<PAGE>   1

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2001
--------------------------------------------------------------------------------
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                   FORM 10-K
                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<C>               <S>
   (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, 2000

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

                  FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

                         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 Number)

               1400 WATTERSON TOWER
               LOUISVILLE, KENTUCKY                                        40218
     (Address of principal executive offices)                           (Zip Code)

                                            (502) 454-1340
                         (Registrant's telephone number, including area code)
                      Securities registered pursuant to Section 12(b) of the Act

                                                                   NAME OF EACH EXCHANGE
                TITLE OF EACH CLASS                                 ON WHICH REGISTERED
--------------------------------------------------- ---------------------------------------------------
                       None
</TABLE>

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

                                 TITLE OF CLASS
                    Common Stock, par value $.001 per share
                      (including rights attached thereto)

     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 [ ].

     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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K.  [X]

     As of March 20, 2001, 9,789,356 shares of the Registrant's Common Stock,
$0.001 par value, were outstanding. The aggregate market value of Registrant's
Common Stock held by non-affiliates of the Registrant as of March 20, 2001 was
approximately $41,311,082 (based on the last sale price of a share of Common
Stock as of March 20, 2001 ($4.22)), as reported by The Nasdaq National Market.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 11, 2001 are incorporated herein by reference in
Part III.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM:                                                                 PAGE
-----                                                                 ----
<C>     <S>                                                           <C>
                                  PART I
  1.    Business....................................................    1
  2.    Properties..................................................   13
  3.    Legal Proceedings...........................................   13
  4.    Submission of Matters to a Vote of Security Holders.........   16
        Supplementary Item. Certain Risk Factors....................   17
                                 PART II
  5.    Market for the Registrant's Common Equity and Related
        Stockholder Matters.........................................   17
  6.    Selected Financial Data.....................................   17
  7.    Management's Discussion and Analysis of Financial Condition
        and Results of Operations...................................   19
 7A.    Quantitative and Qualitative Market Risk Disclosures........   28
  8.    Financial Statements and Supplementary Data.................   28
  9.    Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure....................................   44
                                 PART III
 10.    Directors and Executive Officers of the Registrant..........   44
 11.    Executive Compensation......................................   44
 12.    Security Ownership of Certain Beneficial Owners and
        Management..................................................   44
 13.    Certain Relationships and Related Transactions..............   44
                                 PART IV
 14.    Exhibits, Financial Statement Schedules and Reports on Form
        8-K.........................................................   44
</TABLE>

     THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
HEALTHCARE RECOVERIES, INC. OR ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED, 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-K, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. HEALTHCARE RECOVERIES, INC. UNDERTAKES
NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS OR CIRCUMSTANCES, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.

                                        i
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Healthcare Recoveries, Inc. (the "Company" or "HCRI"), a Delaware
corporation, believes it is a leading independent provider of outsourcing of
insurance subrogation and certain other medical claims recovery and cost
containment services to the private healthcare payor industry in the United
States, based on the Company's experience and assessment of its market. HCRI's
primary business is medical claims recovery, and its primary product is
subrogation recovery, which generally 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 are generally paid from the proceeds of liability or workers'
compensation insurance. The Company's other medical claims recovery services
include (1) the auditing of the bills of medical providers, particularly
hospitals, for accuracy, correctness and compliance with contract terms
("provider bill audit") and, (2) the recovery of overpayments attributable to
duplicate payments, failures to coordinate benefits and similar errors in
payment. HCRI offers its services on a nationwide basis to health maintenance
organizations ("HMOs"), indemnity health insurers, self-funded employee health
plans, companies that provide claims administration services to self-funded
plans (referred to as "third-party administrators"), Blue Cross and Blue Shield
organizations and provider organized health plans. Current clients include
UnitedHealth Group, Humana Inc., Kaiser Permanente, The Principal Financial
Group and Group Health, Inc. The Company had 52.5 million lives under contract
from its clientele at December 31, 2000, a 6% decrease from December 31, 1999.

ORGANIZATIONAL STRUCTURE

     HCRI was incorporated on June 30, 1988 under the laws of the State of
Delaware. The Company was co-founded by its present Chief Executive Officer and
was initially funded by two venture capital investors. The Company operated as
an independent entity until August 28, 1995, when Medaphis Corporation
("Medaphis"), a Delaware corporation, acquired the Company for approximately
$79.1 million in a stock-for-stock exchange accounted for as a pooling of
interests. Medaphis sold the Company in an initial public offering in May 1997.
The Company is now publicly held and is traded on The Nasdaq National Market
under the symbol "HCRI."

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 limited liability partnership ("ODL"
and, together with SAI, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI currently
estimates that it may pay up to $5.4 million pursuant to an earn-out
arrangement, of which $2.8 million was paid on May 18, 2000, with the remainder
to be paid in 2001. Approximately $4.7 and $8.5 million was held in escrow for
the potential earn-out and was included in restricted cash at December 31, 2000
and 1999, respectively. SAI is based in Wisconsin and provides subrogation
recovery services with respect 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.

     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
(the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the
"Acquisitions"). The Company paid approximately $4.5 million on February 15,
2000 pursuant to an amendment to the original earn-out agreement. Pursuant to
the same amendment, through January 15, 2001, the Company was obligated to pay
up to 50% of the fees collected in relation to certain negotiated contracts,
less associated expenses, as an additional earn-out. The final amount, which was
paid in

                                        1
<PAGE>   4

2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider 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.

STRATEGY

     HCRI intends to pursue a two-fold growth strategy. First, with respect to
its existing healthcare recovery business, HCRI will focus on (i) servicing its
existing client base, (ii) selling and installing those additional lives covered
by contracts with existing clients and (iii) selling and installing new clients
and cross-selling expanded product offerings. The MedCap Acquisition enabled
HCRI to broaden its product base to provide medical cost management services to
healthcare insurers and HMOs. During 2000, HCRI placed in service and began to
earn revenue from an internally developed service that offers its clients the
ability to detect, audit and recover a variety of claims overpayments. HCRI will
continue to explore strategic acquisitions which meet its selection criteria and
develop new service products internally. See "-- Business Developments".

     Under the second aspect of its growth strategy, HCRI intends to extend its
systems-driven, process-oriented approach, through acquisitions and internal
development, to outsourcing opportunities in healthcare and other service
industries, including the property and casualty insurance industry. The defining
characteristics of HCRI's business model are (i) the ability to automate
clerical and administrative tasks, using sophisticated and proprietary computer
applications; and (ii) the ability to standardize and scale work using process
management and classical work measurement techniques. Using this model, HCRI
believes that it can dramatically increase the productivity of the skilled
knowledge workers who make up its labor force, and successfully implement
pricing strategies that will reward HCRI for those productivity gains. See
"-- Business Developments".

     HCRI believes that future development opportunities are likely to be
characterized by outsourcing business services that will produce predictable and
recurring revenue streams; competitive advantages from effective process
management, proprietary systems and the provision of knowledge-rich services;
the development of niche markets; value-based pricing; and a non-exclusive focus
on healthcare information services.

INDUSTRY

     Outsourcing.  The Company believes that in recent years, businesses have
increasingly outsourced non-core specialized business functions. Because of
expertise and economies of scale, companies that provide specialized services
are often able to deliver the requisite service at lower costs and with similar
or higher quality than could be achieved by their clients.

     Since the late 1980s, healthcare payors have experienced increasing (i)
price competition, (ii) regulatory complexity and related administrative
burdens, (iii) costs of healthcare claims, and (iv) average age of the insured
population. These factors, resulting from the rapid growth of managed care,
improvements in medical technology, consumer-oriented political pressure and an
aging U.S. population, tend to result in healthcare payors concentrating their
resources on their core business. This, in turn, provides on-going opportunities
for enterprises, like the Company, which are able to perform non-core business
functions on behalf of healthcare payors.

     The recovery process is complex and although many healthcare payors operate
internal recovery departments, HCRI believes that these departments are not
generally as effective per insured life as the Company's operations. HCRI
believes that (i) the relatively small size of recoverable funds as a percentage
of claims paid, (ii) the need for healthcare payors to focus on core
competencies and (iii) the complexity of the recovery process and economies of
scale will continue to provide opportunities for growth of the Company.

     Subrogation Recovery Rights of Healthcare Payors.  By contract and state
law, healthcare payors are generally entitled to certain rights with respect to
paid healthcare claims that may be the primary obligation of

                                        2
<PAGE>   5

other insurance carriers. For example, an HMO may pay the hospitalization and
related health expenses of a member who is injured in an automobile accident.
However, the responsible party is generally liable to the injured person for the
damages arising from the injury, which include lost wages, property loss, pain
and suffering and medical benefits. The responsible party usually has a
liability insurance policy that will pay covered damages, including medical
benefits, upon the acceptance of the injured party's claim. The healthcare payor
actually providing or paying for the medical benefits conferred on the injured
party (in this example, an HMO) may have a variety of rights through which it is
entitled to recover the value of such medical benefits from the responsible
party and the responsible party's liability insurer.

     These recovery rights include:

          (i)   the right of subrogation, which allows the healthcare payor to
     recover accident-related medical claims directly from the responsible party
     or the responsible party's insurance carrier;

          (ii)  the right of reimbursement, which allows the healthcare payor to
     recover from the injured party any payment received by him or her from the
     responsible party or the responsible party's insurance carrier relating to
     this injury;

          (iii) the right of reimbursement for medical benefits provided for
     work-related injuries, which are typically excluded from the healthcare
     insurer's coverage; and

          (iv) other recovery rights against automobile insurers and other
     liability insurers arising from coordination of benefits provisions in
     healthcare and property and casualty insurance coverages.

     Provider Bill Audit Rights of Healthcare Payors.  By contract, healthcare
payors are generally entitled to certain audit rights with respect to healthcare
claims presented to them for payment by medical providers. Providers may bill
healthcare payors under a variety of pricing regimes, including standard
fee-for-service charges, discounted-fee-for service charges, case rates, per
diem rates, and charges based on stop-loss insurance thresholds. In addition,
Medicare risk claims that are paid under a variety of arrangements, including
federally mandated payment methodologies, are also generally subject to audit by
the payor.

     Overpayment Recovery Rights of Healthcare Payors.  Healthcare payors are
generally entitled to recover from contract providers amounts that have been
paid in error or where the payor's obligation is secondary to that of another
payor (i.e., coordination of benefits). Examples of errors include payment of
claims outside the coverage contract, duplicate payments, and payments on claims
for persons no longer covered by the payor. The recovery of such overpayments
may be through set-off against future claims due to the provider or through a
collection process conducted by the Company for its clients.

     The industry conditions described above have contributed to the growing
need for a cost-effective provider of subrogation and other recovery products
and services. HCRI believes that it is a leading independent provider of
outsourcing of insurance subrogation and certain other related medical claims
recovery and cost containment services to the private healthcare payor industry
in the United States. HCRI's success is a result of the implementation of its
recovery processes, the skill and knowledge of its employees, its approach to
sales and marketing, its client base, and its proprietary information management
systems, all as described below.

THE RECOVERY PROCESS

     HCRI utilizes recovery processes to implement its post-payment cost
containment services, which include subrogation, provider bill audit and
overpayment recovery services. HCRI uses proprietary and other software and
various business processes to identify those claims that have recovery
potential. Client-specific threshold dollar amounts are utilized to identify
files where its clients may have a recovery right for subrogation for the
medical benefits provided. In the case of provider bill audit services, HCRI
utilizes specific threshold dollar amounts to investigate proper payment for
medical procedures. To identify overpayment recovery opportunities, typically
all paid claims for a fixed period are analyzed on a rolling quarterly basis.

     Following the identification and investigation of identified claims, HCRI
proceeds to recover from the financially responsible party the value of those
covered medical benefits provided. HCRI has automated this
                                        3
<PAGE>   6

complex processing of all raw data and the management, follow-up and generation
of correspondence. The use of automated processes substantially increases
productivity and enables specially trained personnel to focus more intensely on
matters requiring their professional judgement and expertise. The automated
processes also allow the Company to pursue claims that would otherwise be deemed
too small to pursue economically. HCRI believes that its ability to effectively
recover a broad range of claim sizes is an important competitive advantage in
the market. In addition to automating the recovery processes, HCRI's proprietary
software and other systems generate significant operations and management
information, which enables the Company to employ production and quality
standards in the context of providing specialized services.

     The recovery process has been refined to four major, interrelated steps:
(i) automated identification of related claims provided electronically by its
clients; (ii) investigation of potentially recoverable claims; (iii) assertion
and management of potentially recoverable claims; and (iv) negotiation and
settlement of claims. The Company dedicates staff with specialized skills to
individual services to optimize recoveries. The recovery process for each
healthcare recovery service is described below.

  Healthcare Subrogation Services

     Automated Identification of Claims with Recovery Potential.  The Company's
specialty is using systematic identification methods to determine which files to
pass on to the investigation stage. The automated selection, analysis and
processing of raw claims data are handled primarily through HCRI's proprietary
selection software. Information regarding diagnoses, the cost of treatments,
insured demographics (names, addresses and telephone numbers, etc.) and related
claims is provided to HCRI electronically by the healthcare payor. The automated
systems include direct connections to HCRI's clients' claims information
systems, subject to various security controls to limit access internally. HCRI's
trained staff identifies, sorts, vets and organizes raw claims data into usable
form, essentially engaging in "data mining."

     The primary vehicle for the identification of injured insureds is an
automated analysis of the clients' claims data. This system identifies
potentially recoverable claims and, using client-specific protocols, opens an
on-line, electronic file for such claims. After files are opened, the systems
automatically track the addition of medical expenses to these files, so that
they are updated as additional expenses are paid. Since its inception, HCRI has
automatically opened over 37.5 million of such on-line files.

     Investigation of Potentially Recoverable Claims.  By focusing
investigations only on those cases with the greatest potential for recovery,
HCRI minimizes member contacts and maximizes recovery potential. Subrogation
recoveries are typically related to accidental injuries. Claims may involve
automobile accidents, property and premises injuries, workers' compensation,
product liability or medical malpractice. When a file of claims reaches a value
determined by HCRI, the system automatically generates a series of inquiry
letters that are sent to the injured insured. These individuals respond by
calling the Company's customer service department to provide the facts of the
accident. HCRI also initiates phone calls if the insured does not respond to the
inquiry letters in a reasonable period of time. Historically, approximately 90%
of the injured insureds ultimately respond to HCRI's inquiries and approximately
18% of the claims investigated by customer service representatives are
classified as recoverable. Once a file of related claims is identified as
recoverable, the system updates the backlog and assigns the file to the
appropriate recovery person who begins the assertion and management of
recoverable claims. Since its inception, HCRI has investigated over 6.5 million
accidents.

     Assertion and Management of Potentially Recoverable Claims.  The workflow
performed by the various recovery personnel is directed and guided step-by-step
by the Company's proprietary and other software. The Company's systems document
activity on the claim files and provide an interconnected record of
correspondence and notes taken by the recovery personnel with respect to each
file. HCRI recovery personnel annotate the files on-line, as necessary, to
document progress, developments and status and otherwise maintain the history of
each claim.

     Once a file of claims is classified as recoverable, HCRI recovery
personnel, who are required to undergo extensive training, proceed to assert the
recovery rights of HCRI's clients and track the claims' history and development.
The employees contact all necessary parties to inform them of the existence and
value of the recovery claim. These parties generally include the liability
insurer for the responsible party, the insured and
                                        4
<PAGE>   7

the insured's attorney, if any, in conjunction with the claim. Recovery
personnel maintain contact with the parties involved, including the responsible
party (or insurance carrier), until the claim is settled. Settlement may not
occur until several years after the date of payment. During this phase of the
recovery process, approximately 40% of the amounts initially entered into
backlog (the dollar amount of potentially recoverable claims that the Company is
pursuing) as recoverable are rejected, in which case further activity is
terminated and backlog is reduced.

     Negotiation and Settlement of Claims.  The recovery process culminates in
the negotiation and settlement of claim files. Within the settlement guidelines
established by each client and HCRI's standard operating procedures, recovery
personnel close recoverable files and remove them from backlog by making
recoveries or by rejecting files and terminating recovery efforts. Once a
settlement is made and recorded in the system, receipt of cash is anticipated
and monitored by the responsible employee. Cash receipts are posted to the
credit of the appropriate client.

     Claims remain the property of HCRI's clients and litigation is commenced
solely at their written direction. Similarly, clients may terminate litigation
or other recovery efforts at any time for any reason. HCRI customarily bears the
cost of legal services as part of the services to its clients. HCRI has
established what it believes are cost-effective relationships with providers of
legal services, including its relationship with Sharps & Associates, PSC, a law
firm solely owned by Douglas R. Sharps, HCRI's Executive Vice President --
Finance and Administration, Chief Financial Officer and Secretary. This law firm
employs 31 attorneys, 13 paralegals and 1 administrative assistant at its
offices in Louisville, Kentucky; Pleasanton, California; Chicago, Illinois;
Tampa, Florida; Pittsburgh, Pennsylvania; Dallas, Texas; and Milwaukee,
Wisconsin. Mr. Sharps receives no personal benefit from his ownership of the
firm. See Note 7 in Item 8. "Financial Statements and Supplementary Data".

     Although some subrogation recoveries will be made during the first year of
service, the average time to make a recovery is 18 to 24 months from
installation, with substantially all recoveries made by the sixth year. The
timing of recoveries is driven by the payment cycle of claims (which is the
source of recoveries made by the Company) and circumstances specific to each
claim (e.g., identification of responsible party, responsiveness of responsible
party, cooperation of parties involved, factual complexity and litigation). The
amount of claims recoveries made by the Company on behalf of a client is
generally less than the amount of backlog generated on behalf of such client.
This is for a number of reasons, including (i) the inadequacy of insurance
coverage or other available source of funds to pay the claim; (ii) the absence
of third-party liability; or (iii) the settlement of the claim for less than
full value in accordance with HCRI's established policies.

     Historically, approximately 64% of HCRI's recoveries on behalf of clients
involved automobile liability insurance, 15% involved premises liability
insurance, 9% involved workers' compensation insurance and 12% involved product
liability or other insurance.

  Provider Bill Audit Services

     Automated Identification of Claims with Recovery Potential.  HCRI's
database of information captures over 500 data elements of financial,
demographic and clinical data from members, providers and payors. The Company
utilizes this data to project potential savings outcomes and pre-screen claims
for its various audit services. Provider contract terms are also programmed into
the system, which then reviews claims against the specific contract provisions
to identify discrepancies. The database of statistical information is refined to
include the results of each completed audit. Provider bill claims are selected
for audit based upon statistical analysis and a comparison to previously audited
claims. Typically, claims with billed charges greater than specified thresholds
are selected for audit. Every claim is automatically reviewed in a complete,
focused audit to refine selection criteria.

     Investigation of Potentially Recoverable Claims.  The Company's provider
bill audit service is a process for establishing accurate billing based on the
care and services documented by healthcare professionals and ordered by the
physician in the medical record as compared to the itemized billed charges. When
a claim is identified, it is automatically assigned to a nurse auditor who will
conduct an audit of all the line items that

                                        5
<PAGE>   8

make up the claim at the site of the provider. Based on historical experience,
approximately 91% of reviewed claims generate recoveries.

     Assertion and Management of Potentially Recoverable Claims.  The workflow
performed by the various audit personnel is directed and guided step-by-step by
the Company's proprietary and other software. Registered nurses review provider
bills line by line to determine if inaccuracies exist. This review is completed
on-site at the provider facility where the medical record exists. These audits
benefit any health plan that pays a portion of a claim based on a percent of
billed charges. Nurse auditors review the total claim file to compare the
medical record to the line item bill to ascertain that a physician ordered the
service performed, the supplies billed were actually used and the medication
billed was actually administered. The nurse auditor also verifies that the
billing is in compliance with the provider contract and that stoploss or outlier
provisions are correctly billed. Historically, provider bill audits have
resulted in savings of approximately 5% to 6%.

     Negotiation and Settlement of Claims.  Once the audit is completed, the
Company reviews its findings with a provider representative to reach agreement.
If there is no response from the provider within forty-five days, the audit
results are considered final and the claim is closed. The savings are reported
to the client for recoupment or HCRI will collect them from the provider.

  Overpayment Recovery Services

     Automated Identification of Claims with Recovery Potential.  Healthcare
payors are generally entitled to recover from contract providers claims paid in
error or where the payor's obligation is secondary to another payor (i.e.
coordination of benefits). The automated selection, analysis and processing of
raw claims data are handled primarily through HCRI's proprietary selection
software. This software identifies potential claims adjudication errors based on
the provisions contained in the clients' various health plan and provider
contracts.

     Investigation of Potentially Recoverable Claims.  Suspected overpayments
are identified and classified by type, then reviewed and researched by
experienced claims analysts, who specialize in particularly complex types of
overpayments, including coordination of benefits and Medicare. Based on
historical experience, approximately 20% of reviewed claims generate recoveries.

     Assertion and Management of Potentially Recoverable Claims.  The workflow
performed by the claims recovery personnel is directed and guided step-by-step
by the Company's proprietary and other software. Suspected overpayments are
verified based upon the claims analysts' research.

     Negotiation and Settlement of Claims.  Once an overpayment is verified it
is forwarded to a unit specializing in collections for recovery. Historically,
approximately 60% of verified overpayments have been collected. The Company
recovers the money for its clients through its collection function or reports
the overpayments to the client for recoupment from claims paid to that provider
prospectively, where the right of off-set is present in the payor's contract.

EMPLOYEES

     HCRI employs, and facilitates the development of, skilled
knowledge-workers. HCRI maintains an extensive in-house training program, which
it believes is attractive to employees and essential in developing the necessary
industry-specific skills. The Company believes the tight labor market, in
general, could have an impact on future hiring. HCRI employed approximately 677
persons as of December 31, 2000.

     HCRI requires all employees to enter into confidentiality and nondisclosure
agreements, which generally prohibit them from divulging confidential
information and trade secrets after they terminate employment. Employees are
also required to enter into non-compete agreements, preventing them from working
for a competitor during the first year after they terminate employment. In
addition, the Company's customers generally agree not to employ HCRI employees
during the client's contract term plus a specified period.

     The Company's employees are not represented by a labor union or a
collective bargaining agreement. The Company regards its employee relations as
good.

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MARKETING, SALES AND CLIENT SERVICE

     HCRI primarily markets to and contracts with healthcare payors, including
HMOs, other types of managed healthcare plans, indemnity health insurers,
self-funded employee health plans, insured healthcare plans, third-party
administrators, Blue Cross and Blue Shield organizations and provider organized
health plans. HCRI employs a staff of sales managers, a marketing manager and
client services managers. Sales are made directly through contacts with
prospective clients, trade show presentations and employer seminars. Additional
business is also generated from existing clients, which have expanded their
business by growth or acquisitions or which have business segments not already
under contract with HCRI.

     Due to the nature of the business, the sales process is lengthy and
involves demonstrating to prospective clients that HCRI's economies of scale,
proprietary processes and value-added services allow (i) HCRI to generate and
return to the clients a greater dollar amount of recoveries than the clients'
in-house recovery department and (ii) the clients to focus greater resources on
core business functions. New customer relationships are often established
through pilot programs, which have typically lasted 12 to 18 months.

     Complementing the technical aspects of the recovery process, the client
support function is primarily responsible for communications with clients and
problem resolution. To facilitate strong working relationships, individual
members of the client services staff are assigned to specific clients. HCRI
believes that its investment in resources to resolve a wide variety of business
issues with clients is an important factor in obtaining customers and
maintaining good business relationships. During the year ended December 31,
2000, HCRI has lost ten clients representing approximately 2.0 million lives.
Terminations occurred due to, among other things, consolidations of healthcare
payors, the selection of another vendor, or because the process was taken
in-house.

CLIENT BASE

     The Company provides services to healthcare plans that as of December 31,
2000 covered approximately 52.5 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations.

     Major clients include the following:

<TABLE>
<S>                              <C>
HealthNet                        UnitedHealth Group
Humana Inc.                      The Principal Financial Group
General American Life Insurance  Blue Cross of California, a division of
Group Health, Inc,               WellPoint Health Network Inc.
FIRST HEALTH
Kaiser Permanente
</TABLE>

     HCRI's largest client is UnitedHealth Group. During the years ended
December 31, 2000 and 1999, UnitedHealth Group generated 24% and 23% of HCRI's
revenues, respectively. The loss of this account could have a material adverse
effect on HCRI's business, results of operations and financial condition.

     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.

     HCRI performs its services on a reasonable efforts basis 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. HCRI's contracts
generally provide that in the event of termination, HCRI is entitled to complete
the recovery process on the existing backlog or to receive a cash payment
designed to approximate the gross margin that would otherwise have been earned
from the recovery on the backlog of the terminating client. On December 31,
2000, HCRI had backlog of $1,182.0 million.

                                        7
<PAGE>   10

COMPETITION

     HCRI competes primarily with the internal recovery departments of potential
customers and other outsource recovery service vendors. To the Company's
knowledge, there are two smaller, but significant, independent providers of
subrogation recovery services in addition to HCRI. There are two different
vendors that provide competitive overpayment recovery outsourcing services, as
well as three national companies that provide competing provider bill auditing
services.

     HCRI believes that there are barriers to entry in the bulk of its market,
including process expertise, capital requirements necessitated by the unusually
long revenue cycle in the recovery industry, assembling and training a qualified
and productive employee base possessing appropriate industry expertise, and an
information processing system designed to aid investigators and examiners
engaged in the recovery process. However, there are participants in the
healthcare, insurance, transaction processing and software development
industries that possess sufficient capital, and managerial and technical
expertise to develop competitive services.

PROPRIETARY INFORMATION MANAGEMENT SYSTEMS

     General.  HCRI's computer systems consist of inter-related proprietary
software programs that function as automated data and process management
systems. HCRI holds a copyright registration from the United States Copyright
Office on the software (the "SubroSystem") that supports its subrogation
operations. HCRI utilizes other proprietary systems to support its provider bill
audit operations. See also "-- Business Developments".

     Quality and Management Controls.  The computer systems control, measure and
generate reports on the recovery processes. From data recorded in these systems,
a series of financial reports are generated for clients that allow them to
monitor HCRI's success in making recoveries on their behalf. The data used for
financial reports are also used to produce a wide array of accounting and
management information used by HCRI to operate its business. HCRI employs a
variety of quality control techniques to ensure consistently high-quality
service.

LEGAL AND REGULATORY ENVIRONMENT

     The healthcare industry is subject to numerous regulations, which may
adversely affect HCRI's business. In addition to laws and regulations affecting
healthcare and insurance, changes in federal fair debt collection regulations
may also adversely affect HCRI's business.

     General.  From time to time, legislation is introduced in Congress and in
various state legislatures which would materially affect the Company's business.
The most significant legislation, laws and regulations may, for clarity, be
grouped into three categories: (i) legislation that would substantially limit
the ability of healthcare insurers to recover from third-parties
accident-related medical benefits incurred by injured insureds ("Health
Insurance Primacy Laws"); (ii) legislation that would substantially limit the
Company's ability to receive and utilize individual claim information from
healthcare insurers ("Confidentiality Laws"); and (iii) other federal and state
laws. The following identifies specific risks in these three categories:

  Health Insurance Primacy Laws

     Auto Choice Reform Act.  In both of the last two Congresses, legislation
known as the Auto Choice Reform Act (the "Proposed Act") was introduced, but not
enacted. Under the Proposed Act, in those states not opting out of its
provisions, individual drivers would have been able to choose to be covered by
an auto insurance system in which healthcare insurers, with some exceptions,
could be made primarily responsible for healthcare costs incurred by those
injured in automobile accidents. Consequently, even if the insured's injuries
were caused by the negligence of another driver, the healthcare insurer might
have no rights of recovery against the negligent party or that party's liability
insurer. Revenue generated from recoveries against automobile liability insurers
historically represented approximately 64% of the Company's revenues. Should
similar legislation be enacted, it could have a material adverse effect on the
Company's business, results of operations and financial condition.

                                        8
<PAGE>   11

     Proponents of the Proposed Act assert that (i) the costs of operating a
motor vehicle are excessive due to legal and administrative costs associated
with the processing of claims under the fault-based liability system; and (ii)
the costly fault-based liability insurance system often fails to provide
compensation commensurate with loss and takes too long to pay benefits. Even if
the Proposed Act is ultimately abandoned, these policy reasons may result in
future legislation designed to significantly alter the fault-based liability
system used in most states, eliminate recovery rights of healthcare insurers and
materially adversely affect the Company's business.

     Certain No Fault Insurance Systems.  Certain states have adopted versions
of automobile "no fault" insurance systems in which the injured party's health
insurance carrier or provider is primarily responsible for healthcare related
expenses (and not the responsible party and his or her insurer or the injured
insured's automobile liability insurer). In 1996, California voters rejected a
no-fault automobile insurance measure, Proposition 200, which would have
required drivers with bodily injuries to be compensated by their healthcare
insurers. Although Proposition 200 was rejected by the voters, there can be no
assurance that similar measures will not again be presented in a ballot
initiative or as legislation in California or elsewhere in the future. Growth in
the number of states adopting similar systems could significantly reduce the
amounts otherwise recoverable by the Company in connection with automobile
injuries in such states.

  Confidentiality Laws

     Confidentiality Provisions of the Health Insurance Portability and
Accountability Act of 1996 and Related Regulations.  On December 28, 2000, the
Secretary of Health and Human Services (the "Secretary") published the Standards
for Privacy of Individually Identifiable Health Information (65 Fed. Reg. 82462
(2000)) (the "Rules"). The Rules implement the privacy requirements of the
Administrative Simplification subtitle of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). The Rules are scheduled to become
effective on April 14, 2001, after which affected entities will have at least 24
months to comply. The Rules set standards to protect the privacy of individually
identifiable health information that is transmitted to and from health care
providers, health plans and similar healthcare entities. The requirements of the
Rules will also extend to the "business associates" (as defined in the Rules) of
the covered entities. The covered entities are required to enter into agreements
with their business associates extending many provisions of the Rules to those
business associates. The covered entities are responsible for enforcing those
contractual provisions.

     The Rules establish a complex regulatory framework on a variety of
subjects, including (a) disclosures and uses of health information that require
patient consent, (b) individuals' rights to access and to amend their health
information, and (c) administrative, technical and physical safeguards required
of entities that use, maintain, or transmit protected health information. The
Rules generally prohibit disclosure or use of protected health information
except pursuant to certain authorizations or consents (as defined in the Rules)
by the patient. The Rules allow a health plan (as defined in the Rules) to
condition enrollment in the health plan on the person enrolling providing their
consent to certain health plan operations, including, inter alia, activities
related to "payment" (as defined in the Rules). The Rules define "payment" to
include "subrogation of health benefit claims." (65 Fed. Reg. 82805 (2000)).

     On February 26, 2001, the Secretary announced that a new period for public
comment on the Rules would extend through March 30, 2001, and suggested that
additional changes in the Rules may be forthcoming. Even if the Rules remain
unchanged, they could impair subrogation recovery practices by creating
administrative burdens (for example, individuals' rights to amend health
information or to restrict subsequent uses) or liability risks that lead health
plans to voluntarily restrict their subrogation recovery practices. In addition,
the Rules do not prevent states from imposing more strict privacy standards that
could have similar impacts on subrogation.

     The provisions of the Rules or of future federal legislation and
regulations could impair or prevent the acquisition and use by the Company of
claims and insurance information necessary to process recovery claims on behalf
of its clients. In addition, state laws governing privacy of medical or
insurance records and related matters may significantly affect the Company's
business.

                                        9
<PAGE>   12

  Other Federal and State Laws

     Changes in the regulation of insurance and debt collection could also
affect the Company's business. Similarly, changes in law that would bar
healthcare subrogation or impair an injured party's ability to collect insured
damages (that is, an injured person would be prevented from recovering from the
wrongdoer damages for accident-related medical benefits covered by health
insurance) could similarly adversely affect the Company's business. Existing
debt collection laws also may be amended or interpreted in a manner that could
adversely affect the Company's business. Additionally, although the Company does
not believe that it engages in the unauthorized practice of law, changes in the
law or a judicial or administrative decision defining some of the Company's
activities as the practice of law, could have a material adverse effect on the
Company's business.

  Certain Legal Doctrines

     With respect to recoverable claims, the rights of subrogation and
reimbursement may be limited in some cases by (i) the "made whole doctrine,"
which subordinates the healthcare provider's ability to recover to that of the
injured party when the settlement damage award received by the injured party is
inadequate to cover the injured party's damages, and (ii) the "common fund
doctrine," which permits plaintiff's attorneys to deduct their fees for the
claim based on the entire amount covered by a damage award and may, in some
cases, proportionally diminish the amount recoverable by HCRI on behalf of the
healthcare payor out of that damage award.

BUSINESS DEVELOPMENTS

  Services to the Property & Casualty Insurance Industry:

     On February 14, 2001, the Company disclosed, among other things, its entry
into the subrogation outsourcing market that serves property and casualty
("P&C") insurers. The Company is offering its services to the P&C market under
the brand name, TransPaC Solutions. The Company currently provides subrogation
outsourcing services to two P&C clients, aggregating $60 million of net premiums
earned ("NPE") to date. The Company is in the process of establishing a
full-time direct sales force of three individuals experienced in P&C sales and
marketing. The Company's target market for its P&C subrogation services is P&C
insurers that have a minimum of $50 million of NPE and that have reported below
average subrogation recovery results. Based on available information, the
Company believes that there are currently more than 50 P&C insurers that fit
this description.

     The Company believes that the market for P&C subrogation outsourcing in the
United States is substantial and that the potential savings from subrogation
recoveries will vary depending upon the P&C line of business. The Company
believes that total potential subrogation recoveries in the automobile insurance
market exceed $6 billion per year. Based on its research and early experience
with two customers, the Company believes that there is an opportunity to
increase total subrogation recoveries across a wide spectrum of automobile
insurers. The Company's initial marketing strategy is to offer its services to
smaller, regionally oriented automobile insurers who generally lack the
resources to maximize subrogation recoveries.

     The Company believes that it has an opportunity to leverage its healthcare
subrogation expertise and resources to provide service to the P&C markets. The
primary difference between the two markets is in the acquisition of claims data
for investigation of subrogation potential. The P&C industry does not have
standard data definitions regarding claims as does the health insurance
industry. Nevertheless, the Company used its healthcare subrogation expertise to
build data interfaces with its first two P&C customers, and it has created
proprietary business processes to acquire paper-based and/or imaged claims data
from its customers' claims adjusting offices and archives.

     The Company has assessed the competitive environment for P&C subrogation
outsourcing, and believes that the competition is fragmented and characterized
by claims adjusting companies that operate on a local or regional basis and law
firms that specialize in low volume, but legally complex, subrogation claims.
The

                                        10
<PAGE>   13

Company has identified only one competitor that attempts to serve a national
market. It believes this competitor has enjoyed limited success because it is
owned and controlled by a P&C insurer.

     As previously disclosed, the Company estimates that it will incur losses
from TransPaC Solutions in 2001 of ($0.04) to ($0.05) per diluted share for the
full year 2001, but also expects to be operating at break-even by the end of the
year. The Company estimates that it will earn gross margins comparable to its
healthcare recovery services in providing P & C subrogation recovery services.
The Company cautions that the foregoing forecasts and estimates are not
guarantees of future performance and that actual results of TransPaC Solutions
will be dependent upon, among other things, future facts and circumstances, many
of which are outside the control of management of the Company. See "Safe Harbor
Compliance Statement on Forward Looking Statements" included as Exhibit 99.1.

  Technology Development:

     During 2000, the Company incurred expenses of approximately $366,000 for
research and development costs to develop new products for the insurance
industry. The Company expects to incur additional expenses of between $2.0
million and $2.5 million for research and development with respect to these
products. In addition, in 2001, the Company expects to capitalize approximately
$800,000 of costs in accordance with generally accepted accounting principles
for the development of software for sale to unrelated parties.

     Many participants in the health insurance market do not outsource
subrogation services. The Company currently estimates that 40% to 50% of the
private health insurance and health benefits markets do not outsource
subrogation recoveries. Public sector markets, such as Medicaid and Medicare,
have virtually no outsourcing of subrogation recoveries. These programs
typically rely on their claims administration contractors to provide subrogation
services as part of a bundled service contract. Like the health insurance
market, the Company believes that certain participants in the P&C insurance
market are less likely to outsource subrogation services. The Company believes
mutual insurers have organizational and cultural biases against outsourcing and
larger P&C insurers have sufficient resources to develop relatively
sophisticated internal departments.

     In light of these market conditions, the Company began the internal
development of a web-enabled subrogation software application. The Company will
sell these products as an application service provider ("ASP"), under the trade
name "Troveris," both to the health insurance and benefits market and to the P&C
market. The Company expects to complete and offer for sale a commercially
available health insurance application during the second quarter of 2001 and a
commercially available P&C application during the third quarter of 2001.

     The Troveris marketing strategy combines the opportunity for an internal
subrogation department to gain operating efficiency through the functionality of
state-of-the-art desktop software and to leverage its ability to produce
recoveries through the purchase of unbundled components of the Company's
traditional subrogation outsourcing services. The Troveris software application
allows the Company to administer these customized relationships using the same
proprietary processes as it uses for those customers who purchase turnkey
subrogation outsourcing services. An additional benefit of the Troveris software
application is that the Company believes it will substantially reduce future
expenses for maintaining software applications that it uses to provide turnkey
outsourcing services.

     The Company anticipates that during the fourth quarter of 2001, it will
begin migrating its own subrogation operations to the Troveris application. It
expects that this transition will be completed in the second quarter of 2002. At
that time, the Company expects to abandon its legacy subrogation system, thereby
reducing its technology expense, net of the expense of maintaining the Troveris
application, by at least $600,000 per year. The Troveris application will also
enable the Company to expand its ability to manage its knowledge workers via
telecommuting arrangements. While the Company believes it can achieve the
foregoing transition and corresponding reduction of expenses in the outlined
timeframe, future facts and

                                        11
<PAGE>   14

circumstances could change these estimates. See "Safe Harbor Compliance
Statement for Forward-Looking Statements" included as Exhibit 99.1.

     The Company is not aware of any competition in subrogation software in an
ASP model for the health insurance industry, and it can only identify a single
competitor in the P&C insurance industry. This competitor is partially owned and
controlled by a major P&C insurer, and the Company believes that this
relationship will reduce the ability of the competitor to sell its services to
other P&C insurers.

  Acquisition Activities:

     The Company is actively pursuing acquisition opportunities to provide
additional growth in revenues and net income. The Company's acquisition strategy
is two-fold. First, it plans to acquire additional claims recovery services that
it can sell into its installed base of health insurers, managed care companies,
benefits administrators, and P&C insurers. This will allow the Company to
leverage its sales and marketing resources and to acquire the necessary core
knowledge workers to provide service.

     Second, the Company is seeking opportunities to acquire businesses that
offer knowledge-based services into market segments not currently served by the
Company. The Company believes that these types of acquisitions will enable it to
sell its existing services to current customers of the acquired business and
create an opportunity to serve new customers in that market segment. In
particular, the Company is interested in pursuing acquisition of businesses that
provide cost containment services to various health benefit programs funded by
state and federal government agencies.

     The Company has identified certain target companies that complement the
foregoing acquisition strategy. The Company believes that if consummated under
certain terms and conditions, these acquisition opportunities would be accretive
to fully diluted earnings per share. Because the Company's current capital
resources may not be adequate to fund all acquisition opportunities, the Company
is exploring additional sources of funding. See "Safe Harbor Compliance
Statement for Forward-Looking Statements" included as Exhibit 99.1.

ITEM 2.  PROPERTIES

     As of December 31, 2000, the Company leased property at the following four
locations: (i) approximately 105,718 square feet of space for its executive
offices and main operations in Louisville, Kentucky, under a lease agreement and
amendment expiring in 2009; (ii) approximately 10,206 square feet at a regional
operating office in Pittsburgh, Pennsylvania, under a lease agreement with a
five-year term expiring in 2001; (iii) approximately 8,125 square feet at its
Encino, California location under a 5-year term expiring in 2004; and (iv)
approximately 4,670 square feet at a regional operating office in Atlanta,
Georgia, under a lease agreement with a five-year term expiring in 2005. The
Company is currently in negotiations to extend the lease for the Pittsburgh,
Pennsylvania office for a five-year term expiring in 2006, with substantially
the same terms as the current lease.

     In addition, the Company owns its office in Wisconsin, containing
approximately 60,000 square feet, which is located at 5445 South Westridge
Drive, New Berlin, Wisconsin 53151.

ITEM 3.  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 alleges that HCRI engaged in
fraudulent or negligent practices on behalf of its clients by attempting to
recover, via subrogation, amounts in excess of the actual amounts paid for those
services and that HCRI pursued subrogation recoveries from individuals whose
health insurance plans did not specifically provide for subrogation. HCRI has
responded to these allegations by maintaining that the subrogation rights of its
clients provide for recovery of medical

                                        12
<PAGE>   15

treatment at the "prevailing rates" or "reasonable value" of those services and
that instances in which recoveries were made or sought against individuals
without specific plan language occurred due to either mistaken referrals from
clients or reliance on equitable or common law subrogation rights. 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, and treble damages under RICO,
costs and reasonable attorneys' fees.

     On February 5, 2001, the Company announced that the parties to the DeGarmo
lawsuit had agreed in principal to settle for $3 million and certain
non-monetary terms primarily affecting subrogation recovery activities of one
HCRI client in West Virginia. The agreement in principal is subject to
negotiation and finalization of definitive settlement documentation, a fairness
hearing and court approval, which the Company believes will take place in
mid-May 2001. The Company will fund the settlement with cash flow from
operations and/or borrowings under its existing credit facility. The Company
believes that the settlement agreement will not have an adverse effect on its
subrogation recovery activities. The Company's primary reason for settling the
DeGarmo litigation is its unusual facts, which are, to the Company's best
knowledge, peculiar to this case. The Company does not believe that this
proposed settlement will have an effect on its defense of any other lawsuits or
on its current level of determination to defend vigorously those lawsuits.

     On October 1, 1999, a First Amended Class Action Complaint ("Amended
Complaint") was filed against HCRI in the United States District Court for the
Southern District of Florida, in a putative class action brought by William
Conte and Aaron Gideon, individually and on behalf of all others similarly
situated. In that action, Conte v. Healthcare Recoveries, Inc., No. 99-10062,
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 Florida Consumer Collection Practices Act. The
Complaint also seeks a declaratory judgment that HCRI, as the subrogation agent
for various healthcare payors, is not entitled to assert and recover upon
subrogation or reimbursement liens it asserts on settlements obtained from third
party tortfeasors when the settlement is in an amount less than the amount
required to fully compensate (or "make whole") the injured party for all
elements of damage caused by the tortfeasor. Plaintiffs purport to represent a
class consisting of all participants or beneficiaries of ERISA plans nationwide
whose net recovery of damages through judgments, settlements or otherwise
against liable third parties has been reduced or potentially reduced by HCRI's
alleged assertion and/or recovery of unlawful subrogation/reimbursement rights
of its clients. Plaintiffs also seek compensatory and statutory damages,
exemplary and punitive damages, injunctive relief, prejudgment interest, costs
and attorneys' fees.

     The original complaint in the Conte matter, filed in June 1999, asserted
similar claims on behalf of a putative class of participants or beneficiaries of
one client's health plans located in Florida, Alabama, and Georgia. In response
to HCRI's motion to dismiss that complaint, the Plaintiffs filed the Amended
Complaint on behalf of a putative national class. On November 5, 1999, HCRI
filed a motion to dismiss the Amended Complaint. That motion, now fully briefed,
remains pending. In May, 2000, plaintiffs moved to certify the putative class
and HCRI thereafter filed opposition papers. That motion has now also been fully
briefed and remains pending.

     On October 20, 1999, a class action complaint ("Baker Complaint") was filed
against HCRI and one HCRI client in the Circuit Court of Jefferson County
Alabama, Darrell DeWayne Baker v. Healthcare Recoveries, Inc., United Healthcare
of Alabama, Fictitious Party Defendants A, B, C et al. On December 6, 1999, the
defendants removed the lawsuit to the United States District Court for the
Northern District of Alabama, Southern Division. On January 3, 2000, a First
Amended Complaint was filed, retaining all counts from the original complaint
and seeking an additional declaratory judgment that the health plan and HCRI
have a right to recover through subrogation only the actual benefits paid to
medical providers on behalf of the class. The Baker Complaint, as amended,
asserts claims on behalf of two putative subclasses, both consisting of members
nationwide of the client health plan, who either: (1) allegedly paid inflated
subrogation claims due to alleged failure by the health plan or by HCRI to
disclose discounts in the health plan's payments to medical providers; or (2)
allegedly were denied coverage of certain claims by the health plan. The
plaintiffs
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<PAGE>   16

assert claims against HCRI under a variety of theories including unjust
enrichment, breach of contract, breach of fiduciary duty and violations of RICO.
Plaintiffs demand, on behalf of the putative classes, compensatory damages,
punitive damages, treble damages under RICO, and reasonable attorneys' fees.

     On January 27, 2000, the defendants filed a motion to dismiss the Amended
Complaint, which remains pending. The court has not yet addressed the question
of whether to certify the putative class.

     On October 28, 1999, a class action Plaintiff's Original Petition
("Petition") was filed against HCRI and one HCRI client in the District Court
for the 150th Judicial District, Bexar County, Texas, Joseph R. Cajas, on behalf
of himself and all others similarly situated v. Prudential Health Care Plan,
Inc. and Healthcare Recoveries, Inc. The plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its client Prudential Health Care
Plan, Inc. ("Prudential") violated a number of common law duties, as well as the
Texas Insurance Code and the Texas Business and Commerce Code. The Petition
alleges that HCRI, as the subrogation agent for Prudential, made fraudulent
misrepresentations in the course of unlawfully pursuing subrogation and
reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount
Prudential paid for medical goods and services. HCRI was served with the
Petition in early November 1999, and has answered, denying all allegations. The
court has not yet addressed the question of whether to certify the putative
class.

     In late 1999, the Cajas plaintiff's counsel filed two lawsuits in Texas and
South Carolina that raise issues similar to those in the Cajas lawsuit. On
December 7, 1999, a class action complaint ("Complaint") was filed against HCRI
and one HCRI client in the United States District Court for the Western District
of Texas, San Antonio Division, Timothy Patrick Franks, on behalf of himself and
similarly situated persons v. Prudential Health Care Plan, Inc. and Healthcare
Recoveries, Inc. The Complaint asserted claims on behalf of members of ERISA
governed health plans and alleged that HCRI's subrogation recovery efforts on
behalf of its client Prudential violated a number of common law duties, as well
as the terms of certain ERISA plan documents, RICO, the federal Fair Debt
Collection Practices Act, the Texas Insurance Code and the Texas Business and
Commerce Code. The Complaint alleged that HCRI, as the subrogation agent for
Prudential, made fraudulent misrepresentations in the course of unlawfully
pursuing subrogation and reimbursement claims that plaintiffs assert are
unenforceable because (1) prepaid medical service plans may not exercise rights
of subrogation and reimbursement; (2) the subrogation and reimbursement claims
asserted by the Company are not supported by contract documents that provide
enforceable recovery rights and/or do not adequately describe the recovery
rights; and (3) the sums recovered pursuant to such claims unlawfully exceed the
amount Prudential paid for medical goods and services. The Complaint further
alleged that HCRI unlawfully pursued subrogation and reimbursement claims by (1)
failing to pay pro rata attorney's fees to attorneys who represented purported
class members with respect to tort claims underlying the subrogation and
reimbursement claims; and (2) recovering subrogation and reimbursement claims
from purported class members who have not been fully compensated for their
injuries. Plaintiffs, on behalf of the purported class, demanded compensatory
damages, punitive damages, and treble damages under RICO, costs and reasonable
attorneys' fees. On January 18, 2000, the defendants filed a motion to dismiss
the Complaint.

     In response to the defendants' motion, on February 28, 2001, the court
rendered its opinion and entered an order dismissing all of the plaintiff's
claims with the exception of the plaintiff's claim for attorney fees, which
remains pending before the court for disposition. On March 14, 2001, HCRI filed
an answer to the Complaint denying all of the plaintiff's allegations. Also on
March 14, 2001, the plaintiff filed a motion to alter or amend the court's
ruling on the motion to dismiss. The court has not yet addressed that motion,
nor has the court addressed the issue of class certification.

     On December 22, 1999, a class action complaint ("Complaint") was filed
against HCRI and one HCRI client in the Court of Common Pleas of Richland
County, South Carolina, Estalita Martin et al. vs. Companion Health Care Corp.,
and Healthcare Recoveries, Inc. On January 21, 2000, defendant Companion
Healthcare Corp. ("CHC") filed an Answer and Counterclaim and plaintiff Martin
filed a First Amended

                                        14
<PAGE>   17

Complaint ("Amended Complaint"). The Amended Complaint asserts that HCRI's
subrogation recovery efforts on behalf of its client CHC violated a number of
common law duties, as well as the South Carolina Unfair Trade Practices Act. The
Amended Complaint alleges that HCRI, as the subrogation agent for CHC, made
fraudulent misrepresentations in the course of unlawfully pursuing subrogation
and reimbursement claims that plaintiffs assert are unenforceable because (1)
prepaid medical service plans may not exercise rights of subrogation and
reimbursement; (2) the subrogation and reimbursement claims asserted by the
Company are not supported by contract documents that provide enforceable
recovery rights and/or do not adequately describe the recovery rights; and (3)
the sums recovered pursuant to such claims unlawfully exceed the amount CHC was
entitled to collect for such medical goods and services. The Amended Complaint
further alleges that HCRI and CHC unlawfully pursued subrogation and
reimbursement claims by (1) failing to pay pro rata costs and attorney's fees to
attorneys who represented purported class members with respect to tort claims
underlying the subrogation and reimbursement claims; and (2) failing to include
in subrogation and reimbursement claims all applicable discounts that CHC
received for such medical goods and services. Plaintiffs, on behalf of the
purported class, demand compensatory damages, punitive damages, and treble
damages, disgorgement of unjust profits, costs, and prejudgment interest and
attorneys' fees. HCRI was served with the original Complaint in late December
1999 and has answered denying all allegations. HCRI filed a motion to dismiss on
August 31, 2000. HCRI filed a Memorandum in Support of that Motion to Dismiss on
December 22, 2000. The Court held a hearing on that motion on December 29, 2000.
The Court has not yet ruled on the motion. The court has not yet addressed the
question of whether to certify the putative class.

     The Cajas, Franks, Baker and Martin lawsuits, or any one of them, 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. The Conte, Cajas, Franks, Baker and Martin lawsuits, or
any one or more of them, if successful, could require the Company to refund, on
behalf of its clients, recoveries in a material number of cases. In addition, an
adverse outcome in any of the above referenced lawsuits could impair materially
HCRI's ability to assert subrogation or reimbursement claims on behalf of its
clients in the future.

     In terms of the Company's business practices and the allegations underlying
the Cajas, Franks, Baker and Martin cases, at the end of 1993 HCRI had ceased
the practice of recovering the "reasonable value" of medical treatment provided
by medical providers under DFS arrangements with HCRI's clients. From that date,
the Company's policy has been 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
potentially applicable in these cases. As a result, and taking into account the
underlying facts in each of these cases, the Company believes it has meritorious
grounds to defend these lawsuits, it intends to defend the cases vigorously, and
it believes that the defense and ultimate resolution of the lawsuits should not
have a material adverse effect upon the business, results of operations or
financial condition of the Company. Nevertheless, if any of these lawsuits or
one or more other lawsuits seeking relief under similar theories were to be
successful, it is likely that such resolution would have a material adverse
effect on the Company's business, results of operations and financial condition.

     On March 12, 2001, a Complaint ("Complaint") was filed against HCRI in the
United States District Court for the Eastern District of Louisiana, in a
putative class action brought by Kyle M. Hamilton. In that action, Hamilton v.
Healthcare Recoveries, Inc., No. 01-0650, plaintiff asserts that HCRI's
subrogation recovery efforts on behalf of its clients violate certain Louisiana
state laws, the federal Fair Debt Collection Practices Act and the Louisiana
Unfair Trade Practices Act. The Complaint alleges that HCRI intentionally and
negligently interfered with the plaintiff's and the putative class members'
rights to settle certain personal injury claims. The Complaint further alleges
that HCRI unlawfully pursued subrogation and reimbursement claims that plaintiff
asserts are unenforceable because the clauses in HCRI's clients' coverage
documents that

                                        15
<PAGE>   18

create such recovery rights are rendered null and void by Louisiana statutes
that generally prohibit coordination of benefits with individually underwritten
insurance coverages. Plaintiff purports to represent a class consisting of all
persons covered under group health policies that were issued or delivered in the
State of Louisiana and who received any communication from HCRI attempting to
enforce any clauses that allegedly were rendered null and void by Louisiana law.
Plaintiff seeks on behalf of the purported class compensatory and statutory
damages, interest, costs, attorneys' fees and such additional damages and relief
as may be allowed by any applicable law. HCRI was served with the Complaint in
mid-March and is preparing a formal response.

     Management of the Company has observed that, in parallel with
widely-reported legislative concerns with the healthcare payment system, there
also has occurred an increase in litigation, actual and threatened, including
class actions brought by nationally prominent attorneys, directed at healthcare
payors and related parties. As a result of the foregoing, there can be no
assurance that the Company will not be subject to further class action
litigation, that existing and/or future class action litigation against the
Company and its clients will not consume significant management time and/or
attention and that the cost of defending and resolving such litigation will not
be material.

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

     No matters were submitted to a vote of stockholders of the Company during
the quarter ended December 31, 2000.

SUPPLEMENTARY ITEM.  CERTAIN RISK FACTORS

     See "Healthcare Recoveries, Inc. Private Securities Litigation Reform Act
of 1995 Safe Harbor Compliance Statement For Forward-Looking Statements,"
included as Exhibit 99.1 to this Form 10-K and incorporated herein by reference.

                                    PART II

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

     The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "HCRI." The charts set forth the high and low closing prices for the
Company's Common Stock for the periods indicated, as reflected in The Nasdaq
National Market.

<TABLE>
<CAPTION>
QUARTER ENDED:                                               HIGH     LOW
--------------                                               -----   -----
<S>                                                          <C>     <C>
March 31, 2000.............................................  $5.03   $3.13
June 30, 2000..............................................   3.88    2.75
September 30, 2000.........................................   4.44    3.50
December 31, 2000..........................................   4.44    2.75
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED:                                               HIGH     LOW
--------------                                              ------   -----
<S>                                                         <C>      <C>
March 31, 1999............................................  $17.00   $4.00
June 30, 1999.............................................    4.91    4.06
September 30, 1999........................................    5.31    2.75
December 31, 1999.........................................    4.13    2.75
</TABLE>

     On March 20, 2001, there were approximately 46 holders of record of the
Company's Common Stock.

     The Company has paid no cash dividends since the sale of the Company by
Medaphis Corporation in May 1997. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors (the "Board") and will be
dependent upon the Company's financial condition, results of operations, credit
agreements, capital requirements and such other factors as the Board deems
relevant. The Company's current

                                        16
<PAGE>   19

credit facility limits its ability to pay dividends on its Common Stock. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources".

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth historical selected financial data of the
Company as of the dates and for the periods indicated, which have been derived
from, and are qualified by reference to, the Company's financial statements. The
information set forth below should be read in conjunction with the Company's
financial statements and notes thereto and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

     The selected historical financial data as of December 31, 2000 and 1999 and
for the years ended December 31, 2000, 1999, and 1998 have been derived from,
and are qualified by reference to, the Company's financial statements appearing
elsewhere herein, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected historical financial data as of December
31, 1998, 1997 and 1996 and for the years ended December 31, 1997 and 1996 have
been derived from, and are qualified by reference to, the Company's financial
statements included in the Company's registration statement on Form S-1 (which
have been audited by PricewaterhouseCoopers LLP, independent accountants).

                           STATEMENTS OF INCOME DATA
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                   -----------------------------------------------
                                                    2000      1999      1998      1997      1996
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
Revenues:
  Claims Revenues................................  $63,627   $61,409   $48,734   $39,277   $30,248
  Other Revenues.................................       --        --        --        --     1,171
                                                   -------   -------   -------   -------   -------
          Total Revenues.........................   63,627    61,409    48,734    39,277    31,419
Cost of Services.................................   30,432    31,451    22,199    18,523    15,026
                                                   -------   -------   -------   -------   -------
          Gross Profit...........................   33,195    29,958    26,535    20,754    16,393
Support Expenses.................................   17,061    15,870    10,692     8,922     7,215
Depreciation & Amortization......................    6,372     4,954     2,334     1,181       878
Research and Development.........................      366        --        --        --        --
Other Charges(1).................................       --        --        --     2,848        --
                                                   -------   -------   -------   -------   -------
          Operating Income.......................    9,396     9,134    13,509     7,803     8,300
Special Committee Expenses.......................      (90)     (451)       --        --        --
Interest (Expense) Income, net...................     (237)      144     1,657     1,158       486
Litigation Settlement............................   (3,000)       --        --        --        --
                                                   -------   -------   -------   -------   -------
          Income Before Income Taxes.............    6,069     8,827    15,166     8,961     8,786
Provision for Income Taxes.......................    2,519     3,665     6,266     4,959     3,685
                                                   -------   -------   -------   -------   -------
          Net Income.............................  $ 3,550   $ 5,162   $ 8,900   $ 4,002   $ 5,101
                                                   =======   =======   =======   =======   =======
Basic Earnings per Common Share..................  $  0.33   $  0.46   $  0.78   $  0.37   $  0.52
                                                   =======   =======   =======   =======   =======
Diluted Earnings per Common Share................  $  0.33   $  0.46   $  0.77   $  0.37   $  0.52
                                                   =======   =======   =======   =======   =======
</TABLE>

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

(1) In connection with the sale of the Company by Medaphis in May 1997, the
    Company incurred a one-time $2.8 million non-cash compensation charge. This
    charge was from the issuance by the Company of 200,000 shares of Common
    Stock to the Company's management group, as a bonus for the successful
    completion of the sale of the Company by Medaphis. This represents 2% of the
    shares of Common Stock outstanding after the Company's initial public
    offering and 1.7% of the shares of Common Stock outstanding following the
    exercise of the underwriters' over-allotment option.

                                        17
<PAGE>   20

                               BALANCE SHEET DATA
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                           ---------------------------------------------------
                                            2000       1999       1998       1997       1996
                                           -------    -------    -------    -------    -------
<S>                                        <C>        <C>        <C>        <C>        <C>
Cash and Cash Equivalents................  $ 1,297    $ 1,467    $31,133    $24,674    $    53
Working Capital..........................    7,798      7,865     30,898     22,911(1)   1,730
Total Assets.............................   79,445     82,034     61,003     48,170     23,969
Total Indebtedness.......................   14,000     11,000         --         --         --
Stockholders' Equity.....................   38,162     40,723     37,193     27,865      4,110
</TABLE>

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

(1) The increase in working capital, including cash and cash equivalents, is
    primarily attributable to the $19.2 million of proceeds received by the
    Company from the exercise of the underwriters' over-allotment option granted
    by the Company in connection with the May 1997 initial public offering.

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

OVERVIEW OF COMPANY

     HCRI's primary business is to provide medical claims recovery and cost
containment services to the private healthcare payor industry. Its primary
product is subrogation recovery, which generally 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 known generally as
the right of subrogation and are generally paid from the proceeds of liability
or workers' compensation insurance. The Company's other medical claims recovery
services include provider bill auditing and overpayment recovery services. HCRI
offers its services on a nationwide basis to health maintenance organizations,
indemnity health insurers, self-funded employee health plans and companies that
provide claims administration services to self-funded plans (referred to as
"third-party administrators"). The Company had 52.5 million lives under contract
from its clientele at December 31, 2000.

ACQUISITIONS

     On January 25, 1999, HCRI acquired the assets and certain liabilities of
Subro Audit (which consisted of SAI and ODL), for approximately $24.4 million,
using available unrestricted cash. HCRI currently estimates that it may pay up
to $5.4 million pursuant to an earn-out arrangement, of which $2.8 million was
paid on May 18, 2000, with the remainder to be paid in 2001. Approximately $4.7
and $8.5 million was held in escrow for the potential earn-out and was included
in restricted cash at December 31, 2000 and 1999, respectively. SAI is based in
Wisconsin and provides subrogation recovery services with respect 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.

     On February 15, 1999, HCRI acquired the assets and certain liabilities of
MedCap for approximately $10 million, using available unrestricted cash and
borrowed funds. The Company paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional earn-out. The final amount, which was paid
in 2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider 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.

                                        18
<PAGE>   21

OVERVIEW OF OPERATIONS

     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 providing 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 and closed
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 the Company's clients prior to the
Company's fee) have been produced from backlog in a generally predictable cycle.
Any group of potential recoveries, sufficiently large in number to display
statistically significant characteristics and that originates from a defined
time period, tend to produce recovery results that are 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 from backlog or recoveries it identifies through
other cost containment and related recovery services 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 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 related revenue recognition.

     The Company's expenses are determined primarily by the number of employees
directly engaged in recovery activities ("cost of services") and by the number
of employees engaged in a variety of support activities ("support expenses").
Recovery personnel must be hired and trained in advance of the realization of
recoveries and revenues. Historically, support expenses have not grown in direct
proportion to revenues.

                                        19
<PAGE>   22

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
                         LIVES AND DOLLARS IN MILLIONS

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                2000     1999(1)     1998
                                                              --------   --------   ------
<S>                                                           <C>        <C>        <C>
Cumulative lives sold, beginning of period..................      55.6       40.5     38.5
  Lives from acquisitions...................................        --       18.6       --
  Lives from existing client loss, net......................      (6.6)      (7.7)    (3.1)
  Lives added from contracts with existing clients..........       1.4         .7      2.0
  Lives added from new contracts with new clients...........       2.1        3.5      3.1
                                                              --------   --------   ------
Cumulative lives sold, end of period........................      52.5       55.6     40.5
                                                              ========   ========   ======
Lives installed.............................................      48.7       51.9     38.5
Backlog(2)..................................................  $1,182.0   $1,084.5   $770.7
Claims recoveries...........................................     237.3      226.1    177.7
Throughput(3)...............................................      20.9%      20.8%    24.7%
Effective fee rate..........................................      26.8%      27.2%    27.4%
Claims revenues.............................................  $   63.6   $   61.4   $ 48.7
Employees:
  Direct operations.........................................       536        597      386
  Support...................................................       141        144      109
                                                              --------   --------   ------
          Total employees...................................       677        741      495
                                                              ========   ========   ======
</TABLE>

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

(1) The 1999 key operating indicators include the operating performance of Subro
    Audit and MedCap from their respective acquisition dates of January 25, 1999
    and February 15, 1999.
(2) Backlog is the total dollar amount of potentially recoverable claims that
    the Company is pursuing or auditing on behalf of clients at a given point in
    time.
(3) Throughput equals claims recoveries for the period divided by the average of
    backlog at the beginning and end of the period.

            STATEMENTS OF INCOME AS A PERCENTAGE OF CLAIMS REVENUES

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              2000     1999     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Claims revenues.............................................  100.0%   100.0%   100.0%
Cost of services............................................   47.8     51.2     45.6
Support expenses............................................   26.8     25.8     21.9
Depreciation and amortization...............................   10.0      8.1      4.8
Research and development....................................    0.6      0.0      0.0
Operating income............................................   14.8     14.9     27.7
Other -- Litigation settlement..............................    4.7      0.0      0.0
Other -- Special Committee..................................    0.1      0.7      0.0
Income before income taxes..................................    9.5     14.4     31.1
Net income..................................................    5.6      8.4     18.3
</TABLE>

2000 COMPARED TO 1999

     Revenues.  Claims revenues for the year ended December 31, 2000 increased
3.6%, to $63.6 million from $61.4 million in 1999. This growth in claims
revenues occurred primarily because of a 4.9% growth in claims

                                        20
<PAGE>   23

recoveries, from $226.1 million in 1999 to $237.3 million in 2000. Claims
revenues grew at a slower rate than claims recoveries between the two periods
due to a decrease in the effective fee rate from 27.2% in 1999 to 26.8% in 2000.
The effective fee rate decreased in 2000 because of the recovery mix during the
year, with relatively more recoveries coming from the provider bill audit and
overpayments services and relatively more subrogation recoveries for clients
with lower fee rates.

     The 4.9% increase in recoveries for the year ended December 31, 2000
compared to 1999 resulted primarily from an increase in backlog, which grew 9.0%
over the year ended December 31, 1999, and due to the Acquisitions. Because both
Acquisitions were closed in the first quarter of 1999, a full year of activity
related to the Acquisitions is reported in the results for the year ended
December 31, 2000, while slightly less than a full year of activity was included
in the 1999 results. This reporting anomaly caused an increase in the recovery
growth rate from 1999 to 2000. Recoveries for 2000 grew more slowly than did
backlog primarily because the backlog growth was related to the provider bill
audit and overpayment recovery services, which typically yield less recoveries
than subrogation backlog. Improved productivity in the Company's operations,
particularly in a subrogation unit that specializes in large files, resulted in
a slight improvement in throughput from 20.8% for 1999 to 20.9% for 2000.
Although installed lives decreased from 51.9 million at December 31, 1999 to
48.7 million at December 31, 2000, backlog increased $97.5 million from $1,084.5
million at December 31, 1999 to $1,182.0 million at December 31, 2000. The
reason that backlog increased during the same period in which lives installed
decreased is that the Company typically continues to make recoveries on the
backlog of terminated clients that exists as of the contract termination date,
until that backlog is exhausted (i.e., usually 5 to 6 years), but removes
terminated clients from the category of "lives installed" as of the contract
termination date.

     Cost of Services.  Cost of services decreased 3.2% in 2000 to $30.4 million
from $31.5 million in 1999. As a percentage of claims revenues, cost of services
decreased to 47.8% in 2000 from 51.2% in 1999. The decrease in cost of services
in total and as a percentage of claims revenues in 2000 compared to 1999
resulted primarily from certain productivity enhancements instituted early in
2000 and management of labor costs.

     Support Expenses.  Support expenses increased 7.5% to $17.1 million for the
year ended December 31, 2000, from $15.9 million for 1999 due to hiring
additional staff to support the planned growth and development of new
operations. Support expenses as a percentage of claims revenues increased from
25.8% for the year ended December 31, 1999 to 26.8% for 2000. The increase in
support expenses as a percentage of claims revenues resulted primarily from
expenses incurred in the development of new operations. Support expenses
typically do not vary in proportion to revenues.

     Research and Development.  The Company incurred $366,000 of expenses
related to research and development activities in connection with the creation
of new products for the insurance industry. See Item 1. "Business -- Business
Developments".

     Depreciation and Amortization.  Depreciation and amortization expenses
increased 28.6% to $6.4 million for the year ended December 31, 2000 from $5.0
million for 1999. The increase in depreciation expense was attributable to the
purchased property and equipment related to the Acquisitions and system
upgrades. The increase in amortization expense was attributable to the addition
of intangible assets acquired in the Acquisitions.

     Interest Expense.  Interest expense totaled $1.3 million and $0.9 million
for the years ended December 31, 2000 and 1999, respectively. The increase in
interest expense for 2000 resulted primarily from an increase in borrowed funds
related to the stock repurchase program and the MedCap earn-out payment, and was
impacted by higher effective interest rates during 2000.

     Other -- Special Committee Expenses.  In August 1999, the Board of
Directors appointed the Special Committee to evaluate strategic alternatives
available to the Company, including its possible sale. During the first quarter
of 2000, the Company incurred $90,000 of expenses related to the work of the
committee. In March 2000, the Special Committee ceased seeking a buyer for the
Company and its efforts to enhance shareholder value were assumed by the full
Board of Directors. See "-- Other Matters -- Special Committee".

                                        21
<PAGE>   24

     Other -- Litigation Settlement.  In January 2001, the Company reached an
agreement in principle to settle the DeGarmo class action litigation, currently
pending against the Company in federal court in West Virginia, for approximately
$3 million. See Item 3. "Legal Proceedings".

     Tax.  Provision for income taxes was approximately 41.5% of pre-tax income
for each of the years ended December 31, 2000 and 1999. 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 year ended December 31, 2000 decreased $1.6
million, or 31.2%, to $3.6 million or $0.33 per diluted share, from $5.2
million, or $0.46 per diluted share, for the year ended December 31, 1999. Net
income decreased primarily as a result of the year to year increases in support
expenses and depreciation and amortization as well as the litigation settlement
expense described above, which collectively more than offset the increase in
claims revenues between the two years.

1999 COMPARED TO 1998

     Revenues.  Total revenues for the year ended December 31, 1999 increased
26.1%, to $61.4 million from $48.7 million in 1998. Growth in claims revenues
occurred primarily because of increased claims recoveries, from $177.7 million
in 1998 to $226.1 million in 1999. In response to operational changes which
affect the Company's ability to identify when the parties reached agreement on
all material terms, refinements were made to the estimation process with the
intent of maintaining consistency in the timing of revenue recognition. The
Company believes this change had no significant impact on its revenues for 1999.
The effective fee rate decreased modestly to 27.2% from 27.4% due to the broader
mix of services and contracts since the Acquisitions. The increase in total
claims recoveries resulted principally from the Acquisitions, which increased
the baseline recovery operations, backlog and lives installed. Backlog increased
40.7% to $1,084.5 million at December 31, 1999 from $770.7 million at December
31, 1998. The Company had a throughput rate of approximately 20.8% and 24.7%
during 1999 and 1998, respectively. Lives installed grew 34.8% in 1999 to 51.9
million.

     During the first quarter of 1999, subrogation services generated a lower
than historical level of yield from its 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 during 1999 appears to have resulted from
certain changes made in the Company's claims recovery operations during the
second half of 1998 and the first quarter of 1999. The changes in operations
entailed materially increasing the number of files assigned to recovery
personnel, which management believes caused the unforeseen decline in
throughput. In response to the decline in throughput, management implemented a
plan to reduce the ratio of files to recovery personnel. Management believes
that the execution of this plan by year end enabled the Company to improve
subrogation throughput and recoveries in the fourth quarter of 1999.

     Cost of Services.  Cost of services increased 41.9% in 1999 to $31.5
million from $22.2 million in 1998. The increase primarily results from costs
associated with operating the acquired companies and additional direct
operational employees, including employees hired in response to the plan to
reduce the ratio of files to recovery personnel, as described above. As a
percentage of claims revenues, cost of services increased to 51.2% in 1999 from
45.6% in 1998. The increase in cost of services 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 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 48.4% to $15.9 million for
the year ended December 31, 1999, from $10.7 million for the comparable period
in 1998 due to hiring of additional support staff for the system upgrade
projects, the integration of the Acquisitions, and year 2000 (Y2K) issues.
Support expenses

                                        22
<PAGE>   25

increased as a percentage of claims revenues from 21.9% for the year ended
December 31, 1998 to 25.8% for the comparable period in 1999. The increase in
support expenses as a percentage of claims revenues resulted from revenues being
lower than anticipated. Support costs do not vary in proportion to revenues.

     Depreciation and Amortization.  Depreciation and amortization expenses
increased 112.3% to $5.0 million for the year ended December 31, 1999 from $2.3
million for the comparable period in 1998. The increase in depreciation expense
was attributable to the purchase of fixed assets related to the Acquisitions and
increased system cost upgrades. The increase in amortization expense was
attributable to the addition of intangible assets related to the Acquisitions.

     Special Committee Expenses.  In August 1999, the Board of Directors
appointed the Special Committee to evaluate strategic alternatives available to
the Company, including its possible sale. The Company incurred $451,000 of
expenses related to the work of the Special Committee during 1999. In March
2000, the Special Committee ceased seeking a buyer for the Company and its
efforts to enhance shareholder value were assumed by the full Board of
Directors. See "Other Matters -- Special Committee".

     Interest Income.  Interest income totaled $1.1 million and $1.8 million for
the years ended December 31, 1999 and 1998, respectively. The decrease in
interest income resulted primarily from utilizing available cash for the
Acquisitions.

     Interest Expense.  Interest expense totaled $0.9 million and $0.1 million
for the years ended December 31, 1999 and 1998, respectively. The increase in
interest expense for 1999 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 year ended December 31, 1999 and 41.3% for the year ended December 31,
1998. 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 year ended December 31, 1999 decreased $3.7
million, or 42%, to $5.2 million or $0.46 per diluted share, from $8.9 million
or $0.77 per diluted share for the year ended December 31, 1998. Net income
decreased as a result of lower than anticipated subrogation recoveries and the
additional expenses, such as amortization and interest expense, associated with
the Acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's statements of cash flows for the years ended December 31,
2000, 1999 and 1998 are summarized below:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                           ----------------------------
                                                            2000       1999      1998
                                                           -------   --------   -------
                                                                  (IN THOUSANDS)
<S>                                                        <C>       <C>        <C>
Net Cash Provided by Operating Activities................  $ 8,445   $  9,056   $ 9,814
Net Cash Used In Investing Activities....................   (5,500)   (48,078)   (3,783)
Net Cash (Used In) Provided by Financing Activities......   (3,115)     9,356       428
                                                           -------   --------   -------
Net (Decrease) Increase in Cash and Cash Equivalents.....  $  (170)  $(29,666)  $ 6,459
                                                           =======   ========   =======
</TABLE>

     The Company had working capital of $7.8 million at December 31, 2000,
including cash and cash equivalents of $1.3 million, compared with working
capital of $7.9 million at December 31, 1999.

     Net cash provided by operating activities decreased $0.6 million for the
year ended December 31, 2000, compared to the year ended December 31, 1999,
primarily as a result of the decrease in net income in 2000 and the timing of
recurring cash receipts and disbursements related to accrued expenses and
subrogation recoveries. In addition, the Company spent approximately $1.2
million to acquire long-term contracts with two health plans. These contracts
are characterized as long-lived assets, are included in other assets, and are
amortized over the recovery cycle of the contract.

     Net cash used in investing activities in the year ended December 31, 2000
includes $4.8 million paid under the earnout agreements related to the
Acquisitions. Capital expenditures for the year ended Decem-

                                        23
<PAGE>   26

ber 31, 2000 were approximately $3.1 million. Disposals of property and
equipment of $1.3 million included the sale of a building owned in Atlanta. Over
the next 12 months, the Company anticipates capital expenditures approximating
$3.6 million to meet the requirements of the Company's growing revenue base and
development activities.

     Net cash provided by financing activities for the year ended December 31,
2000 reflects $3.0 million in net cash borrowings from the Company's credit
facility as discussed below and $5.7 million as a reduction in stockholders'
equity, resulting from the stock repurchase program. See "-- Other
Matters -- Stock Repurchase Program".

     On May 15, 2000, the Company entered into a third amendment (the
"Amendment") to its February 1, 1998 revolving credit facility with National
City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The
Company's obligations under the Credit Facility are secured by substantially all
of the Company's assets, subject to certain permitted exceptions. Under the
Amendment, the maturity date was extended to April 30, 2002 from January 31,
2001, the maximum borrowing capacity decreased to $40 million from $50 million,
and certain other financial terms and covenants were amended. Principal amounts
outstanding under the Credit Facility bear interest at a variable rate based on
the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed
margin. The Credit Facility contains customary covenants and events of default
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. It
also contains a material adverse change clause. The Company does not expect
changes in interest rates to have a material effect on its financial position,
results of operations or financial condition in 2001. The Credit Facility was
amended in May 1998 to enable the Company to acquire entities that do not
maintain audited financial statements, in March 1999 to permit borrowings from
the Credit Facility for the repurchase of up to $10 million of outstanding
Common Stock, and in June 2000, to increase the amount of other debt that the
Company is permitted to maintain outstanding under another of the Credit
Facility's financial covenants. As of December 31, 2000, $14.0 million was
outstanding under the Credit Facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations Other Matters".

     At December 31, 2000 and 1999, the Company reported as a current asset on
its balance sheets, restricted cash of $21.6 million, and $26.1 million,
respectively. Restricted cash at December 31, 2000 and December 31, 1999
represented claims recoveries effected by HCRI for its clients and also included
an escrowed amount of $4.7 million and $8.5 million, respectively, for a
potential earn-out in connection with the Subro-Audit Acquisition. At December
31, 2000 and December 31, 1999, HCRI reported on its balance sheets, as a
current liability, funds due clients of $12.4 million and $13.2 million,
respectively, representing recoveries to be distributed to clients, net of the
fee earned on such recoveries.

     In light of its acquisition strategy, the Company is currently assessing
its opportunities for capital formation. The Company believes that its available
cash resources, together with the borrowings available under the Credit Facility
and other potential sources of funding, will be sufficient to meet its current
operating requirements and acquisition and internal development activities. See
Item 1. "Business -- Business Developments".

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     There are no recently issued accounting pronouncements, which are expected
to have a significant impact on the Company, other than those previously
disclosed and currently being applied.

EXTERNAL FACTORS

     The business of recovering subrogation and other 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. Examples of these factors include,
but are not limited to, 1) the non-availability of recovery from such sources as
property and casualty and workers' compensation coverages, 2) law changes that
limit the use of or access to claims and medical records, or 3) the ability of
healthcare payors to recover related claims and audit medical records. Because
the Company's profitability
                                        24
<PAGE>   27

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 are derived 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 medical claims 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 December 31,
2000 covered approximately 52.5 million lives. HCRI's clients are national and
regional healthcare payors, large third-party administrators or self-insured
corporations. HCRI's largest client is UnitedHealth Group. During the years
ended December 31, 2000 and 1999, UnitedHealth Group generated 24% and 23% of
HCRI's revenues, respectively. The loss of this account could have a material
adverse effect on HCRI's business, results of operations and financial
condition.

     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.

     HCRI performs its services on a reasonable efforts basis 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. HCRI's contracts
generally provide that in the event of termination, HCRI is entitled to complete
the recovery process on the existing backlog or to receive a cash payment
designed to approximate the gross margin that would otherwise have been earned
from the recovery on the backlog of the terminating client. On December 31,
2000, HCRI had backlog of $1,182.0 million.

OTHER MATTERS

  Special Committee

     In August 1999, members of the Company's management approached the Board of
Directors to propose a transaction in which a private equity firm would acquire
the Company for cash and members of the Company's management would acquire
equity participations in the acquisition vehicle. The proposal was conceptual in
nature and did not include a specific proposal on price.

     In response, the Board of Directors appointed a Special Committee composed
of the non-management directors. The Board of Directors assigned the Special
Committee a broad mandate to evaluate the strategic alternatives available to
the Company and to explore one or more of those alternatives, as the committee
deemed appropriate. The Special Committee retained its own financial and legal
advisers. After consulting with its advisers, the Special Committee directed its
financial adviser, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
to solicit indications of interest from financial and strategic acquirors
regarding a possible sale or business combination, while at the same time
evaluating and advising the Special Committee on other possible approaches to
maximizing shareholder value. Subsequently, 22 third parties entered into
confidentiality agreements and several of them conducted significant "due
diligence" investigations of the Company, including management interviews. At
the conclusion of this process, most of the participants declined to pursue a
transaction. The private equity firm that had originally proposed a transaction
with management advised that, after conducting diligence, it was willing to
proceed with a transaction, but

                                        25
<PAGE>   28

only at a price range lower than the range it had initially communicated to the
Board of Directors. Furthermore, the private equity firm indicated that its
interest remained subject to a number of contingencies and further diligence.
DLJ advised the Special Committee that, even if the private equity firm were in
fact to make a definitive offer to acquire the Company at the high end of the
range it now described as possible, DLJ would be unwilling to render its opinion
that a transaction at that price would be fair from a financial point of view to
the Company's stockholders. After considering (i) DLJ's advice on the fairness
of the range of prices being discussed, (ii) the likelihood that any definitive
offer that might ultimately be forthcoming from the private equity firm might
well be at a price even lower than the price range mentioned in the latest
indication of interest and (iii) the negative impact that the distraction and
diversion of management resources associated with a protracted sale process was
having on the Company's performance, the Special Committee determined that the
process of actively seeking an acquiror or a strategic merger partner should be
terminated and that the interests of the Company's shareholders would be best
served by focusing on building the Company's business.

     Since that time, the Company has taken steps to enhance shareholder value
through continuation of the stock repurchase plan authorized by the Board in
March 1999 and through a variety of business development efforts. See Item 1.
"Business -- Business Developments" and "-- Stock Repurchase Plan".

  Resignation of a Director

     Effective October 31, 2000, Elaine J. Robinson resigned as a director of
the Company. Under the Company's Certificate of Incorporation and Bylaws, a
vacancy on the Board of Directors created by a resignation may be filled by a
majority vote of the remaining directors. A director so chosen to fill the
vacancy would hold office until the next succeeding Annual Meeting. The Board of
Directors, through its Nominating Committee, is currently engaged in identifying
candidates for the vacant position.

  Stock Repurchase Plan

     HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. Shares may be repurchased using cash from operations and borrowed
funds and may 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 2000, HCRI repurchased 1,467,765 shares of its
Common Stock at an average price of $3.86 per share. During 1999, HCRI acquired
305,000 shares of its Common Stock at an average price of $4.50 per share. From
inception of the program through December 31, 2000, the total number of
repurchased shares was 1,772,765 at a cost of $7.0 million, or an average price
of $3.97 per share. All of the reacquired shares of Common Stock through
December 31, 2000 are reflected as treasury stock on the accompanying Balance
Sheets. No additional shares have been repurchased since the fourth quarter of
2000.

  Adoption of a Rights Plan

     On February 12, 1999, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one preferred stock purchase right (a "Right")
for each outstanding share of Common Stock of the Company. The dividend was
payable to stockholders of record on March 1, 1999. The Rights, which initially
trade with the Common Stock, separate and become exercisable only upon the
earlier to occur of (i) 10 days after the date (the "Stock Acquisition Date") of
a public announcement that a person or group of affiliated persons has acquired
20% or more of the Common Stock (such person or group being hereinafter referred
to as an "Acquiring Person") or (ii) 10 days (or such later date as the Board of
Directors shall determine) after the commencement of, or announcement of an
intention to make, a tender offer or exchange offer that could result in such
person or group owning 20% or more of the Common Stock (the earlier of such
dates being called the "Distribution Date"). When exercisable, each Right
initially entitles the registered holder to purchase from the Company one
one-hundredth of a share of a newly created class of preferred stock of the
Company at a purchase price of $65 (the "Purchase Price"). The Rights are
redeemable for $0.001 per Right at the option of the Board of Directors. The
Rights expire on March 1, 2009.

                                        26
<PAGE>   29

     If any person becomes an Acquiring Person, each holder of a Right will
thereafter have the right (the "Flip-In Right") to receive, in lieu of shares of
preferred stock and upon payment of the Purchase Price, shares of Common Stock
having a value equal to two times the Purchase Price of the Right. Also, if at
any time on or after the Stock Acquisition Date, (i) the Company is acquired in
a transaction in which the holders of all the outstanding shares of Common Stock
immediately prior to the consummation of the transaction are not the holders of
all of the surviving corporation's voting power, or (ii) more than 50% of the
Company's assets, cash flow or earning power is sold or transferred other than
in the ordinary course of business, then each holder of a Right shall thereafter
have the right (the "Flip-Over Right") to receive, in lieu of shares of
preferred stock and upon exercise and payment of the Purchase Price, common
shares of the acquiring company having a value equal to two times the Purchase
Price. If a transaction would otherwise result in a holder having a Flip-In as
well as a Flip-Over Right, then only the Flip-Over Right will be exercisable. If
a transaction results in a holder having a Flip-Over Right subsequent to a
transaction resulting in the holder having a Flip-In Right, a holder will have a
Flip-Over Right only to the extent such holder's Flip-In Rights have not been
exercised.

  Related Party Transaction

     On June 30, 2000, at the direction of the Board of Directors and in
accordance with terms authorized by it, the Company loaned to Patrick B.
McGinnis, the Chief Executive Officer of the Company, $500,000. Under these
terms, the $500,000 loan to Mr. McGinnis was combined with his existing debt to
the Company of $350,000 of principal and $36,520 of accrued interest. Mr.
McGinnis delivered to the Company his full recourse promissory note in the
amount of $886,520, bearing interest at a fixed rate of 6.62% per annum,
compounded annually (the "Amended Promissory Note"), and the Company cancelled
the old promissory note evidencing the prior debt. The Amended Promissory Note
provides for mandatory prepayments from certain of the proceeds received by Mr.
McGinnis from his sale of the Company's securities and any related transactions.
At December 31, 2000, the $886,520 note and accrued interest of $25,800 were
outstanding.

     In addition, on June 30, 2000, pursuant to Board authorization and in
accordance with the terms of the Amended Promissory Note, the Company and Mr.
McGinnis entered into a deferred compensation agreement (the "Agreement"). Under
the Agreement, 50% of the amount otherwise payable to Mr. McGinnis under the
Company's Management Group Incentive Compensation Plan shall be deferred until
the Amended Promissory Note is paid in full, with such deferred compensation
then being paid in full to Mr. McGinnis within 30 days thereafter. The Company
has full right of set-off against any deferred compensation under the Agreement
should Mr. McGinnis default under the Amended Promissory Note. At the election
of Mr. McGinnis, the payment of the deferred compensation, upon payment of the
Amended Promissory Note, may be extended for a period of not more than ten
years.

ITEM 7A.  QUANTITATIVE & QUALITATIVE MARKET RISK DISCLOSURES

     An element of market risk exists for the Company from changes in interest
rates related to its amended Credit Facility, which matures April 30, 2002. The
impact on earnings and value of any debt on the Company's balance sheets are
subject to change as a result of movements in market rates and prices as the
Credit Facility is subject to variable interest rates. However, the Company does
not expect changes in interest rates to have a material effect on its financial
position, results of operations or cash flows in 2001. As of December 31, 2000,
the Company had $14 million outstanding under its Credit Facility, with interest
rates ranging from 8.76% to 8.84%. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                        27
<PAGE>   30

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Healthcare Recoveries, Inc.

     In our opinion, the accompanying balance sheets and the related statements
of income, changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Healthcare Recoveries, Inc. (the
Company) at December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Louisville, Kentucky
February 14, 2001

                                        28
<PAGE>   31

                          HEALTHCARE RECOVERIES, INC.

                                 BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.................................  $  1,297   $  1,467
  Restricted cash...........................................    21,647     26,121
  Accounts receivable, less allowance for doubtful accounts
    of $434 in 2000 and $380 in 1999........................     7,660      6,870
  Other current assets......................................     2,153      1,663
                                                              --------   --------
         Total current assets...............................    32,757     36,121
                                                              --------   --------
Property and equipment, at cost:
  Buildings and land........................................     4,001      5,482
  Furniture and fixtures....................................     3,230      3,095
  Office equipment..........................................     1,992      1,946
  Computer equipment........................................    13,883     11,253
  Leasehold improvements....................................     1,308      1,073
                                                              --------   --------
                                                                24,414     22,849
  Accumulated depreciation and amortization.................   (13,781)   (10,002)
                                                              --------   --------
         Property and equipment, net........................    10,633     12,847
                                                              --------   --------
Cost in excess of net assets acquired, net..................    29,143     26,296
Identifiable intangibles, net...............................     4,934      5,496
Other assets................................................     1,978      1,274
                                                              --------   --------
         Total assets.......................................  $ 79,445   $ 82,034
                                                              ========   ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable....................................  $  1,231   $  1,914
  Accrued expenses..........................................     9,906     12,146
  Funds due clients.........................................    12,437     13,178
  Income taxes payable......................................     1,385      1,018
                                                              --------   --------
         Total current liabilities..........................    24,959     28,256
Other liabilities...........................................     2,324      2,055
Long-term borrowings........................................    14,000     11,000
                                                              --------   --------
         Total liabilities..................................    41,283     41,311
                                                              --------   --------
Commitments and 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;
    9,771 shares and 11,209 shares issued and outstanding at
    December 31, 2000 and 1999, respectively................        12         12
  Capital in excess of par value............................    22,637     22,541
  Other.....................................................      (912)      (369)
  Treasury stock at cost; 1,773 shares and 305 shares at
    December 31, 2000 and 1999, respectively................    (7,037)    (1,373)
  Retained earnings.........................................    23,462     19,912
                                                              --------   --------
         Total stockholders' equity.........................    38,162     40,723
                                                              --------   --------
         Total liabilities and stockholders' equity.........  $ 79,445   $ 82,034
                                                              ========   ========
</TABLE>

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

                                        29
<PAGE>   32

                          HEALTHCARE RECOVERIES, INC.

                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Claims revenues.............................................  $63,627   $61,409   $48,734
Cost of services............................................   30,432    31,451    22,199
                                                              -------   -------   -------
          Gross profit......................................   33,195    29,958    26,535
Support expenses............................................   17,061    15,870    10,692
Depreciation and amortization...............................    6,372     4,954     2,334
Research and development....................................      366        --        --
                                                              -------   -------   -------
          Operating income..................................    9,396     9,134    13,509
Interest income.............................................    1,104     1,084     1,790
Interest expense............................................   (1,341)     (940)     (133)
Other -- Litigation settlement..............................   (3,000)       --        --
Other -- Special Committee expenses.........................      (90)     (451)       --
                                                              -------   -------   -------
          Income before income taxes........................    6,069     8,827    15,166
Provision for income taxes..................................    2,519     3,665     6,266
                                                              -------   -------   -------
          Net income........................................  $ 3,550   $ 5,162   $ 8,900
                                                              =======   =======   =======
Earnings per common share (basic)...........................  $  0.33   $  0.46   $  0.78
                                                              =======   =======   =======
Earnings per common share (diluted).........................  $  0.33   $  0.46   $  0.77
                                                              =======   =======   =======
</TABLE>

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

                                        30
<PAGE>   33

                          HEALTHCARE RECOVERIES, INC.

                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        CAPITAL IN
                                     COMMON STOCK       EXCESS OF    RETAINED
                                  -------------------      PAR       EARNINGS    TREASURY
                                    SHARES     AMOUNT     VALUE      (DEFICIT)    STOCK     OTHER    TOTAL
                                  ----------   ------   ----------   ---------   --------   -----   -------
<S>                               <C>          <C>      <C>          <C>         <C>        <C>     <C>
Balances, December 31, 1997.....  11,470,000    $11      $22,001      $ 5,853    $    --    $  --   $27,865
  Net Income....................                                        8,900                         8,900
  Issuance of Common Stock......      32,987      1          427                                        428
                                  ----------    ---      -------      -------    -------    -----   -------
Balances, December 31, 1998.....  11,502,987     12       22,428       14,753         --       --    37,193
  Net income....................                                        5,162                         5,162
  Issuance of Common Stock......      10,720                  98                                         98
  Repurchase of Common Stock....    (305,000)                                     (1,373)            (1,373)
  Other.........................                              15           (3)               (369)     (357)
                                  ----------    ---      -------      -------    -------    -----   -------
Balances, December 31, 1999.....  11,208,707     12       22,541       19,912     (1,373)    (369)   40,723
  Net income....................                                        3,550                         3,550
  Issuance of Common Stock......      29,929                  92                                         92
  Repurchase of Common Stock....  (1,467,765)                                     (5,664)            (5,664)
  Other.........................                               4                             (543)     (539)
                                  ----------    ---      -------      -------    -------    -----   -------
Balances, December 31, 2000.....   9,770,871    $12      $22,637      $23,462    $(7,037)   $(912)  $38,162
                                  ==========    ===      =======      =======    =======    =====   =======
</TABLE>

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

                                        31
<PAGE>   34

                          HEALTHCARE RECOVERIES, INC.

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               2000       1999      1998
                                                              -------   --------   -------
<S>                                                           <C>       <C>        <C>
Cash flows from operating activities:
  Net income................................................  $ 3,550   $  5,162   $ 8,900
  Adjustments to reconcile net income to net cash provided
     by operating activities:
  Depreciation and amortization.............................    6,372      4,954     2,334
  Deferred income taxes.....................................     (640)       511       341
  Other.....................................................        4         15        --
  Changes in operating assets and liabilities:
     Restricted cash........................................      287        603    (2,720)
     Accounts receivable....................................     (790)    (2,153)   (1,100)
     Other current assets...................................      268         51      (960)
     Other assets...........................................   (1,229)        41      (318)
     Trade accounts payable.................................     (683)     1,175       248
     Accrued expenses.......................................    1,682      1,487       746
     Funds due clients......................................     (741)      (852)    1,475
     Income taxes payable...................................      367     (1,466)      730
     Other liabilities......................................       (2)      (472)      138
                                                              -------   --------   -------
          Net cash provided by operating activities.........    8,445      9,056     9,814
                                                              -------   --------   -------
Cash flows from investing activities:
  Acquisitions, net of cash acquired........................   (3,765)   (44,215)       --
  Purchases of property and equipment.......................   (3,076)    (3,863)   (3,783)
  Disposals of property and equipment.......................    1,341         --        --
                                                              -------   --------   -------
          Net cash used in investing activities.............   (5,500)   (48,078)   (3,783)
                                                              -------   --------   -------
Cash flows from financing activities:
  Issuance of common stock..................................       92         98       428
  Repurchase of common stock................................   (5,664)    (1,373)       --
  Line of credit proceeds...................................    8,700     14,300        --
  Line of credit repayments.................................   (5,700)    (3,300)       --
  Other.....................................................     (543)      (369)       --
                                                              -------   --------   -------
Net cash (used in) provided by financing activities.........   (3,115)     9,356       428
                                                              -------   --------   -------
Net (decrease) increase in cash and cash equivalents........     (170)   (29,666)    6,459
Cash and cash equivalents, beginning of period..............    1,467     31,133    24,674
                                                              -------   --------   -------
Cash and cash equivalents, end of period....................  $ 1,297   $  1,467   $31,133
                                                              =======   ========   =======
Supplemental cash flows disclosure:
Income tax payments.........................................  $ 2,896   $  4,819   $ 5,293
                                                              =======   ========   =======
Cash paid for interest expense..............................  $ 1,140   $    844   $   132
                                                              =======   ========   =======
Details of businesses acquired in purchase transactions:
  Fair value of assets acquired.............................  $    --   $ 45,813   $    --
  Less: liabilities assumed.................................       --      1,598        --
                                                              -------   --------   -------
  Cash paid for acquired businesses, net of cash acquired...  $    --   $ 44,215   $    --
                                                              =======   ========   =======
</TABLE>

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

                                        32
<PAGE>   35

                          HEALTHCARE RECOVERIES, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

     Healthcare Recoveries, Inc. (hereinafter referred to as the "Company" or
"HCRI"), a Delaware corporation, was incorporated on June 30, 1988. The
Company's primary business is to provide complete outsourcing of insurance
subrogation and certain other medical claims recovery and cost containment
services to the private healthcare payor industry. Its primary service is
medical claims recovery, and its primary product is subrogation recovery, which
generally 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
are generally paid from the proceeds of liability or workers' compensation
insurance. The Company's other medical claims recovery services include provider
bill auditing, contract compliance review and cost management consulting,
coordination of benefits and overpayments recovery services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND RESTRICTED CASH

     Cash and cash equivalents include cash, demand deposits and highly liquid
investments with an original maturity of three months or less. Carrying values
of cash and cash equivalents approximate fair value due to the short-term nature
of the instruments.

     Restricted cash represents the balance in client-specific bank accounts of
amounts collected on behalf of certain clients. A portion of the balance will be
disbursed to clients in accordance with the terms of the contracts between the
Company and its clients, while the remainder will be released to the Company.
Restricted cash at December 31, 2000 and 1999 includes $4.7 million and $8.5
million, respectively, for the potential Subro Audit (as defined herein)
earn-out amount held in escrow (See Note 3).

     Substantially all of the Company's cash, cash equivalents and restricted
cash have been placed with one financial institution.

PROPERTY AND EQUIPMENT

     Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives of property and equipment range from three to
forty years. Depreciation expense for the years ended 2000, 1999 and 1998 was
$3.8 million, $3.1 million, and $2.0 million, respectively.

     Effective January 1, 1998, the Company adopted Statement of Position 98-1,
which requires the capitalization of internal and external costs incurred to
develop or obtain computer software for internal use.

INTANGIBLE ASSETS

     Cost in excess of net assets acquired represents the unamortized excess of
cost over the fair value of tangible and identifiable intangible assets acquired
and is being amortized on a straight-line basis over twenty years. Identifiable
intangible assets are being amortized on a straight-line basis over varying
periods, ranging from four to fifteen years. Amortization expense for the years
ended 2000, 1999 and 1998 was $2.6 million, $1.9 million, and $0.3 million,
respectively.

REVENUE RECOGNITION

     Subrogation revenues are generally derived from contingent fee arrangements
based on the recoveries effected by the Company on behalf of its clients.
Revenue is recognized when a fee is earned based on the settlement of a case. A
case is deemed settled when the parties agree on all material terms associated
with the

                                        33
<PAGE>   36
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

settlement. In response to operational changes which affect the Company's
ability to identify when the parties reached agreement on all material terms,
refinements were made to the estimation process during 1999 with the intent of
maintaining consistency in the timing of revenue recognition. The Company
believes this change had no significant impact on its revenues for 2000 and
1999.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on revenue recognition and related disclosures
and was effective beginning October 1, 2000. The Company was previously
following the requirements provided under SAB 101 and, accordingly, the
implementation of this pronouncement had no impact on the Company's financial
position or results of operations for 2000.

SPECIAL COMMITTEE

     In August 1999, the Board of Directors appointed a Special Committee to
evaluate strategic alternatives available to the Company, including its possible
sale. In March 2000, the Special Committee ceased seeking a buyer for the
Company and its efforts to enhance shareholder value were assumed by the full
Board of Directors. The Company incurred $90,000 and $451,000 of expenses
related to the work of the Special Committee during 2000 and 1999, respectively.

RESEARCH AND DEVELOPMENT

     During 2000, the Company began research and development activities in
connection with the creation of new products for the insurance industry. The
Company incurred $366,000 of expenses related to research and development during
2000.

LITIGATION SETTLEMENT

     In January 2001, the Company reached an agreement in principle to settle
the DeGarmo class action litigation, currently pending against the Company in
Federal Court in West Virginia. The Company incurred expenses related to this
settlement of $3.0 million during 2000.

PROVISION FOR INCOME TAXES

     The provision for income taxes has been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."

STOCK-BASED COMPENSATION PLANS

     The Company accounts for its employee stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Effective in 1996, the Company implemented the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 requires companies that elect not to account for
stock-based compensation as prescribed by SFAS No. 123, to disclose the pro
forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used in determining the pro forma effects
of SFAS No. 123.

                                        34
<PAGE>   37
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER COMMON SHARE

     A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share calculations follows (dollars in thousands,
except per share results):

<TABLE>
<CAPTION>
                                                                                  PER-SHARE
                                                        NET INCOME     SHARES      RESULTS
                                                        ----------   ----------   ---------
<S>                                                     <C>          <C>          <C>
YEAR ENDED DECEMBER 31, 2000:
  Basic earnings per common share.....................    $3,550     10,654,995    $ 0.33
  Effect of dilutive stock options....................        --         72,627        --
  Diluted earnings per common share...................     3,550     10,727,622      0.33
YEAR ENDED DECEMBER 31, 1999:
  Basic earnings per common share.....................     5,162     11,287,724      0.46
  Effect of dilutive stock options....................        --         43,547        --
  Diluted earnings per common share...................     5,162     11,331,271      0.46
YEAR ENDED DECEMBER 31, 1998:
  Basic earnings per common share.....................     8,900     11,484,266      0.78
  Effect of dilutive stock options....................        --         70,676     (0.01)
  Diluted earnings per common share...................     8,900     11,554,942      0.77
</TABLE>

     Basic earnings per common share were computed based on the weighted-average
number of shares outstanding during the year. The dilutive effect of stock
options is calculated using the treasury stock method. Options to purchase
1,470,978 and 1,088,358 shares for the years ended December 31, 2000 and 1999,
respectively, were not included in the computation of diluted earnings per
common share because the exercise prices of these options were greater than the
average market price of the common shares during the respective years.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which was required to be adopted in fiscal years beginning after
June 15, 1999. In June 1999, the FASB delayed the effective date of SFAS 133 for
one year. Management has determined that the adoption of SFAS 133 on January 1,
2001 will not have a material impact on the Company's financial position or
results of operations.

USE OF ESTIMATES AND ASSUMPTIONS

     Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect (i) reported amounts of assets and liabilities, (ii)
disclosure of contingent assets and liabilities at the date of the financial
statements and (iii) reported amounts of revenues and expenditures during the
reporting period. Actual results may differ from those estimates.

3. 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 limited liability partnership ("ODL"
and, together with SAI, "Subro Audit"), for approximately $24.4 million (the
"Subro Audit Acquisition"), using available unrestricted cash. HCRI currently
estimates that it may pay up to $5.4 million pursuant to an earn-out
arrangement, of which $2.8 million was paid on May 18, 2000, with the remainder
to be paid in 2001. 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

                                        35
<PAGE>   38
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

United States of America. The Subro Audit Acquisition was accounted for using
the purchase method of accounting.

     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
(the "MedCap Acquisition" and, together with the Subro Audit Acquisition, the
"Acquisitions"). HCRI paid approximately $4.5 million on February 15, 2000
pursuant to an amendment to the original earn-out agreement. Pursuant to the
same amendment, through January 15, 2001, the Company was obligated to pay up to
50% of the fees collected in relation to certain negotiated contracts, less
associated expenses, as an additional amount. The final amount, which was paid
in 2000 in relation to the fees collected on those contracts, was approximately
$292,000. MedCap provides a variety of medical cost management services to
health insurers and HMOs, primarily in California. These services include
provider 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.

     If the Acquisitions had taken place on January 1, 1999, approximate claims
revenues, net income and earnings per common share for the year ended December
31, 1999 would have been $62.7 million, $5.1 million and $0.45 per share,
respectively. If the Acquisitions had taken place on January 1, 1998,
approximate claims revenues, net income and earnings per common share for the
year ended December 31, 1998 would have been $61.3 million, $7.5 million and
$0.65 per share, respectively. The cost in excess of net tangible and
identifiable intangible assets acquired, allocated and recorded in connection
with the Acquisitions, was approximately $30.8 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.

4. LEASE COMMITMENTS

     The Company leases office space in Louisville, Kentucky, Encino,
California, Pittsburgh, Pennsylvania, and Atlanta, Georgia. Future minimum lease
payments, by year and in the aggregate, under noncancelable operating leases
with initial or remaining terms in excess of one year at December 31, 2000 are
as follows (in thousands):

<TABLE>
<S>                                                           <C>
2001........................................................  $1,698
2002........................................................   1,639
2003........................................................   1,824
2004........................................................   1,768
2005........................................................   1,686
Thereafter..................................................   4,961
</TABLE>

     Rental expense, which includes amounts applicable to short-term leases, was
approximately $1,951,000, $1,302,000, and $1,110,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

                                        36
<PAGE>   39
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES

     The provision (benefit) for income taxes for the years ended December 31,
2000, 1999 and 1998 consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                               2000     1999     1998
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Current:
  Federal...................................................  $2,395   $2,310   $4,961
  State and local...........................................     764      844      964
                                                              ------   ------   ------
                                                               3,159    3,154    5,925
                                                              ------   ------   ------
Deferred:
  Federal (benefit).........................................    (531)     428      286
  State and local (benefit).................................    (109)      83       55
                                                              ------   ------   ------
                                                                (640)     511      341
                                                              ------   ------   ------
                                                              $2,519   $3,665   $6,266
                                                              ======   ======   ======
</TABLE>

     The following is a reconciliation of the effective tax rate to the federal
statutory rate for the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                2000    1999    1998
                                                                ----    ----    ----
<S>                                                             <C>     <C>     <C>
Federal statutory rate......................................    34.0%   34.0%   35.0%
State and local taxes, net of federal tax benefit...........     6.9     6.9     6.8
Other, net..................................................     0.6     0.6    (0.5)
                                                                ----    ----    ----
                                                                41.5%   41.5%   41.3%
                                                                ====    ====    ====
</TABLE>

     Temporary differences giving rise to deferred taxes in the accompanying
balance sheets at December 31, 2000 and 1999 consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                             2000                   1999
                                                     --------------------   --------------------
                                                     ASSETS   LIABILITIES   ASSETS   LIABILITIES
                                                     ------   -----------   ------   -----------
<S>                                                  <C>      <C>           <C>      <C>
Accrued bonuses....................................  $  620                 $  667
Accounts receivable................................             $1,986                 $1,846
Accrued litigation.................................   1,849                    832
Other..............................................     614      1,034         315        545
                                                     ------     ------      ------     ------
                                                     $3,083     $3,020      $1,814     $2,391
                                                     ======     ======      ======     ======
</TABLE>

     Management believes that the deferred tax assets are realizable based
primarily on the existence of sufficient taxable income within the allowable
carryback period.

6. MAJOR CLIENTS

     UnitedHealth Group accounted for 24%, 23% and 28% of the Company's total
revenues for the years ended December 31, 2000, 1999 and 1998, respectively. No
other client accounted for more than 10% of the Company's total revenues. The
loss of this client could have a material adverse effect on the Company's
results of operations, financial position and cash flows.

7. RELATED PARTY TRANSACTIONS

     The Company has entered into a contract for legal services with a
professional service corporation that is wholly owned by one of the Company's
officers. This arrangement exists solely for the purpose of minimizing

                                        37
<PAGE>   40
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the costs of legal services purchased by the Company on behalf of its clients.
For the years ended December 31, 2000, 1999 and 1998, approximately $2,484,000,
$2,040,000 and $1,320,000, respectively, was paid to this law firm for such
legal services.

     On February 12, 1999, the Board of Directors approved a loan in the amount
of $350,000 to Patrick B. McGinnis, the Chairman and Chief Executive Officer of
the Company, in exchange for a full recourse promissory note in the same amount
from Mr. McGinnis. On June 30, 2000, at the direction of the Board of Directors
and in accordance with terms authorized by it, the Company loaned Mr. McGinnis
an additional $500,000. Under these terms, the $500,000 loan to Mr. McGinnis was
combined with his existing debt to the Company of $350,000 of principal and
$36,520 of accrued interest. Mr. McGinnis delivered to the Company his full
recourse promissory note in the amount of $886,520, bearing interest at a fixed
rate of 6.62% per annum, compounded annually (the "Amended Promissory Note"),
and the Company cancelled the old promissory note evidencing the prior debt. The
Amended Promissory Note provides for mandatory prepayments from certain of the
proceeds received by Mr. McGinnis from his sale of the Company's securities and
any related transactions. At December 31, 2000, the $886,520 note and accrued
interest of $25,800 were outstanding and at December 31, 1999, the $350,000 note
and accrued interest of $18,641 were outstanding.

     On June 30, 2000, pursuant to Board authorization and in accordance with
the terms of the Amended Promissory Note, the Company and Mr. McGinnis entered
into a deferred compensation agreement (the "Agreement"). Under the Agreement,
50% of the amount otherwise payable to Mr. McGinnis under the Company's
Management Group Incentive Compensation Plan shall be deferred until the Amended
Promissory Note is paid in full, with such deferred compensation then being paid
in full to Mr. McGinnis within 30 days thereafter. The Company has full right of
set-off against any deferred compensation under the Agreement should Mr.
McGinnis default under the Amended Promissory Note. At the election of Mr.
McGinnis, the payment of the deferred compensation, upon payment of the Amended
Promissory Note, may be extended for a period of not more than ten years.

8. EMPLOYEE BENEFIT PLAN

PENSION PLAN

     Effective on January 1, 1997, the Company's employees began participation
in the Company's 401(k) defined contribution pension plan. An annual expense
provision for the plan is based upon the level of employee participation, as the
plan requires the Company to match a certain portion of the employees'
contributions. Total retirement plan expense was approximately $818,300,
$877,200 and $522,300 for the years ended December 31, 2000, 1999 and 1998,
respectively.

OTHER

     Accrued bonuses included in the accompanying balance sheets at December 31,
2000 and 1999 approximate $3.9 million and $4.5 million, respectively.

9. CONTINGENCIES

     The Company is engaged in the business of identifying and recovering
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 has, from time to time, 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 and
financial condition.

                                        38
<PAGE>   41
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. CREDIT FACILITY

     On May 15, 2000, the company entered into a third amendment (the
"Amendment") to its February 1, 1998 revolving credit facility with National
City Bank of Kentucky and the lenders named therein (the "Credit Facility"). The
Company's obligations under the Credit Facility are secured by substantially all
of the Company's assets, subject to certain permitted exceptions. Under the
Amendment, the maturity date was extended to April 30, 2002 from January 31,
2001, the maximum borrowing capacity decreased to $40 million from $50 million,
and certain other financial terms and covenants were amended. Principal amounts
outstanding under the Credit Facility bear interest at a variable rate based on
the Prime Rate or Eurodollar Rate, as applicable, plus the pre-determined fixed
margin. At December 31, 2000, the interest rates ranged from 8.7% to 8.84%. The
Credit Facility contains customary covenants and events of default 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. It also contains
a material adverse change clause. The Credit Facility was amended in May 1998 to
enable the Company to acquire entities that do not maintain audited financial
statements, in March 1999 to permit borrowings from the Credit Facility for the
repurchase of up to $10 million of outstanding Common Stock, and in June 2000,
to increase the amount of other debt that the Company is permitted to maintain
outstanding under another of the Credit Facility's financial covenants. The
amount outstanding under the Credit Facility as of December 31, 2000 and 1999
was $14.0 million and $11.0 million, respectively.

11. COMMON STOCK OPTIONS

     In May 1997, the Company adopted the Healthcare Recoveries, Inc.
Non-Qualified Stock Option Plan for Eligible Employees (the "Employees' Plan"),
the Healthcare Recoveries, Inc. Amended and Restated Directors' Stock Option
Plan (the "Directors' Plan") and the Healthcare Recoveries, Inc. Employee Stock
Purchase Plan (the "Purchase Plan"). On December 8, 1997, the Company adopted
the Healthcare Recoveries, Inc. 1997 Stock Option Plan for Eligible Participants
(the "1997 Plan").

     The Employees' Plan provides for the award of stock options to certain
officers and key employees of the Company. Options under the Employees' Plan are
exercisable at 100% of the market value of the Company's Common Stock on the
date of grant. Awards under the Employees' Plan vest ratably over a three-year
period and expire ten years from the date of grant. As provided in the
Employees' Plan, all options granted to the Company's employees automatically
vest in the event of a change in control. At December 31, 2000, 673,750 shares
of Common Stock were reserved for issuance under the Employees' Plan, including
159,133 shares available for future award.

     The Directors' Plan provides for the grant of options to purchase the
Company's Common Stock to each non-employee director of the Company. Options
under the Directors' Plan are exercisable at 100% of the market value of the
Company's Common Stock on the date of grant. Pursuant to the Directors' Plan,
each eligible director is to be granted on the date he or she first becomes a
director an option to purchase 10,000 shares of Common Stock, and each eligible
director is to be granted on the date of each annual meeting of stockholders of
the Company beginning in 1998 an option to purchase 2,000 shares of Common
Stock, for so long as shares are available under the Directors' Plan, but not
after March 31, 2002. Terms of options granted under this plan commence on the
date of grant and expire on the tenth anniversary of the grant date. Each option
is to become exercisable when vested. The options vest ratably over a three-year
period, provided that the optionee must be a non-employee director of the
Company on each such anniversary in order for options to vest on such date. At
December 31, 2000, 150,000 shares of Common Stock were reserved for issuance
under the Directors' Plan, including 74,000 shares available for future award.

     Under the Purchase Plan, eligible employees may purchase shares of the
Company's Common Stock, subject to certain limitations, at 85% of its market
value. Purchases are made from payroll deductions up to a maximum of 15% of an
employee's eligible annual compensation. During the year ended December 31,
2000,
                                        39
<PAGE>   42
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

29,929 shares of the Company's Common Stock were purchased under the Purchase
Plan, resulting in 252,614 reserved shares of Common Stock being available for
purchase at December 31, 2000.

     The 1997 Plan provides for the grant of options to purchase the Company's
Common Stock to eligible participants of the Company at 100% of the market value
of the Company's Common Stock on the date of grant. Awards under the 1997 Plan
expire ten years from the date of grant and vest according to the terms that the
compensation committee of the Board of Directors determines in its sole
discretion. As provided in the 1997 Plan, all options granted to the Company's
employees automatically vest in the event of a change in control. At December
31, 2000, 1,760,000 shares of Common Stock have been reserved under the 1997
Plan, of which 15,013 shares are available for future award.

     Activity related to the Employees' Plan, Directors' Plan and 1997 Plan for
the years ended December 31, 2000, 1999 and 1998 is summarized as follows:

<TABLE>
<CAPTION>
                                      2000                        1999                        1998
                            -------------------------   -------------------------   -------------------------
                            SHARES   WEIGHTED-AVERAGE   SHARES   WEIGHTED-AVERAGE   SHARES   WEIGHTED-AVERAGE
                            (000)     EXERCISE PRICE    (000)     EXERCISE PRICE    (000)     EXERCISE PRICE
                            ------   ----------------   ------   ----------------   ------   ----------------
<S>                         <C>      <C>                <C>      <C>                <C>      <C>
Options outstanding as of
  January 1...............   1,562        $12.55         1,085        $16.58           723        $14.93
  Granted.................     859        $ 3.10           640          6.01           537        $17.85
  Exercised...............      --            --            --            --           (26)       $17.60
  Canceled................     (85)       $10.94          (163)       $13.51          (149)       $15.79
                            ------                      ------                      ------
Options outstanding as of
  December 31.............   2,336        $ 9.13         1,562        $12.55         1,085        $16.58
                            ======                      ======                      ======
Weighted-average fair
  value of options granted
  during the year (per
  share)..................  $ 3.00                      $ 1.94                      $ 8.07
                            ======                      ======                      ======
</TABLE>

     The following table summarizes information about options outstanding under
the Employees' Plan, Directors' Plan and 1997 Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                  ---------------------------------------   ------------------------
                                     NUMBER       WEIGHTED-                    NUMBER
                                  OUTSTANDING      AVERAGE      WEIGHTED-   OUTSTANDING    WEIGHTED-
                                  DECEMBER 31,    REMAINING      AVERAGE    DECEMBER 31,    AVERAGE
                                      2000       CONTRACTUAL    EXERCISE        2000       EXERCISE
RANGE OF EXERCISE PRICES             (000)       LIFE (YEARS)     PRICE        (000)         PRICE
------------------------          ------------   ------------   ---------   ------------   ---------
<S>                               <C>            <C>            <C>         <C>            <C>
$ 2.75 - $16.36.................     1,938           8.1          $6.99          761        $12.32
$16.37 - $23.50.................       398           7.1          19.57          275         19.52
                                     -----                                     -----
                                     2,336           8.0           9.13        1,036         14.23
                                     =====                                     =====
</TABLE>

     The Company accounts for options granted under its employee stock-based
compensation plans in accordance with APB No. 25. As a result, the Company has
not recognized compensation expense for stock options granted with an exercise
price equal to the quoted market price of the common stock on the date of grant
and which vest based solely on continuation of employment by the recipient of
the option award. The Company adopted SFAS No. 123 for disclosure purposes in
1996. For SFAS No. 123 purposes, the fair value of each option grant and stock
based award has been estimated as of the date of grant using the Black-Scholes

                                        40
<PAGE>   43
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

option pricing model. The following summarizes the weighted average assumptions
used in valuing awards under the Employees' Plan, Directors' Plan and 1997 Plan:

<TABLE>
<CAPTION>
                                                              2000    1999    1998
                                                              -----   -----   ----
<S>                                                           <C>     <C>     <C>
Expected life (years).......................................    5.0     5.0    5.0
Risk-free interest rate.....................................    6.5%    5.7%   5.5%
Dividend yield..............................................    0.0     0.0    0.0
Expected volatility.........................................  187.6   137.3   38.2
</TABLE>

     Had compensation expense been recognized under the provisions of SFAS No.
123, utilizing the assumptions in the table above, the Company's net income for
the years ended December 31, 2000, 1999 and 1998 and earnings per common share
(basic and diluted) for the years ended December 31, 2000, 1999 and 1998 would
have decreased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                               2000     1999     1998
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Net income as reported......................................  $3,550   $5,162   $8,900
Proforma....................................................   1,434    3,021    7,333
Earnings per common share:
As reported (basic).........................................    0.33     0.46     0.78
As reported (diluted).......................................    0.33     0.46     0.77
Proforma (basic and diluted)................................    0.13     0.27     0.64
</TABLE>

     The effects of applying SFAS No. 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma net income or earnings
per common share for future years because variables such as option grants,
option exercises, and stock price volatility included in the disclosures may not
be indicative of actual future activity.

12. STOCK REPURCHASE PLAN

     HCRI's Board approved a stock repurchase plan on March 12, 1999 under which
the Company is authorized to repurchase, from time to time, up to $10 million of
HCRI Common Stock in the open market, at prices per share deemed favorable by
the Company. Shares may be repurchased using cash from operations and borrowed
funds and may 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 1999, HCRI acquired 305,000 shares of its Common
Stock at an average price of $4.50 per share. During 2000, HCRI repurchased
1,467,765 shares of its Common Stock at an average price of $3.86 per share.
From inception of the program through December 31, 2000, the total number of
repurchased shares was 1,772,765 at a cost of $7.0 million, or an average price
of $3.97 per share. All of the reacquired shares of Common Stock through
December 31, 2000 are reflected as treasury stock on the accompanying Balance
Sheets.

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     A summary of the Company's quarterly results of operations follows (dollars
in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                    FIRST    SECOND     THIRD    FOURTH(1)
                                                   -------   -------   -------   ---------
<S>                                                <C>       <C>       <C>       <C>
YEAR ENDED DECEMBER 31, 2000:
Claims revenues..................................  $16,567   $15,950   $15,113    $15,997
Income (loss) before income taxes................    1,931     2,209     2,128       (199)
Net income (loss)................................    1,130     1,292     1,245       (117)
Earnings (loss) per common share (basic).........     0.10      0.12      0.12      (0.01)
Earnings (loss) per common share (diluted).......     0.10      0.12      0.12      (0.01)
</TABLE>

                                        41
<PAGE>   44
                          HEALTHCARE RECOVERIES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
YEAR ENDED DECEMBER 31, 1999:
Claims revenues...................................  $13,860   $15,793   $15,247   $16,508
Income before income taxes........................    2,391     2,417     2,098     1,924
Net income........................................    1,398     1,415     1,227     1,124
Earnings per common share (basic).................     0.12      0.13      0.11      0.10
Earnings per common share (diluted)...............     0.12      0.13      0.11      0.10
</TABLE>

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

(1) Includes expense of $3.0 million pretax ($1.755 million after tax, or $0.18
    per diluted share) related to a litigation settlement and $263,000 pretax
    ($154,000 after tax, or $0.01 per diluted share) related to research and
    development.

                                        42
<PAGE>   45

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

     None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item with respect to Directors and
Executive Officers of the Registrant is included in the sections entitled
"Management of the Company", "Executive Officers", "Certain Relationships and
Related Transactions" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 11, 2001 and is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item is included in the sections entitled
"Executive Compensation", "Stock Option Grants", "Stock Option Exercises",
"Management of the Company -- Directors' Compensation", "Employment Agreements",
"Compensation Committee Report on Executive Compensation", "Compensation
Committee Interlocks and Insider Participation" and "Stock Price Performance
Graph" of the Proxy Statement for the Annual Meeting of Stockholders to be held
on May 11, 2001 and is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 11, 2001 and
is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is included in the sections entitled
"Executive Compensation" and "Certain Relationships and Related Transactions" of
the Proxy Statement for the Annual Meeting of Stockholders to be held on May 11,
2001 and is incorporated herein by reference.

                                    PART IV

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

     (a) 1. Financial Statements

          Report of Independent Accountants

          Balance Sheets -- years ended December 31, 2000 and 1999

          Statements of Income -- years ended December 31, 2000, 1999 and 1998

          Statements of Changes in Stockholders' Equity -- years ended December
     31, 2000, 1999 and 1998

          Statements of Cash Flow -- years ended December 31, 2000, 1999 and
     1998

     2. Financial Statement Schedules (none required)

                                        43
<PAGE>   46

     3. Exhibits

     The following list of Exhibits includes both exhibits submitted with this
Form 10-K 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 the
            Registrant, 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.
 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, File No. 000-22585).
10.1   --   Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
            for Eligible Employees (incorporated by reference to Exhibit
            4.2 of Registrant's Registration Statement on Form S-1, File
            No. 333-23287).
10.2   --   Healthcare Recoveries, Inc. Amended and Restated Directors'
            Stock Option Plan (incorporated by reference to Exhibit 10.2
            of Registrant's Annual Report on Form 10-K for the fiscal
            year ended December 31, 1998).
10.3   --   Healthcare Recoveries, Inc. 1997 Stock Option Plan for
            Eligible Participants (incorporated by reference to Annex A
            of Registrant's Proxy Statement for a Special Meeting, dated
            November 10, 1997).
10.4   --   Healthcare Recoveries, Inc. Employee Stock Purchase Plan
            (incorporated by reference to Exhibit 99.1 of Registrant's
            Registration Statement on Form S-8, File No. 333-41559).
10.5   --   2001 Management Group Incentive Compensation Plan.
10.6   --   Employment Agreement between the Registrant and Patrick B.
            McGinnis (incorporated by reference to Exhibit 10.2 to
            Registrant's Registration Statement on Form S-1, File No.
            333-23287).
10.7   --   Amendment No. 1 to Employment Agreement between the
            Registrant and Patrick B. McGinnis, dated February 12, 1999
            (incorporated by reference to Exhibit 10.6 of Registrant's
            Annual Report on Form 10-K for the fiscal year ended
            December 31, 1998).
10.8   --   Employment Agreement between the Registrant and Kevin M.
            O'Donnell, dated January 25, 1999 (incorporated by reference
            to Exhibit 10.9 of Registrant's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1998).
</TABLE>

                                        44
<PAGE>   47
<TABLE>
<C>    <C>  <S>
10.9   --   Separation Agreement between Medaphis and the Registrant
            (incorporated by reference to Exhibit 10.1 of Registrant's
            Amendment No. 2 to Registration Statement on Form S-1, File
            No. 333-23287).
10.10  --   Supplemental Retirement Savings Plan (incorporated by
            reference to Exhibit 10.5 of Registrant's Amendment No. 2 to
            Registration Statement on Form S-1, File No. 333-23287).
10.11  --   Lease between W&M Kentucky, Inc. and the Registrant
            (incorporated by reference to Exhibit 10.6 of Registrant's
            Registration Statement on Form S-1, File No. 333-23287).
10.12  --   Lease Addendum VI between W&M of Kentucky, Inc. and the
            Registrant, dated December 22, 1999 (incorporated by
            reference to. Exhibit 10.12 of Registrant's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1999).
10.13  --   Credit Agreement, dated as of February 1, 1998, by and among
            the Registrant, the Lending Institutions named therein and
            National City Bank of Kentucky (incorporated by Reference to
            Exhibit 10.12 of Registrant's Annual Report on Form 10-K for
            the fiscal year ended December 31, 1997).
10.14  --   Amendment No. 1 to the Credit Agreement, dated as of May 15,
            1998, by and among the Registrant, the Lending Institutions
            named therein and National City Bank of Kentucky
            (incorporated by reference to Exhibit 10.16 of Registrant's
            Annual Report on Form 10-K for the fiscal year ended
            December 31, 1998).
10.15  --   Amendment No. 2 to the Credit Agreement, dated as of March
            19, 1999, by and among the Registrant, the Lending
            Institutions named therein and National City Bank of
            Kentucky (incorporated by reference to Exhibit 10.17 of
            Registrant's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1998).
10.16  --   Amendment No. 3 to the Credit Agreement, dated as of May 15,
            2000, by and among the Registrant, the Lending Institutions
            named therein and National City Bank of Kentucky
            (incorporated by reference to Exhibit 10.1 of Registrant's
            Quarterly Report on Form 10-Q for the quarter ended June 30,
            2000).
10.17  --   Amendment No. 4 to the Credit Agreement, dated as of June
            23, 2000, by and among the Registrant, the Lending
            Institutions named therein and National City Bank of
            Kentucky (incorporated by reference to Exhibit 10.2 of
            Registrant's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 2000).
10.18  --   Employment Agreement between the Registrant and Timothy E.
            Cahill, dated October 19, 1999(incorporated by reference to
            Exhibit 10.17 of Registrant's Annual Report on Form 10-K for
            the fiscal year ended December 31, 1999).
10.19  --   Employment Agreement between the Registrant and Robert L.
            Jefferson, dated November 29, 1999(incorporated by reference
            to Exhibit 10.18 of Registrant's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1999).
10.20  --   Form of Change-in-Control Agreement between the Registrant
            and Douglas R. Sharps, Debra M. Murphy, Mark J. Bates and
            Robert G. Bader, dated February 24, 2000 (incorporated by
            reference to Exhibit 10.19 of Registrant's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1999).
10.21  --   Form of Severance Agreement between the Registrant and
            Douglas R. Sharps, Debra M. Murphy, Mark J. Bates and Robert
            G. Bader dated February 24, 2000 (incorporated by reference
            to Exhibit 10.20 of Registrant's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1999).
10.22  --   Promissory Note Payable to the Registrant from Patrick B.
            McGinnis (incorporated by reference to Exhibit 10.21 of
            Registrant's Annual Report on Form 10-K for the fiscal ended
            December 31, 1999).
</TABLE>

                                        45
<PAGE>   48
<TABLE>
<C>    <C>  <S>
10.23  --   Amended and Restated Promissory Note Payable to the
            Registrant from Patrick B. McGinnis, dated June 30, 2000
            (incorporated by reference to Exhibit 10.3 of Registrant's
            Quarterly Report on Form 10-Q for the quarter ended June 30,
            2000).
10.24  --   Deferred Compensation Agreement, dated June 30, 2000, by and
            between the Registrant and Patrick B. McGinnis (incorporated
            by reference to Exhibit 10.4 of Registrant's Quarterly
            Report on Form 10-Q for the quarter ended June 30, 2000).
23.1   --   Consent of PricewaterhouseCoopers LLP.
99.1   --   Healthcare Recoveries, Inc. Private Securities Litigation
            Reform Act of 1995 Safe Harbor Compliance Statement for
            Forward-Looking Statement.
</TABLE>

     (b) Reports on Form 8-K

     No reports filed during the fourth quarter of 2000.

                                        46
<PAGE>   49

                                   SIGNATURES

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

                                          HEALTHCARE RECOVERIES, INC.

                                          By:    /s/ PATRICK B. MCGINNIS
                                            ------------------------------------
                                                    Patrick B. McGinnis
                                               Chairman, President and Chief
                                                      Executive Officer

                                          Dated: March 27, 2001

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

<TABLE>
<CAPTION>
                       SIGNATURE                                      TITLE                   DATE
                       ---------                                      -----                   ----
<C>                                                       <S>                            <C>

                /s/ PATRICK B. MCGINNIS                   Chairman, President and Chief  March 27, 2001
--------------------------------------------------------    Executive Officer
                  Patrick B. McGinnis                       (Principal Executive
                                                            Officer)

                 /s/ DOUGLAS R. SHARPS                    Executive Vice President and   March 27, 2001
--------------------------------------------------------    Chief Financial Officer
                   Douglas R. Sharps                        (Principal Financial and
                                                            Accounting Officer)

              /s/ WILLIAM C. BALLARD, JR.                 Director                       March 27, 2001
--------------------------------------------------------
                William C. Ballard, Jr.

                   /s/ JILL L. FORCE                      Director                       March 27, 2001
--------------------------------------------------------
                     Jill L. Force

                   /s/ JOHN H. NEWMAN                     Director                       March 27, 2001
--------------------------------------------------------
                     John H. Newman

                /s/ CHRIS B. VAN ARSDEL                   Director                       March 27, 2001
--------------------------------------------------------
                  Chris B. Van Arsdel
</TABLE>

                                        47