b) Reports on Form 8-K

<TABLE>
<CAPTION>
                                             FINANCIAL
                                             STATEMENTS
               ITEM REPORTED                   FILED        DATE OF REPORT          FILE DATE
               -------------                 ----------     --------------          ---------
<S>                                          <C>           <C>                  <C>
Consolidated Supplemental Financial            Yes(1)      January 25, 1999     April 7, 1999(3)
  Statements To give effect for the
  Subro-Audit Acquisition
Consolidated Supplemental Financial            Yes(2)      February 15, 1999    April 29, 1999(4)
  Statements To give effect for the MedCap
  Acquisition
</TABLE>

---------------

(1) Financial Statements of SAI and ODL (collectively, "Subro-Audit").
     (a) Financial Statements of Subro-Audit:
        (i)    Combined Balance Sheets as of December 31, 1997 and 1996.
        (ii)   Combined Statements of Income for the years ended December 31,
               1997 and 1996.
        (iii)  Combined Statements of Changes in Owners' Equity for the years
               ended December 31, 1997 and 1996.
        (iv)   Combined Statements of Cash Flow for the years ended December 31,
               1997 and 1996.
        (v)   Notes to Combined Financial Statements.

     (b) Unaudited Financial Statements of Subro-Audit, together with an
     independent auditors review report:
        (i)    Condensed Combined Balance Sheets as of September 30, 1998 and
               December 31, 1997.
        (ii)   Condensed Combined Statements of Income for the nine month
               periods ended September 30, 1998 and 1997.
        (iii)  Condensed Combined Statements of Cash Flows for the nine month
               periods ended September 30, 1998 and 1997.
        (iv)   Notes to Condensed Combined Financial Statements.

     (c) Unaudited Pro Forma Financial Information and Notes:
        (i)    Unaudited Pro Forma Condensed Balance Sheet of HCRI at September
               30, 1998.
        (ii)   Unaudited Pro Form Condensed Statement of Income for the nine
               month period ended September 30, 1998.
        (iii)  Unaudited Pro Forma Condensed Statement of Income for the year
               ended December 31, 1997.
        (iv)   Notes to Unaudited Pro Forma Condensed Financial Statements.

(2) Financial Statements of MedCap Medical Cost Management, Inc. ("MedCap").
     (a) Financial Statements of MedCap:
        (i)    Balance Sheet as of December 31, 1997.
        (ii)   Statement of Income for the year ended December 31, 1997.
        (iii)  Statement of Changes in Shareholder's Equity for the year ended
               December 31, 1997.
        (iv)   Statement of Cash Flows for the year ended December 31, 1997.
        (v)   Notes to Financial Statements.

     (b) Unaudited Financial Statements of MedCap, together with an independent
     auditors review report:
        (i)    Condensed Balance Sheets as of September 30, 1998 and December
               31, 1997.
        (ii)   Condensed Statements of Income for the nine month periods ended
               September 30, 1998 and 1997.
        (iii)  Condensed Statements of Cash Flows for the nine month periods
               ended September 30, 1998 and 1997.
        (iv)   Notes to Condensed Financial Statements.

                                       18
<PAGE>   21

     (c) Unaudited Pro Forma Financial Information and Notes:
        (i)    Unaudited Pro Forma Condensed Balance Sheet of HCRI at September
               30, 1998.
        (ii)   Unaudited Pro Form Condensed Statement of Income for the nine
               month period ended September 30, 1998.
        (iii)  Unaudited Pro Forma Condensed Statement of Income for the year
               ended December 31, 1997.
        (iv)   Notes to Unaudited Pro Forma Condensed Financial Statements.

(3) Form 8-K/A amending Form 8-K filed February 3, 1999.

(4) Form 8-K/A amending Form 8-K filed February 26, 1999.

                                       19
<PAGE>   22

                                   SIGNATURES

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

                                          HEALTHCARE RECOVERIES, INC.

  Date: August 12, 1999                         /s/ PATRICK B. MCGINNIS
                                          --------------------------------------
                                                   Patrick B. McGinnis
                                                 Chairman, President and
                                                 Chief Executive Officer

  Date: August 12, 1999                          /s/ DOUGLAS R. SHARPS
                                          --------------------------------------
                                                    Douglas R. Sharps
                                            Executive Vice President and Chief
                                                    Financial Officer
                                            Principal Financial and Accounting
                                                         Officer

                                       20