HEALTHCARE RECOVERIES INC, S-1, 1997-03-14

HEALTHCARE RECOVERIES INC
S-1, 1997-03-14

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 1997

REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
---------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------

HEALTHCARE RECOVERIES, INC.
(Exact Name of Applicant as Specified in Charter)
---------------------

<TABLE>
<S> <C> <C>
DELAWARE 7322 61-1141758
(state or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) identification number)
</TABLE>

1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(502) 454-1340
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
---------------------
PATRICK B. MCGINNIS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1400 WATTERSON TOWER
LOUISVILLE, KENTUCKY 40218
(502) 454-1340
(Name, address, including zip code and telephone number, including area code of
agent for service)
---------------------
Copies to:

<TABLE>
<C> <C>
ROBERT W. MILLER GARY L. SELLERS
KING & SPALDING SIMPSON THACHER & BARTLETT
191 PEACHTREE STREET 425 LEXINGTON AVENUE
ATLANTA, GEORGIA 30303 NEW YORK, NEW YORK 10017
(404) 572-4600 (212) 455-2000
</TABLE>

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
====================================================================================================
PROPOSED
MAXIMUM AMOUNT OF
AGGREGATE REGISTRATION
TITLE OF CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.001 per share..................... $167,641,250 $50,800.38
====================================================================================================
</TABLE>

(1) Calculated in accordance with Rule 457(o).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

HEALTHCARE RECOVERIES, INC.
---------------------

CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE
PROSPECTUS OF CERTAIN ITEMS OF FORM S-1

<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
-------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page; Outside Back Cover
Page; Available Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholder
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................. Outside Front Cover Page; Dividend Policy;
Capitalization; Prospectus Summary;
Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant................................. Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Principal and Selling Stockholder; Certain
Transactions; Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ *
</TABLE>

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

* Item is omitted because response is negative or item is inapplicable.
<PAGE> 3

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus; one to be
used in connection with a United States and Canadian offering (the "U.S.
Prospectus") and one to be used in a concurrent international offering (the
"International Prospectus"). The two prospectuses will be identical in all
respects except for the front and back cover pages.

The form of the U.S. Prospectus is included herein and the form of the
front cover page and back cover page of the International Prospectus follows the
front cover page and back cover page, respectively, of the U.S. Prospectus.
<PAGE> 4

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MARCH 14, 1997

PROSPECTUS

[LOGO]

HEALTHCARE RECOVERIES, INC.
COMMON STOCK
------------------------------

All of the shares of Common Stock, par value $.001 per share (the "Common
Stock"), of Healthcare Recoveries, Inc. ("HRI" or the "Company") offered hereby
are being sold by its sole stockholder, Medaphis Corporation ("Medaphis" or the
"Selling Stockholder"). The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Stockholder. The Company will receive
the proceeds of the sale of Common Stock to the extent the Underwriters exercise
their over-allotment option.

A total of shares (the "U.S. Shares") are being offered in the
United States and Canada (the "U.S. Offering") by the U.S. Underwriters and
shares (the "International Shares") are being offered outside the
United States and Canada (the "International Offering") by the Managers. The
initial public offering price and the underwriting discount per share are
identical for both the U.S. Offering and the International Offering
(collectively, the "Offering").

Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
of the Common Stock will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company has applied for inclusion of the
Common Stock in the Nasdaq National Market under the symbol "HCRI."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=======================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING SELLING PROCEEDS TO
PUBLIC DISCOUNT(1) STOCKHOLDER(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $ $
=======================================================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the U.S.
Underwriters and the Managers (collectively the "Underwriters").
(2) Before deducting expenses payable by the Selling Stockholder, estimated at
$ . If the over-allotment option described below is exercised, the
Company will pay a pro-rata portion of such expenses.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
shares of Common Stock solely to cover over-allotments, if any. If
the option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------------

The U.S. Shares are offered by the several U.S. Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by counsel.
The U.S. Underwriters reserve the right to withdraw, cancel or modify the U.S.
Offering and to reject orders in whole or in part. It is expected that delivery
of the U.S. Shares will be made against payment therefor on or about
, 1997, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York,
New York 10167.

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

BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 5

SUBJECT TO COMPLETION, DATED MARCH 14, 1997

PROSPECTUS

[LOGO]

HEALTHCARE RECOVERIES, INC.
COMMON STOCK
------------------------------

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

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------------

The International Shares are offered by the several Managers, subject to
prior sale, when, as and if delivered to and accepted by them and subject to
certain conditions, including the approval of certain legal matters by counsel.
The Managers reserve the right to withdraw, cancel or modify the International
Offering and to reject orders in whole or in part. It is expected that delivery
of the International Shares will be made against payment therefor on or about
, 1997, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167.

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

BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE ROBINSON-HUMPHREY COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 6

[FLOW CHART OF THE SUBROGATION PROCESS]

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 7

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including risk factors and
financial statements and notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus (i) assumes that
the Underwriters' overallotment option will not be exercised, (ii) has been
adjusted to give effect to a -for-1 split to occur immediately prior to
the consummation of the Offering (the "Stock Split") and (iii) assumes the
operation of the Company independently of the Selling Stockholder pursuant to
the Separation Agreement. References in this Prospectus to the "Company" and
"HRI" refer to Healthcare Recoveries, Inc., except where the context otherwise
requires.
THE COMPANY

The Company is the leading provider of health insurance subrogation and
related recovery services for private healthcare payors. HRI recovers the value
of accident-related healthcare benefits provided by its clients to insureds when
a third-party is responsible for such healthcare benefits. The Company offers
its services on a nationwide basis to health maintenance organizations,
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 United HealthCare, Blue
Shield of California, Healthsource, Humana, Kaiser Permanente, Oxford Health
Plans, Sears and The Prudential. The Company had 31.1 million lives under
contract from its clientele at January 31, 1997, more than double the 14.5
million lives under contract at December 31, 1994.

The rising costs of healthcare and price competition have contributed to
industry consolidation and an increasing trend towards outsourcing for non-core
functions, including subrogation. Based on the 1997 Health Network and Alliance
Sourcebook, the Company calculates that in 1995 there were approximately 150
million persons covered by private health insurance in states that allow
healthcare payors to exercise subrogation and related recovery rights. The
Company estimates that these 150 million insured persons (or "lives") in 1995
incurred $1.0 to $1.4 billion of medical benefits that were potentially
recoverable through subrogation. HRI believes that an increasing number of
subrogation claims are being outsourced, since companies are often able to
provide specialized services at lower costs, and at similar or higher quality,
than could be achieved by the healthcare payor.

HRI's services are provided by its highly trained employees in conjunction
with a proprietary automated recovery process. The Company's system has greatly
automated the complex recovery process from the electronic sourcing and
processing of claims data, through process guidance and assistance in
correspondence to follow-up and settlement of claims. The use of this system
enables HRI's personnel to focus on those matters requiring their expertise,
which increases their productivity and allows the Company to pursue claims which
would otherwise not be economical to recover.

Over the past three fiscal years, the Company's revenues have grown from
$16.9 million to $31.4 million, at a compound annual growth rate of 36%, and its
net income has grown from $1.9 million to $5.1 million, at a compound annual
growth rate of 65%. Lives installed and gross recoveries in process, two key
operating statistics, have also grown significantly with compound annual growth
rates of 43% and 37%, over this period. The Company believes these results are
driven by its (i) process automation, (ii) highly specialized and incented labor
and (iii) high levels of customer service. HRI plans to continue to grow its
business by capitalizing on its operational strengths and increasing its
revenues through (i) the addition of lives for existing customers, (ii)
broadening its customer base, including private and public sector health plans,
(iii) seeking opportunities through the identification of other businesses with
similar claim recovery opportunities and (iv) the possible acquisitions of
companies that provide claim recovery services.

HRI is a wholly-owned subsidiary of Medaphis, which is divesting its entire
interest in the Company in the Offering. Medaphis is selling HRI as part of its
restructuring plan to divest non-core businesses and is required to use the net
proceeds from the Offering to retire bank debt. In August 1995, Medaphis
acquired HRI for approximately $79.1 million in a stock-for-stock exchange.

The Company is incorporated in Delaware. The address of the Company's
principal business is 1400 Watterson Tower, Louisville, Kentucky 40218, and its
telephone number is (502) 454-1340.
3
<PAGE> 8

THE OFFERING

Common Stock offered by the Selling Stockholder (1):

U.S. Offering...................... shares
International Offering............. __________ shares

Total......................... shares

Common Stock to be outstanding after
the Offering............................ shares(2)

Use of Proceeds......................... The Company will not receive any of
the proceeds from the sale of
Common Stock by the Selling
Stockholder. The Company will use
the net proceeds from the exercise
of the Underwriters' over-allotment
option, if any, for general
corporate purposes, including
capital expenditures, working
capital or possible future
acquisitions. See "Use of
Proceeds."

Proposed Nasdaq National Market
Symbol.................................. HCRI
- ---------------

(1) The only shares of Common Stock offered by the Company are shares issuable
upon the exercise of the Underwriters' over-allotment option.
(2) Includes shares of Common Stock (2% of shares to be outstanding
after the Offering) to be granted by the Company to certain members of the
Company's management as a Divestiture Bonus upon consummation of the
Offering, and excludes shares of Common Stock reserved for issuance
upon exercise of outstanding stock options that the Company plans to issue
to members of its management and to non-employee directors exercisable at
the initial offering price. See "Management -- Divestiture Bonus."
4
<PAGE> 9

SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth summary historical financial and other 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 and other records. See "Selected Financial Data."

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------
1992 1993 1994 1994(1) 1995 1996
------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Subrogation........................ $ 5,853 $10,960 $14,993 $16,941 $22,496 $30,248
Other Revenues..................... 0 0 0 0 0 1,171
------- ------- ------- ------- ------- -------
Total Revenues............. 5,853 10,960 14,993 16,941 22,496 31,419
Cost of Services..................... 4,754 6,223 7,251 7,947 10,265 15,026
------- ------- ------- ------- ------- -------
Gross Profit......................... 1,099 4,737 7,742 8,994 12,231 16,393
Support Expenses..................... 3,807 4,527 5,269 6,066 6,899 8,093(2)
------- ------- ------- ------- ------- -------
Operating Income (Loss).............. (2,708) 210 2,473 2,928 5,332 8,300
Interest Income...................... 169 80 182 320 580 486
------- ------- ------- ------- ------- -------
Income (Loss) Before Taxes........... (2,539) 290 2,655 3,248 5,912 8,786
Income Tax Expense (Benefit)......... 0 (3,008) 1,113 1,363 2,486 3,685
------- ------- ------- ------- ------- -------
Net Income (Loss).................... $(2,539) $ 3,298 $ 1,542 $ 1,885 $ 3,426 $ 5,101
======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>

OTHER DATA:
Lives Installed (in millions)............................... 14.5 18.0 29.8
Gross Recoveries in Process (in millions)(3)................ $ 284.3 $ 364.9 $ 535.0
Effective Fee Rate.......................................... 29.0% 29.1% 27.4%
Total Employees............................................. 248 300 387
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996(4)
--------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................................... $ 53
Working Capital............................................. 1,730
Total Assets................................................ 23,969
Total Indebtedness.......................................... 0
Stockholders' Equity........................................ $ 4,110
</TABLE>

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

(1) Includes total revenues, operating income and net income of $8.1 million,
$1.7 million and $700,000, respectively, for the period January 1, 1994
through June 30, 1994 also included in the Statement of Income Data for the
year ended June 30, 1994.
(2) The Company's financial statements for the quarter ending June 30, 1997,
will reflect a $ million non-cash charge (assuming an initial public
offering price of $ per share) (not deductible for income tax purposes)
in connection with the Divestiture Bonus (2% of shares to be outstanding
after the Offering) to be granted by the Company to certain members of the
Company's management upon consummation of the Offering. See
"Management -- Divestiture Bonus."
(3) Gross recoveries in process represents the total dollar amount of
potentially recoverable claims that the Company is pursuing on behalf of
clients at a certain point in time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
(4) Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the balance sheet data
will be unaffected by the Offering. The Company will continue to make
distributions out of net income to Medaphis for the period from January 1,
1997 through the end of the month prior to the consummation of the Offering.
As a result, the Company will have a nominal amount of unrestricted cash
upon consummation of the Offering and stockholders' equity of $4.1 million
as of the end of that month. See "Dividend Policy."
5
<PAGE> 10

RISK FACTORS

Prospective investors should carefully consider the following risk factors,
in addition to the other information contained in this Prospectus, before
purchasing the shares of Common Stock. This Prospectus contains "forward-looking
statements" regarding the intent, belief or current expectations of the Company
and members of its management team. 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 under Risk
Factors and in other sections of this Prospectus including Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
Company undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.

REGULATORY AND POLITICAL RISKS

General. From time to time, legislation is introduced in Congress and in
various state legislatures that would materially affect the Company's business.
The most significant legislation, law and regulation, for clarity, may be
grouped in three categories: (1) 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"),
(2) legislation that would substantially limit the Company's ability to receive
and utilize individual claim information from healthcare insurers
("Confidentiality Laws") and (3) other federal and state laws. The following
identify specific risks in those three categories:

Health Insurance Primacy Laws:

Auto Choice Reform Act of 1996. In June 1996, Senators McConnell, Dole,
Moynihan and Lieberman introduced the Auto Choice Reform Act of 1996. Under this
Act, in those states not opting out of its provisions, healthcare insurers would
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 would have no rights
of recovery against the negligent party or that party's liability insurer.
Revenue generated from recoveries against automobile liability insurers
represented approximately 60% of the Company's 1996 revenues. This legislation
was not enacted in the previous session of Congress but is expected to be
reintroduced in the current session of Congress. Should this or similar
legislation be enacted, it would have a material adverse effect on the Company's
business, results of operations and financial condition.

The proposed legislation asserts 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 Auto
Choice Reform 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
adversely affect the Company's business.

Clinton Administration Healthcare Proposals. In 1993, as part of its
healthcare reform proposals, the Clinton Administration proposed to require in
effect that an injured insured's healthcare insurance provider be primarily
liable for the insured's healthcare costs, for both injuries caused by a
third-party and work related injuries. Although these proposals were never
enacted into law, had they or similar rules been enacted into law, the Company's
services would be rendered largely unnecessary and the Company's business,
results of operations and financial condition would be materially adversely
affected. Although the Clinton Administration has abandoned its healthcare
reform proposal, there can be no guaranty that a future administration or
Congress will not propose or enact such a provision or other regulatory scheme
that would diminish or eliminate the value of the Company's services.

6
<PAGE> 11

Certain No Fault Insurance Systems. Michigan, Pennsylvania and New Jersey
have adopted 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 1994,
proponents of the California "pay-at-the-pump" bill attempted to enact, by
referendum, legislation that would have made the injured insured's healthcare
payors primarily liable for healthcare expenses for automobile accidents in
California. Although this referendum was withdrawn, there can be no assurance
that it will not be presented in a ballot initiative or as legislation 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. See "Business -- Legal and
Regulatory Environment -- Health Insurance Primacy Laws: Certain No Fault
Insurance Systems."

Confidentiality Laws:

Confidentiality Provisions of the Health Insurance Portability and
Accountability Act of 1996. Section 262 of the Health Insurance Portability and
Accountability Act of 1996 (42 U.S.C. sec. 1177) prohibits any person from
knowingly obtaining or disclosing individually identifiable health information
relating to an individual in violation of the standards relating to the
electronic transmission of healthcare information established by the Secretary
of the Department of Health and Human Services. The Secretary has not proposed
or adopted implementing regulations, but is not obligated to do so until January
1998. Depending on the provisions of the regulations when adopted, the
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 to federal law, state laws and regulations governing
privacy of insurance records and related matters may significantly affect the
Company's business. State efforts to restrict the use of such records, which
clients currently provide to the Company, could impair the Company's business,
results of operations and financial condition. See "Business -- Legal and
Regulatory Environment -- Confidentiality Laws: Confidentiality Provisions of
the Health Insurance Portability and Accountability Act of 1996."

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. See "Business -- Legal and Regulatory Environment -- Other
Federal and State Laws."

CLIENT CONCENTRATION

The loss of one or more of the Company's three largest clients, which
represented 25%, 12% and 9% of the Company's 1996 revenues, respectively, or
other significant clients, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business -- Client
Base." Of the revenues generated by these three clients, contracts covering
approximately 23% of revenues may be terminated by the client on 120 days notice
to the Company. The remainder of the Company's contracts generally are
terminable on 60 to 180 days notice. The Company does, however, generally retain
the right to continue recovery activities on the gross recoveries in process of
any client that terminates its relationship with the Company.

LENGTH OF REVENUE CYCLE AND FLUCTUATION IN OPERATING RESULTS

The Company's operating results may fluctuate from time to time as a result
of a number of factors, including additions of new clients, cancellation of
client contracts, postponement of client decisions to enter

7
<PAGE> 12

into contracts, delays in transmission of clients' claims data, changes in
prices offered to new clients, timing of acquisitions, introduction of new
services or introduction of new technologies to the Company's business
processes. HRI expends substantial time, effort and funds to install lives and
generate active files. As a result, HRI incurs expenses related to its revenue
in advance of the time such revenue is received which can result in fluctuations
in operating results.

In particular, the volume and timing of receipt of clients' claims data
received during a fiscal quarter are difficult to forecast. The Company's
clients continuously update and modify their claims and medical encounter
processing systems, and such changes often create delays in or errors to the
transmission of claims data. Furthermore, the Company's expense levels are based
in part on expectations of future receipt of claims data and the Company has
been significantly increasing and intends to continue to increase operating
expenditures and working capital balances as it expands its operations.
Specifically, material increases in new clients and lives installed, and
consequently client claims data received, will cause the Company to increase its
operating capacity well in advance of its expectation to earn revenues from such
new clients. Operating results in any particular quarter which do not meet the
expectations of securities analysts could cause volatility in the price of the
Company's Common Stock.

COMPETITION

HRI competes primarily with the internal recovery operations of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are three smaller, but significant, independent providers of
subrogation recovery services in addition to HRI. All three independent
competitors preceded HRI's entry into the recovery industry, and no major
competitors have entered the market since that time. HRI believes that there are
significant barriers to entry to 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
and transaction processing industries that possess sufficient capital, and
managerial and technical expertise to develop competitive services.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant degree upon the continued
contributions of members of the Company's senior management and other key sales,
marketing, computer systems and operations personnel, and the loss of any such
persons could have a materially adverse effect on the business of the Company.
The Company's success also depends upon its ability to attract and retain highly
qualified and skilled managerial, sales, marketing and computer software
development and operations personnel, the competition for whom is intense. There
can be no assurance that the Company will be successful in hiring or retaining
the requisite personnel, which could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
does not maintain key man insurance. The Company has employment agreements with
Patrick B. McGinnis, Chairman and Chief Executive Officer, Dennis K. Burge,
Executive Vice President -- Operations, Douglas R. Sharps, Executive Vice
President -- Finance and Administration, Chief Financial Officer and Secretary,
Bobby T. Tokuuke, Senior Vice President -- Systems, and Debra M. Murphy, Senior
Vice President -- Sales & Marketing. See "Management -- Directors and Executive
Officers" and "Management -- Employment Agreements."

INFORMATION MANAGEMENT SYSTEM

The SubroSystem and Its Prospective Upgrade. Although the Company's
existing information management system (the "SubroSystem"), a key feature of the
Company's recovery process, adequately serves the Company's information
gathering and management needs, the Company plans, in three consecutive steps
over 24 to 36 months, (i) to migrate the SubroSystem from a MS-DOS based
environment to a Windows NT operating environment, (ii) to adopt a new data base
system and (iii) to adopt an object oriented programming language, such as C++.
The Company anticipates spending approximately $3.2 million on these activities,
of which $2.6 million spent on hardware and third-party software will be
capitalized. There can be

8
<PAGE> 13

no assurances that the implementation of any of the foregoing will be entirely
successful, within budget or that such implementation will not have an adverse
effect on the Company's business, results of operations or financial condition.
Furthermore, because the SubroSystem is proprietary, industry-specific software,
the absence of detailed written documentation with respect to the SubroSystem's
functioning and code structure makes the Company dependent on existing staff,
who are skilled in its operations and some of whom participated in its design.
See "Business -- The SubroSystem and Platform."

Dependence on Proprietary Software Applications. The Company's success
depends, in part, upon its proprietary technology, specifically the integrated
software programs comprising the SubroSystem. Although certain elements of the
SubroSystem are protected by federal copyright law, such protection neither
confers a monopoly on the use of subrogation recovery software systems nor
prevents competitors from developing similar systems. The SubroSystem, like all
other software programs, may be subject to a variety of replication techniques
(for example, reverse engineering, logic tracing, disassembly and decompilation)
that would produce a functionally similar software system not covered by the
Company's registered copyright. Therefore, there can be no assurance that the
Company's registered copyright on the SubroSystem will preclude or deter
circumvention by current or future competitors, with the effect that the Company
might lose any advantage conferred by the SubroSystem.

CONSOLIDATION AMONG HEALTHCARE PAYORS; PRESSURE ON MARGINS

Consolidation among healthcare payors could increase their bargaining
strength as the number of lives insured or otherwise covered by such healthcare
payors grows, which may place downward pressure on the Company's historic
margins and may create additional competition from such healthcare payors in the
form of better equipped, in-house recovery departments. Additionally, existing
clients may be lost through acquisition by non-client healthcare payors.

LITIGATION

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. See "Business -- Legal Proceedings."

LIMITATION ON DIVIDENDS

From August 28, 1995, the date Medaphis acquired HRI, through
1997, the Company has paid dividends to Medaphis totaling
, including the distributions to Medaphis for the period from January 1,
1997 through the end of the month prior to the consummation of the Offering.
After the Offering, however, the Company currently intends to retain earnings to
finance the growth and development of its business and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. See
"Dividend Policy." The Company's Line of Credit limits its ability to pay
dividends on its Common Stock. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources."

MANAGEMENT OF GROWTH

The Company recently has experienced significant growth in both its
revenues and the number of its employees. This growth has resulted in an
increase in responsibilities placed upon the Company's management and has placed
added pressures on the Company's operating systems. The Company expects to
expand its management, systems development and support, marketing, sales and
customer service and to upgrade the SubroSystem, which could place a strain on
the Company's operations. Furthermore, the initial expenses associated with the
addition of new clients may be incurred prior to the recognition of any revenues
from such new clients. There can be no assurance that the Company will
successfully manage its expanding operations or

9
<PAGE> 14

implement its growth strategy; and if the Company's management is unable to
manage growth effectively, the Company's business, operating results and
financial condition could be adversely affected.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Amended and Restated Certificate of Incorporation
and Bylaws of the Company may be deemed to have the effect of making difficult
an acquisition of control of the Company in a transaction not approved by the
Company's Board of Directors. These provisions include the ability of the
Company's board of directors to issue shares of preferred stock in one or more
series without further authorization of the Company's stockholders. Accordingly,
the Company's Board of Directors is empowered, without stockholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of Common Stock. In the event of such issuance, the preferred stock
could also be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no current intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. These provisions may also have the effect of discouraging a
third-party from making a tender offer or otherwise attempting to obtain control
of the Company even though such a transaction might be economically beneficial
to the Company and its stockholders. See "Description of Capital Stock."
Furthermore, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time of the transaction in which the person
first becomes an "interested stockholder", unless the business combination is
approved in a prescribed manner. The application of Section 203 could have the
effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws may have the effect of delaying or preventing changes
of control or management of the Company, which could adversely affect the market
price of the Common Stock. Among these are provisions (i) requiring a classified
board of directors, (ii) prohibiting action by written consent of the
stockholders, (iii) limiting the persons able to, and the procedures for,
calling a special meeting of the stockholders and (iv) requiring certain
supermajority stockholder votes to amend certain of the foregoing provisions.
See "Description of Capital Stock."

PROFESSIONAL LIABILITY AND INDEMNITY OBLIGATIONS TO CLIENTS

From time to time, the Company may be subject to claims from its clients
that it failed to provide services in accordance with its contract or that its
recovery activities have harmed the client. To date, no client has terminated
its contract with the Company based upon the failure to provide services, nor
has any client asserted that the Company has in any way damaged its business.
The Company has agreed to indemnify and hold certain of its clients harmless
from negligent acts or omissions of the Company in the performance of recovery
services. Although the Company maintains, and intends to continue maintaining
insurance covering these types of risks, there can be no assurance that such
insurance will be available at reasonable costs in the future.

DILUTION

Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $ per share (assuming an initial public offering
price of $ per share) based on the difference between the public offering
price and the net tangible book value of the Company at December 31, 1996. See
"Dilution."

ABSENCE OF PRIOR TRADING MARKET; STOCK PRICE VOLATILITY

Prior to the Offering, there has been no prior market for the Common Stock,
and there can be no assurance that a viable public market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price is being determined through negotiations among the Company, the Selling
Stockholder, the representatives of the U.S. Underwriters and the Managers based
upon several factors and may not be an indication of the market price of the
Common Stock after the Offering. The Company believes that a variety of factors
could cause the price of the Common Stock to fluctuate, perhaps substantially,

10
<PAGE> 15

including: announcements of developments related to the Company's business;
changes in financial estimates by securities analysts; and developments in the
Company's relationships with its customers, distributors and suppliers. In
addition, in recent years the stock price of companies has experienced extreme
price fluctuations which have often been unrelated to the operating performance
of such companies. Such fluctuations may adversely affect the market price of
the Common Stock. See "Underwriting."

USE OF PROCEEDS

All of the shares of Common Stock offered hereby are being sold by the
Selling Stockholder. The Company will not receive any of the proceeds from the
sale by the Selling Stockholder of the Common Stock offered under this
Prospectus. The Company has granted the Underwriters an option to purchase
shares of Common Stock solely to cover over-allotments. If the
Underwriters exercise their over-allotment option in full, the net proceeds to
the Company from the sale of the shares of Common Stock offered by the
Company under this Prospectus, based on an assumed initial public offering price
of $ per share and after deducting the underwriting discount and estimated
offering expenses payable by the Company, are estimated to be approximately
$ million. To the extent the Company receives net proceeds from the
Offering, it expects to use such net proceeds for general corporate purposes,
including capital expenditures, working capital or possible acquisitions. From
time to time, the Company evaluates potential acquisitions of businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade securities.

DIVIDEND POLICY

The Company intends to retain earnings to fund its growth and development
of its business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company has paid cash dividends to the
Selling Stockholder since the Selling Stockholder acquired the Company in August
1995 through , 1997 in the aggregate amount of $ ,
including the distributions to Medaphis for the period from January 1, 1997
through the end of the month prior to the consummation of the Offering. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other factors as the Board
of Directors deems relevant.

DILUTION

The net tangible book value of the Company as of December 31, 1996 was $4.1
million, or $ per share of Common Stock. The net tangible book value per
share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding.
Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the net tangible book value
of the Company will be unaffected by the Offering. Based on the difference
between the public offering price and the net tangible book value of the Company
as of December 31, 1996, purchasers of the Common Stock offered hereby will
experience an immediate dilution of $ per share (assuming an initial public
offering price of $ per share).

If the Underwriters' over-allotment option is exercised in full, net
tangible book value upon completion of the Offering would be $ per share
(assuming an initial public offering price of $ per share and after
deducting underwriting discount and estimated offering expenses payable by the
Company) and, as a result, purchasers of the Common Stock offered hereby will
experience an immediate dilution of $ per share.

All of the options to be granted on the date of this Prospectus will be
granted at the initial public offering price. Accordingly, to the extent such
options are exercised the dilution to new investors will be decreased.

The Selling Stockholder acquired the Common Stock offered hereby for
approximately $79.1 million, or $ per share. Management of the Company
receiving the Divestiture Bonus are not paying any consideration for the Common
Stock they will receive.

11
<PAGE> 16

CAPITALIZATION

The following table sets forth the cash and cash equivalents, total
liabilities and capitalization of the Company as of December 31, 1996. This
table should be read in conjunction with the other financial information
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31,
1996(1)
----------------------
(IN THOUSANDS)
<S> <C>
Cash and Cash Equivalents................................... $ 53
=======
Current Liabilities:
Trade Accounts Payable.................................... $ 586
Accrued Expenses.......................................... 3,740
Funds Due Clients......................................... 14,953
-------
Total Current Liabilities......................... 19,279
Other Liabilities........................................... 580
-------
TOTAL LIABILITIES................................. $19,859
-------
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares
authorized; none issued................................ 0
Common Stock, $.001 par value; 20,000,000 shares
authorized; shares issued and
outstanding(2).........................................
Equity Funding from Medaphis..............................
Retained earnings.........................................
-------
TOTAL STOCKHOLDERS' EQUITY........................ 4,110
-------
TOTAL CAPITALIZATION.............................. $ 4,110
=======
</TABLE>

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

(1) Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the total
capitalization will be unaffected by the Offering. The Company will
continue to make distributions out of net income to Medaphis for the period
from January 1, 1997 through the end of the month prior to the consummation
of the Offering. As a result, the Company will have a nominal amount of
unrestricted cash upon consummation of the Offering and stockholders'
equity of $4.1 million as of the end of that month. See "Dividend Policy."

(2) Includes shares of Common Stock (2% of shares to be outstanding
after the Offering) granted by the Company to certain members of the
Company's management as a Divestiture Bonus upon consummation of the
Offering, and excludes shares of Common Stock reserved for
issuance upon exercise of outstanding stock options that the Company plans
to issue to members of its management and to non-employee directors
exercisable at the initial offering price. See "Management -- Divestiture
Bonus."

12
<PAGE> 17

SELECTED FINANCIAL DATA

The following table sets forth historical selected financial and other 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 and certain other records. The information set forth below should be
read in conjunction with the Company's Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.

The selected historical financial data as of December 31, 1995 and 1996 and
for the years ended December 31, 1994, 1995 and 1996, have been derived from,
and are qualified by reference to, the Company's financial statements appearing
elsewhere herein, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected historical financial data as of June 30,
1992, 1993 and 1994 and December 31, 1994 and for the years ended June 30, 1992,
1993 and 1994, have been derived from the Company's financial statements.

Certain revisions to allocations and estimates in the historical financial
data have been made by management for the periods during which the Company was a
subsidiary of Medaphis to present the financial position and results of
operations of the Company as an independent entity.

Although adjustments have been made to the historical financial data to
reflect an allocation of costs incurred by Medaphis on behalf of the Company,
the historical financial data does not necessarily reflect the financial
position or results of operations that would have been obtained had the Company
been operated as a separate stand-alone entity during the periods presented.

13
<PAGE> 18

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------
1992 1993 1994 1994(1) 1995 1996
------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Subrogation............................ $ 5,853 $10,960 $14,993 $16,941 $22,496 $30,248
Other Revenues......................... 0 0 0 0 0 1,171
------- ------- ------- ------- ------- -------
Total Revenues................. 5,853 10,960 14,993 16,941 22,496 31,419
Cost of Services......................... 4,754 6,223 7,251 7,947 10,265 15,026
------- ------- ------- ------- ------- -------
Gross Profit............................. 1,099 4,737 7,742 8,994 12,231 16,393
Support Expenses......................... 3,807 4,527 5,269 6,066 6,899 8,093(2)
------- ------- ------- ------- ------- -------
Operating Income (Loss).................. (2,708) 210 2,473 2,928 5,332 8,300
Interest Income.......................... 169 80 182 320 580 486
------- ------- ------- ------- ------- -------
Income (Loss) Before Taxes............... (2,539) 290 2,655 3,248 5,912 8,786
Income Tax Expense (Benefit)............. 0 (3,008) 1,113 1,363 2,486 3,685
------- ------- ------- ------- ------- -------
Net Income (Loss)........................ $(2,539) $ 3,298 $ 1,542 $ 1,885 $ 3,426 $ 5,101
======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
OTHER DATA:
Lives Installed (in millions)............................... 14.5 18.0 29.8
Gross Recoveries in Process (in millions)(3)................ $284.3 $364.9 $535.0
Effective Fee Rate.......................................... 29.0% 29.1% 27.4%
Total Employees............................................. 248 300 387
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------- ---------------------------
1992 1993 1994 1994 1995 1996(4)
------ ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................. $1,998 $ 2,077 $ 5,023 $ 5,950 $ 0 $ 53
Working Capital........................... 278 285 532 709 1,675 1,730
Total Assets.............................. 6,055 10,363 13,324 15,872 13,390 23,969
Total Indebtedness........................ 2 2 2 2 0 0
Stockholders' Equity...................... $2,884 $ 6,182 $ 7,724 $ 9,188 $ 3,274 $ 4,110
</TABLE>

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

(1) Includes total revenues, operating income and net income of $8.1 million,
$1.7 million and $700,000, respectively, for the period January 1, 1994
through June 30, 1994 also included in the Statement of Income Data for the
year ended June 30, 1994.
(2) The Company's financial statements for the quarter ending June 30, 1997,
will reflect a $ million non-cash charge (assuming an initial public
offering price of $ per share) (not deductible for income tax purposes)
in connection with the Divestiture Bonus (2% of shares to be outstanding
after the Offering) to be granted by the Company to certain members of the
Company's management upon consummation of the Offering. See
"Management -- Divestiture Bonus."
(3) Gross recoveries in process represents the total dollar amount of
potentially recoverable claims that the Company is pursuing on behalf of
clients at a certain point in time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
(4) Because no shares will be sold by the Company in the Offering (unless the
Underwriters exercise their over-allotment option), the balance sheet data
will be unaffected by the Offering. The Company will continue to make
distributions out of net income to Medaphis for the period from January 1,
1997 through the end of the month prior to the consummation of the
Offering. As a result, the Company will have a nominal amount of
unrestricted cash upon consummation of the Offering and stockholders'
equity of $4.1 million as of the end of that month. See "Dividend Policy."

14
<PAGE> 19

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

OVERVIEW

HRI provides insurance subrogation and related recovery services to the
private healthcare payor industry. HRI services comprise the complete
outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by their clients for which other
persons or entities have primary responsibility. The rights of HRI's clients to
recover the value of these medical benefits arise 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.

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

"Gross recoveries in process" is the total dollar amount of potentially
recoverable claims that the Company is pursuing on behalf of its clients at a
certain point in time. These claims are gross figures, prior to estimates of
claim settlement and rejection. Gross recoveries in process increases when the
Company opens new files of potentially recoverable claims and decreases when
files of claims are recovered (or, after further investigation, determined to be
nonrecoverable). Historically, subrogation recoveries (the amount actually
recovered for its clients prior to the Company's fee) have been produced from
the gross recoveries in process in a generally predictable cycle, because any
group of potential recoveries that has been sufficiently large in number to
display statistically significant characteristics and that originates from a
defined time period, tended to produce recovery results that have been
comparable to other groups having similar characteristics. Although recoveries
will be made during the first year of service, the average time to make a
recovery is 18 to 24 months, with substantially all recoveries made by the sixth
year. Gross recoveries in process for a client will range in age from newly
identified potential recoveries (which will be identified each year) to
potential recoveries that are in the late stages of the recovery process. As a
result of this cycle, approximately six years from the date of installation, the
client's annual amounts of subrogation recoveries as a percent of the client's
gross recoveries in process will be generally constant, except for variations
due to the number of installed lives for the client.

Management of the Company calculates that gross recoveries in process was
$551 million as of January 31, 1997. This information is generated by the
Company for internal management and budgeting purposes. As of December 31, 1992,
the Company had gross recoveries in process of $158 million. Through December
31, 1996, the Company has realized recoveries of $64.8 million, and there is
remaining $14 million of gross recoveries in process from the December 31, 1992
balance. However, because gross recoveries in process is based on the judgment
of Company personnel, historical performance may not be indicative of future
results and the actual amount of future subrogation revenues to be derived from
gross recoveries in process could differ significantly from historical
experience. Further, the recovery characteristics of gross recoveries in process
in future years may be different than historical experience for a variety of
reasons. See "Risk Factors."

The Company is paid a fee from the amount of subrogation recoveries it
makes from gross recoveries in process on behalf of its clients. The Company's
revenues are a function of subrogation recoveries and effective fee rates.
Effective fee rates vary depending on the mix between recovery services provided
and client fee schedules. Since the Company records revenues only when a file is
settled and records expenses as costs are incurred, there is a lag between
expense and 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-related employees must be hired and trained in advance of the
realization of recoveries and revenues and, during times of rapid growth,
installed lives and cost of service will grow more

15
<PAGE> 20

rapidly than revenue. The number of employees accounted for in support expenses
generally grows less rapidly than revenue due to economies of scale.

HRI was incorporated on June 30, 1988 under the laws of Delaware and
operated as an independent entity until August 28, 1995, when the Company was
acquired by Medaphis in a transaction valued at approximately $79.1 million and
accounted for as a pooling of interests. Medaphis is selling HRI as part of its
restructuring plan to divest non-core businesses and is required to use the net
proceeds from the Offering to retire bank debt. In anticipation of the sale of
Common Stock, certain revisions have been made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. Medaphis has allocated to the
Company costs of $56,000 and $361,000 for the period August 28, 1995 to December
31, 1995 and the year ended December 31, 1996, respectively. These costs include
executive salaries, employee benefits, insurance, payroll processing and other
general and administrative expenses. Management believes that, in the aggregate,
these costs reflect the fair value of services rendered by Medaphis and that it
would have incurred similar costs as an independent company. Management does not
expect a significant change in the costs incurred by the Company as a result of
operating on a stand-alone basis, except for the nonrecurring, non-cash charge
to be incurred as a result of the Divestiture Bonus.

RESULTS OF OPERATIONS

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

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Lives Sold............................................ 15.4 24.2 30.4
Lives Installed....................................... 14.5 18.0 29.8
Gross Recoveries in Process(1)........................ $284.3 $364.9 $535.0
Subrogation Recoveries................................ $ 58.4 $ 77.2 $110.2
Effective Fee Rate.................................... 29.0% 29.1% 27.4%
Subrogation Revenues.................................. $ 16.9 $ 22.5 $ 30.2
Employees:
Direct Operations................................... 188 239 314
Support............................................. 60 61 73
------ ------ ------
Total Employees............................. 248 300 387
====== ====== ======
</TABLE>

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

(1) Gross recoveries in process represents the total dollar amount of
potentially recoverable claims that the Company is pursuing on behalf of
clients at a certain point in time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."

STATEMENTS OF INCOME AS A PERCENTAGE OF SUBROGATION REVENUE

<TABLE>
<CAPTION>
PERCENTAGE OF SUBROGATION REVENUES
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Subrogation Revenues................................. 100.0% 100.0% 100.0%
Cost of Services..................................... 46.9 45.6 49.7
Support Expenses..................................... 35.8 30.7 26.8
Operating Income..................................... 17.3 23.7 27.4
Income Before Income Taxes........................... 19.2 26.3 29.0
Net Income........................................... 11.1 15.2 16.9
</TABLE>

16
<PAGE> 21

1996 COMPARED TO 1995

Revenues. Total revenues for the year ended December 31, 1996 increased
39.7%, to $31.4 million. This increase is primarily attributable to a 34.5%
growth in subrogation revenues, from $22.5 million to $30.2 million, and, to a
lesser extent, $1.2 million generated from the breast implant litigation
settlement services provided on an ad hoc basis by the Company. Growth in
subrogation revenues occurred primarily because of increased subrogation
recoveries, from $77.2 million in 1995 to $110.2 million in 1996. This increase
in subrogation revenues was partially offset by a decline in the effective fee
rate from 29.1% to 27.4%. This decline was directly attributable to the
installation of a large new client which, as a result of both the volume and
nature of services provided by the Company, carries a lower than standard fee
rate. The increase in total subrogation recoveries was due primarily to growth
in gross recoveries in process, which in turn grew primarily because of an
increase in the number of lives installed. Gross recoveries in process increased
46.6% to $535.0 million at December 31, 1996 from $364.9 million at December 31,
1995. The Company was also able to obtain subrogation recoveries at a rate of
approximately 6% of average gross recoveries in process per quarter during 1995
and 1996. Lives installed grew 65.3% in 1996 to 29.8 million. The installation
of a large new client during 1996 accounted for 36.0% of the growth in lives
installed, representing 6.5 million lives installed.

Cost of Services. Cost of services increased to $15.0 million in 1996 from
$10.3 million in 1995, an increase of 46.4%. As a percentage of subrogation
revenues, cost of services were 49.7% in 1996 and 45.6% for 1995. This was a
result of substantial growth of lives installed, resulting in increased
processing activities, which correspondingly led to increased staffing and
investigation costs in advance of recoveries associated with such lives in
future years. The lower effective fee rate has also contributed to the increase
in cost of services as a percentage of subrogation revenues.

As a result of the nature of the Company's contingent fee arrangements with
its clients, the Company incurs significant current expenses 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, the growth rate for lives installed
exceeds the revenue growth rate.

Support Expenses. Support expenses increased to $8.1 million in 1996 from
$6.9 million in 1995, an increase of $1.2 million, primarily as a result of
additional staffing necessitated by the growth in lives installed. As a
percentage of subrogation revenue, support expenses decreased to 26.8% for 1996
from 30.7% for 1995. This decline resulted from improved economies of scale in
the support functions.

Interest Income. Interest income totaled $486,000 in 1996, compared to
$580,000 in 1995, a decrease of $94,000, as a result of reduced short-term
investment balances due to the payment of dividends to Medaphis. No interest
expense was incurred during 1996 or 1995.

Tax. Income taxes were 41.9% of pre-tax income in 1996 and 42.1% in 1995.
The effective tax rates exceeded the U.S. statutory tax rate due to the impact
of state and local taxes, nondeductible expenses and other provisions.

1995 COMPARED TO 1994

Revenues. Subrogation revenues for the year ended December 31, 1995
increased 32.8% to $22.5 million from $16.9 million for 1994. Growth in
subrogation revenues occurred primarily as a function of increased subrogation
recoveries, from $58.4 million in 1994 to $77.2 million in 1995. The effective
fee rate increased slightly to 29.1% from 29.0%. The increase in 1995
subrogation recoveries was due primarily to growth in gross recoveries in
process, which increased 28.4% to $364.9 million at December 31, 1995 from
$284.3 million at December 31, 1994, and obtaining subrogation recoveries at a
rate of approximately 6% of average gross recoveries in process per quarter
during 1994 and 1995. Lives installed grew 24% in 1995 to 18.0 million.
Subrogation revenues grew faster than lives installed during 1995 due to the
increase in lives installed in 1994, which grew 44.4%.

Cost of Services. Cost of services increased to $10.3 million in 1995 from
$7.9 million in 1994, an increase of $2.4 million or 29.2%. The increase in cost
of services is primarily related to increased processing activities, which
resulted in additional staffing and investigation costs. As a percentage of
subrogation

17
<PAGE> 22

revenues, cost of services decreased to 45.6% in 1995 from 46.9% in 1994. The
decrease is a result of lower growth in the lives installed and their associated
costs in 1995 relative to the growth in revenue for the year and increased
efficiencies by the Company.

Support Expenses. Support expenses increased to $6.9 million in 1995 from
$6.1 million in 1994, an increase of $800,000. Support expenses increased
primarily as a result of additional hiring in the fourth quarter of 1994 to
support the continued growth of the Company. As a percentage of revenues,
support expenses were 30.7% for 1995 as compared to 35.8% for 1994. This
decrease in support expenses as a percentage of revenues was attributable
principally to economies of scale in the support functions.

Interest Income. Interest income totaled $580,000 in 1995 and $320,000 in
1994, an increase of $260,000. The increase is primarily attributable to higher
yields, and increased average levels of cash, cash equivalents and marketable
securities. No interest expense was incurred during 1995 or 1994.

Tax. Income taxes were 42.1% of pre-tax income in 1995 and 42.0% in 1994.
The effective tax rates exceeded the U.S. statutory tax rate due to the impact
of state and local taxes, nondeductible expenses and other provisions. All net
operating loss carryforwards of the Company had been utilized prior to the
Company's acquisition by Medaphis.

LIQUIDITY AND CAPITAL RESOURCES

The Company's statements of cash flows for the years ended December 31,
1994, 1995 and 1996 are summarized below:

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operations........................... $ 3,212 $ 4,681 $ 5,876
Net cash used in investing activities..................... (758) (1,280) (1,558)
Net cash provided by (used in) financing activities....... 176 (9,351) (4,265)
Net increase (decrease) in cash and cash equivalents...... $ 2,630 $(5,950) $ 53
</TABLE>

Net cash provided by operations increased $1.5 million and $1.2 million in
1995 and 1996, respectively, primarily as a result of increased net income and
the timing of recurring cash receipts and disbursements related to accrued
expenses and subrogation recoveries.

Net cash used in investing activities primarily reflects the Company's
annual capital expenditures for ongoing facility expansion and system
enhancements, including computer hardware, to meet the requirements of the
Company's growing revenue base.

The Company anticipates that capital expenditures for the year ending
December 31, 1997 will be approximately $2.9 million, for facility expansion,
computer hardware and the planned upgrade of the subrogation system. Over the
next 24 to 36 months, the Company anticipates total expenditures for the upgrade
of approximately $3.2 million, of which $2.6 million spent on hardware and
third-party software will be capitalized. See "Business -- The SubroSystem and
Platform."

The Company anticipates cash outlays of approximately $1.4 million related
to the payment of selling commissions to an unrelated party in connection with
the acquisition of contracts for recovery services.

Net cash used in financing activities reflects the Company's ongoing
distributions to Medaphis in 1995 and 1996, subsequent to its acquisition of the
Company. See "Dividend Policy." The Company will continue to make distributions
out of net income to Medaphis until the end of the month prior to the date of
consummation of the Offering. As a result, the Company will have a nominal
amount of unrestricted cash upon consummation of the Offering and will have
stockholders' equity of $4.1 million as of the end of that month.

On , 1997, the Company and National City Bank of Kentucky entered
into an agreement under which the bank will, upon the successful completion of
the Offering, extend to the Company an unsecured revolving line of credit (the
"Line of Credit") for maximum borrowings of up to $10 million. Interest on the
outstanding indebtedness will accrue at either: (1) the greater of the bank's
prime rate or the effective federal

18
<PAGE> 23

funds rate plus 0.5% (the "Base Rate") or (2) the LIBOR plus 2.25%, at the
Company's option and will be payable in arrears on a quarterly basis for draws
bearing interest at the Base Rate and on a monthly, bimonthly or quarterly
basis, at the Company's option, for draws bearing interest at the LIBOR-based
rate. The maturity date for all outstanding indebtedness under the Line of
Credit is , 1999. In consideration for the bank making available the
Line of Credit, the Company has agreed to pay a closing fee of $25,000 and an
annual commitment fee, payable in quarterly installments, equal to 0.25% of the
unused portion of the Line of Credit. The Line of Credit contains customary
covenants, including covenants to maintain certain minimum interest coverage and
leverage ratios and a minimum level of net worth, that may limit the Company's
ability to pay dividends.

By contract, with respect to its standard recovery services, the Company
disburses recoveries to its clients on or before the 15th day of the month
following the month in which recoveries are made. At December 31, 1995 and 1996,
HRI reported on its balance sheet, as a current asset, restricted cash of $9.5
million and $18.8 million, respectively, representing subrogation recoveries
effected by HRI for its clients during the month of December, except that
restricted cash at December 31, 1996 also includes $6.4 million in recoveries
from the breast implant settlement received in November and December 1996. At
December 31, 1995 and 1996, HRI reported on its balance sheet, as a current
liability, funds due clients of $6.9 million and $15.0 million, respectively,
representing recoveries to be disbursed to clients, net of the fee earned on
such recoveries.

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

EXTERNAL FACTORS

The business of recovering subrogation and related claims for healthcare
payors is subject to a wide variety of external factors. Prominent among these
are factors that would materially change the healthcare payment, fault-based
liability or workers' compensation systems. Because the Company's profitability
depends in large measure upon obtaining and using claims data, and the
availability of property and casualty and workers' compensation coverages as
sources of recovery, changes in laws that would limit or bar either the access
to or use of claims data or the ability of healthcare payors to recover
subrogation and related claims represent an ongoing risk to the Company.

Moreover, because the Company's revenues derive from the recovery of the
costs of medical treatment of accidents, material changes in such costs will
tend to affect the Company's 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. 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 subrogation recovery industry.

19
<PAGE> 24

BUSINESS

GENERAL

INDUSTRY

Outsourcing. The outsourcing of non-core specialized business functions
has been increasing in recent years. Outsourcing enables a client to concentrate
its resources on its core business. Because of expertise and economies of scale,
companies that provide specialized services are often able to deliver the
requisite service at lower cost and of 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 are driven primarily by the rapid growth of managed
care, improvements in medical technology, consumer-oriented political pressure
and an aging U.S. population. These factors drive healthcare payors to
concentrate their resources on their core business and thus provide on-going
opportunities for enterprises able to perform non-core business functions on
behalf of healthcare payors.

The recovery process is complex and, although many healthcare payors
operate recovery departments, HRI believes that these departments are not
generally as effective per insured life as the Company. HRI 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 resulting in continued growth for the Company. See
"-- Competition."

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 other insurance
carriers. For example, the hospitalization and related health expenses of a
person injured in an automobile accident may be paid by an HMO to which the
injured person belongs. However, the responsible party is generally liable to
the injured person for the damages arising from the injury, which damages
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 directly from the injured party any payment received from
the responsible party or the responsible party's insurance
carrier relating to this injury;

20
<PAGE> 25

(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 property and casualty insurance coverages.

Based on the 1997 Health Network Alliance Sourcebook, the Company
calculates that in 1995 there were approximately 150 million persons covered by
private health insurance under insurance policies or similar agreements in
states that allow healthcare payors to exercise subrogation and related recovery
rights. HRI estimates that these 150 million insured persons suffered between 20
to 24 million injuries in 1995 and that these injuries gave rise to
approximately $19 to $23 billion in medical benefits. HRI estimates that
approximately $1.0 to $1.4 billion of the total medical benefits resulting from
injuries and paid by healthcare payors in 1995 were potentially recoverable
through subrogation.

The industry conditions described above have contributed to the growing
need for a cost-effective provider for subrogation services. HRI believes it
became the leading independent provider of subrogation and related recovery
services for private healthcare payors in 1995. HRI believes that its success is
a result of the implementation of the following strategy.

STRATEGY

HRI's strategy is to focus on growing opportunities to provide
cost-effective and efficient outsourcing of subrogation and related recovery
services and solutions to its clients. HRI capitalizes on these opportunities
through a sophisticated operation which relies on:

- A high degree of process automation;

- Highly specialized labor;

- Comprehensive customer service that emphasizes courteous and
non-intrusive interaction with all parties; and

- Incentives to its employees at all levels of the organization.

HRI plans to continue to grow its business by servicing additional lives
for existing clients and targeting new clients. HRI plans to further grow its
business by:

- Expanding its client base to include public sector healthcare
payors;

- Applying its core abilities to other businesses with similar claims
recovery opportunities; and

- Acquiring companies which provide claims recovery services.

THE RECOVERY PROCESS

HRI uses proprietary software and various business processes to identify
those claims that exceed a client-specific threshold dollar amount and as to
which its clients may have a recovery right for the medical benefits provided to
an insured. Following the identification and investigation of those claims, HRI
proceeds to recover from the financially responsible party the value of those
covered medical benefits provided to the insured. HRI has automated this complex
processing of all raw electronic data and the electronic guidance, follow-up and
generation of correspondence. The use of an automated process enables its
specially trained personnel to focus more intently on matters requiring their
professional judgement and expertise and increases productivity. This also
allows the Company to pursue claims that would otherwise be deemed too small to
pursue economically. HRI believes that its ability to effectively recover a
broader range of claim sizes is an important competitive advantage. In addition
to automating the recovery process, the SubroSystem generates significant
operations and management information which enables the Company to employ
production and quality standards in the context of providing specialized
services.

In order to obtain recoveries, HRI has to establish whether or not the
healthcare payor has a right to recover from another person or entity, determine
which medical claims exceeding the predetermined dollar

21
<PAGE> 26

threshold resulted from accidents and take the actions needed to effect
recovery. These tasks require knowledge of the property and casualty insurance
process, knowledge of healthcare payment systems, knowledge of the law of torts,
subrogation and related legal doctrines, a skilled labor force, adequate
information data bases and information systems, investigative and negotiating
skills, and careful workflow engineering.

HRI has refined the recovery process to four major, interrelated steps: (a)
automated identification of accident related claims provided electronically by
its clients, (b) investigation of potentially recoverable claims, (c) assertion
and management of potentially recoverable claims and (d) negotiation and
settlement of claims.

Automated Identification of Accident Related Claims. The automated
selection, analysis and processing of raw claims data is handled primarily
through HRI's proprietary software, the "SubroSystem." Information regarding
diagnoses, the costs of treatment, insured demographics (names, addresses and
telephone numbers, etc.) and related claims matters are provided to HRI
electronically. The primary vehicle for the identification of injured insureds
is an automated analysis of the clients' claims data. The SubroSystem includes
several direct connections to HRI's clients' claims information systems, subject
to various security controls to limit access. HRI's trained staff, using the
SubroSystem's diagnostic tools, identifies, sorts, vets and organizes raw claims
data into usable form, essentially engaging in "data mining". This system
identifies those claims which are accident-related and opens an on-line,
electronic file for such claims. After files are opened, the SubroSystem
automatically tracks the medical expenses on files, so that files are updated as
insureds undergo additional treatments related to their injuries. Since its
inception, HRI has automatically opened over 10 million of such on-line files.

Investigation of Potentially Recoverable Claims. When a file of claims
reaches a value determined by HRI, the SubroSystem automatically generates a
series of inquiry letters, the forms of which have been approved in advance by
HRI's clients, that are sent to injured persons. HRI's well trained and
courteous customer service representatives receive in-coming phone calls from
injured insureds who typically call in response to HRI's system-generated
inquiry letters. HRI also initiates phone calls if the insured has not responded
to the inquiry letters in a reasonable period of time. Approximately 92% of the
injured insureds ultimately respond to HRI's inquiries. The customer service
representatives ask a series of questions that enable them to determine whether
a claim is recoverable, based on carefully selected investigation protocols and
training. Approximately 19% of the claims investigated by customer service
representatives are classified as recoverable. Once a claim or set of related
claims in a file is identified as recoverable, the system updates the gross
recoveries in process and assigns the file to the appropriate examiner who
begins the assertion and management of recoverable claims. Since its inception,
HRI has investigated over 2 million accidents.

Assertion and Management of Potentially Recoverable Claims. Once a file of
claims is classified as recoverable, HRI staff examiners, who are required to
undergo extensive training, proceed to assert the recovery rights of HRI's
clients. The Company requires that all of its examiners within one year of
employment either be licensed as insurance adjusters or meet comparable
accreditation standards in states where licensure is not available. Examiners
contact all necessary parties to inform them of the existence and value of the
recovery claim; these parties generally include the liability insurer for a
responsible party, the insured and, if any, the insured's attorney in
conjunction with the injury. Examiners maintain contact with the injured party
and responsible party (or insurance carrier) until the matter is settled, which
may not occur until several years after the date of the injury. During this
phase of the recovery process, approximately 20% of the amounts initially
entered into gross recoveries in process as recoverable is rejected, in which
case further activity is terminated and gross recoveries in process is reduced.

All of the work flow performed by examiners is directed and guided
step-by-step by the SubroSystem. The SubroSystem creates a paperless,
inter-connected record of correspondence and notes taken by the examiner with
respect to the on-line file. Examiners annotate the files on-line, as necessary,
to document progress, developments and status. The SubroSystem provides HRI's
examiners access to a library of more than 100 standardized correspondence
packets and generates them automatically at the request of the examiner.

22
<PAGE> 27

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 HRI's standard operating procedures, examiners
close recoverable files and remove them from gross recoveries in process by
making recoveries or by rejecting files and terminating recovery efforts. Once a
settlement is made and recorded on the SubroSystem, cash receipts are
anticipated and monitored by the responsible examiner. Cash receipts are checked
against settlement screens and posted to the credit of the appropriate client.

Claims remain the property of HRI'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. Few files require
extensive attorney involvement. HRI bears the cost of legal services as part of
the normal services to its clients. HRI has established what it believes are
cost-effective relationships with providers of legal services, including its
relationship with Sharps & Associates. See "Certain Transactions."

Approximately 60% of HRI's recoveries on behalf of clients involves
automobile liability insurance, 20% involves premises liability insurance, 10%
involves workers' compensation insurance and 10% involves product liability or
other insurance.

MARKETING, SALES AND CLIENT SERVICE

HRI 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. HRI employs a staff of five sales managers, a marketing manager
and four 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, who have expanded their
business by growth or acquisitions or who have business segments not already
under contract with HRI.

Due to the nature of the business, the sales process is lengthy and
involves demonstrating to prospective clients that HRI's economies of scale,
proprietary processes and value-added services allow (i) HRI to generate and
return to the clients a greater dollar amount of recoveries than the clients'
in-house recovery department and (ii) the client to focus greater resources on
core business functions. Frequently, new customer relationships are 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. HRI
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 last three years, HRI has
lost only four clients, representing in the aggregate fewer than 220,000 lives.
Only one of these clients was lost to an independent provider of recovery
services.

CLIENT BASE

The Company provides services to healthcare plans that as of January 31,
1997, covered approximately 31.1 million lives sold. HRI's clients are national
and regional healthcare payors, large third-party administrators or self-insured
corporations.

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<PAGE> 28

Major commercial health plan clients include the following organizations or
selected plans sponsored by or affiliated with the following:

<TABLE>
<S> <C>
Blue Shield of California Principal Mutual Life Insurance
FIRST HEALTH Company
Healthsource Principal Health Care, Inc.
Humana Inc. The Prudential Insurance Company of
Kaiser Foundation Health Plan America
(Northern California Region) NYLCARE
Oxford Health Plans, Inc. United HealthCare Corporation
</TABLE>

Major self-insured clients include:

<TABLE>
<S> <C>
Bell Atlantic Corporation NYNEX Corp.
Electronic Data Systems Corporation Sears Roebuck & Co.
</TABLE>

HRI's largest clients are United HealthCare, Kaiser Foundation Health Plan
(Northern California Region) and Humana, generating 25%, 12%, and 9%,
respectively, of HRI's 1996 revenues. The loss of one or more of these accounts
could have a material adverse effect on HRI's business, results of operations
and financial condition. However, HRI's contracts provide that in the event of
termination, HRI is generally entitled to complete the recovery process on the
gross recoveries in process for that client. On January 31, 1997, HRI had gross
recoveries in process of $551 million.

HRI's revenues are earned under written contracts with its clients that
provide for contingency fees from recoveries under a variety of pricing regimes.
The pricing arrangements offered by HRI 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 HRI's service increases and a fee percentage that varies
with HRI's recovery performance.

HRI performs its services on a reasonable efforts basis and does not
obligate itself to deliver any specific result. These contracts are generally
terminable on 60 to 180 days' notice by either party, although in a few cases
the contracts extend over a period of years. Pursuant to the terms of its client
contracts, HRI is generally entitled to continue to make recoveries and earn its
fees on the gross recoveries in process of the client at the time of
termination.

COMPETITION

HRI competes primarily with the internal recovery departments of potential
customers and other subrogation recovery service vendors. To the Company's
knowledge, there are three smaller, but significant, independent providers of
subrogation recovery services in addition to HRI. All three independent
competitors preceded HRI's entry into the recovery industry, and no major
competitors have entered the market since that time. HRI believes that there are
significant barriers to entry to 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
and transaction processing industries that possess sufficient capital, and
managerial and technical expertise to develop competitive services.

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<PAGE> 29

EMPLOYEES

HRI employs, and facilitates the development of, skilled knowledge-workers.
HRI maintains an extensive, in-house training program, which it believes is
attractive to employees and essential to develop the necessary industry specific
skills. All HRI employees participate in one of four incentive compensation
plans, depending upon the responsibilities of each employee. HRI employed
approximately 390 persons as of January 31, 1997.

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

HRI's employees are not represented by a union. HRI believes its relations
with its employees are good.

THE SUBROSYSTEM AND PLATFORM

HRI's existing information management system (the "SubroSystem") consists
of proprietary software programs that function as an automated data and process
management system. See "-- The Recovery Process." HRI holds a copyright
registration from the United States Copyright Office on the software.

The SubroSystem software is a character-based application that runs on
Intel-based personal computers in an MS-DOS operating environment. The personal
computers are arranged in local area networks ("LANs") that represent logical
units of work; typically one LAN will service one to four clients and up to 25
HRI employees. This architecture provides a high level of fault tolerance, since
the failure of any particular server on the network will only impact the
operations of one LAN. Historically, the system has experienced negligible
amounts of down time and HRI maintains an inventory of platform components for
redundancy. On-line data is stored on redundant devices, and on a daily basis
all on-line storage systems are copied to magnetic tapes, which are removed to a
security vault off-site. Development and maintenance of the SubroSystem is
handled entirely by HRI's systems department.

Although the SubroSystem, a key feature of the Company's recovery process,
adequately serves the Company's information gathering and management needs, the
Company plans, in three consecutive steps over 24 to 36 months, (i) to migrate
the SubroSystem from a MS-DOS based environment to a Windows NT operating
environment, (ii) to adopt a new data base system and (iii) to adopt an object
oriented programming language, such as C++. The Company has a detailed
implementation plan which contemplates a comprehensive testing of all key
elements prior to implementation of each step. The Company anticipates spending
approximately $3.2 million on these activities, of which $2.6 million spent on
hardware and third-party software will be capitalized. It is HRI's policy to
expense software development costs as incurred. See "Risk Factors -- The
Information Management System."

Quality and Management Controls. The SubroSystem controls, measures and
reports on the recovery process. From data recorded on the SubroSystem, a series
of financial reports are generated for clients that allow them to monitor HRI's
success in making recoveries and building gross recoveries in process on their
behalf. The same data are used to produce a wide array of accounting and
management information used by HRI to operate its business. HRI employs a
variety of quality control techniques to insure consistently high quality
service.

LEGAL AND REGULATORY ENVIRONMENT

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

25
<PAGE> 30

clarity, may be grouped in three categories: (1) 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"), (2) legislation that would substantially
limit the Company's ability to receive and utilize individual claim information
from healthcare insurers ("Confidentiality Laws") and (3) other federal and
state law. The following identify specific risks in those three categories:

Health Insurance Primacy Laws:

Certain No Fault Insurance Systems. Michigan, Pennsylvania and New Jersey
have adopted 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 1994,
proponents of the California "pay-at-the-pump" bill attempted to enact by
referendum, legislation that would have made the injured insured's healthcare
payors primarily liable for healthcare expenses for automobile accidents in
California. Although this referendum was withdrawn, there can be no assurance
that it will not again be presented in a ballot initiative or as legislation 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:

26
<PAGE> 31

the provisions of the regulations when adopted, the 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 to federal law, state laws and regulations governing privacy of
insurance records and related matters may significantly affect the Company's
business. State efforts to restrict the use of such records, which clients
currently provide to the Company, could impair the Company's business, results
of operations and financial condition.

Other Federal and State Laws:

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 may limit the healthcare provider's ability to recover
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 determine their compensation based on the
entire amounts covered by a damage award and may, in some cases, proportionally
diminish the amount recoverable by HRI on behalf of the healthcare payor out of
that damage award. The "made whole doctrine" and the "common fund doctrine" are
long-standing legal doctrines.

PROPERTIES

HRI leases approximately 66,345 square feet of space for its offices in
Louisville, under a lease agreement with a five-year term expiring in 2002,
where it maintains its executive offices and main operations. At its regional
operating office in Pittsburgh, HRI leases approximately 9,800 square feet,
under a lease agreement with a five-year term expiring 2001. At its Minneapolis
location, HRI leases approximately 566 square feet, under a one-year lease
subject to annual renewals until 2001.

LEGAL PROCEEDINGS

In March 1994 a class action complaint was filed against HRI 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 HRI'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
Racketeer Influenced and Corrupt Organization Act (RICO). The complaint also
seeks judgment, under the federal Declaratory Judgment Act, that HRI as the
subrogation agent for various healthcare payors be limited, in recovering from
persons who caused accidents or from the healthcare payors' injured insureds, to
the actual costs of the medical treatment provided to such injured insureds by
such healthcare payors, notwithstanding provisions in the applicable healthcare
policies or agreements, which generally allow recovery by the healthcare payors
of the "reasonable value" of such treatments. The complaint alleges that HRI
made fraudulent representations to recover sums in excess of those actually
expended by the applicable healthcare payor to pay for medical services.
Plaintiffs, and the putative class, demand compensatory damages, treble damages
under RICO, costs and reasonable attorneys' fees. HRI believes that this case
does not satisfy requirements for a class action because the plaintiffs are not
adequate representatives of the putative class and potential claims by class
members lack the commonality required for class actions due to the number of
states whose laws apply to the subrogation provisions of applicable healthcare
policies and agreements and the varying language of such subrogation provisions.
The DeGarmo case is in non-merits discovery, and no class of plaintiffs has been
certified. HRI does not believe

27
<PAGE> 32

that this litigation will have a material adverse effect upon its financial
condition or upon results of its operations.

By the end of 1993, at the direction of three clients, HRI had ceased the
practice of recovering the "reasonable value" of medical benefits provided by
those clients under discounted fee for service ("DFS") arrangements with medical
providers. HRI historically recovered the reasonable value of medical benefits
provided under DFS arrangements only on behalf of these three clients. However,
HRI historically and currently recovers the reasonable value of medical benefits
provided under capitation arrangements with medical providers on behalf of those
clients that compensate medical providers under this payment mechanism, to the
extent that these benefits are related to treatment of the injuries as to which
clients have recovery rights.

In March 1996 a class action complaint was filed against HRI in the 261st
Judicial District Court, Travis County, Texas, Evelyn Dickey v. Healthcare
Recoveries, Inc. The complaint alleges that HRI violated Texas law by not filing
a $10,000 bond with the Secretary of State, as required for all debt collectors.
The plaintiffs sought damages of $100 for each class member. In August 1996, the
plaintiffs filed an amended petition alleging, additionally, that HRI violated
Texas law in attempting to collect consumer debts without disclosing in any
communication to the debtors that it was collecting consumer debts. The putative
class consists of all persons contacted in Texas by HRI with respect to a
recovery. HRI believes that it is not a "debt collector" under Texas law and,
accordingly is not subject to the Texas laws listed in the complaint. The
Company has filed a motion for summary judgment in the case and does not believe
that this litigation will have a material adverse effect upon its financial
condition or upon results of its operations.

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<PAGE> 33

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Upon the completion of the Offering, except as noted below with respect to
Messrs. McDowell, Spalding and Ms. Harreld, the Directors and Executive Officers
of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Patrick B. McGinnis.................... 49 Chairman, Chief Executive Officer, Director
Dennis K. Burge........................ 50 Executive Vice President -- Operations
Douglas R. Sharps...................... 43 Executive Vice President -- Finance and
Administration, Chief Financial Officer and
Secretary
Kathleen K. Harreld(1)................. 44 Executive Vice President -- Business
Development
Bobby T. Tokuuke....................... 51 Senior Vice President -- Systems
Debra M. Murphy........................ 41 Senior Vice President -- Sales & Marketing
William C. Ballard, Jr................. 56 Director
Jill L. Force.......................... 44 Director
John H. Newman......................... 52 Director
Elaine J. Robinson..................... 48 Director
Chris B. Van Arsdel.................... 52 Director
David E. McDowell(1)................... 54 Director
William R. Spalding(1)................. 38 Director
</TABLE>

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

(1) Messrs. McDowell and Spalding serve in their capacity as Executive Officers
of Medaphis and have agreed to resign from the board of directors of the
Company effective upon the completion of the Offering. Ms. Harreld intends
to resign upon the completion of the Offering.

PATRICK B. MCGINNIS serves as Chairman, Chief Executive Officer and a
Director of the Company. In 1988, Mr. McGinnis left Humana Inc., where he served
as Vice President -- Finance & Planning, to co-found the Company. He served as
the Company's Chief Executive Officer until August 1995, when he became
President of the Medaphis Healthcare Information Technology Company, which
provides a variety of sophisticated software solutions to healthcare enterprises
throughout the United States. He rejoined the Company in January 1997 as its
Chairman and Chief Executive Officer.

DENNIS K. BURGE serves as Executive Vice President -- Operations of the
Company. Mr. Burge joined the Company in 1991 as Vice President, Operations. He
was promoted to Senior Vice President -- Operations in October 1994. In May
1996, he joined Gottlieb Financial Services (a Medaphis subsidiary) as Chief
Operating Officer, where he served until February 1997, when he rejoined the
Company.

DOUGLAS R. SHARPS serves as Executive Vice President -- Finance and
Administration, Chief Financial Officer and Secretary. Mr. Sharps joined the
Company in January 1990 as Vice President and General Counsel. He served as
Senior Vice President -- Finance and General Counsel from October 1994 to August
1995. He is also the principal of Sharps & Associates, PSC, a law firm that
provides support to HRI and handles litigated recoveries in California,
Illinois, Kentucky and Texas.

KATHLEEN K. HARRELD serves as Executive Vice President -- Business
Development. Ms. Harreld joined the Company in August 1989 as Vice
President -- Sales and Marketing. She served as Senior Vice
President -- Operations from May 1996 to August 1996, and as President of HRI
from August 1996 until January 1997, when she assumed her present duties.

BOBBY T. TOKUUKE serves as Senior Vice President -- Systems. Mr. Tokuuke
joined the Company at its inception in 1988 and was part of the team that
developed the SubroSystem. From October 1994 he served as Vice President of
Systems and assumed his present position in April 1996.

29
<PAGE> 34

DEBRA M. MURPHY serves as Senior Vice President -- Sales and Marketing. Ms.
Murphy joined the Company in 1991 as Sales and Marketing Manager. She was
promoted to Director of Sales in October 1994 and to Vice President -- Sales in
February 1996 until April 1996, when she assumed her current responsibilities in
April 1996.

WILLIAM C. BALLARD, JR. has agreed to become a Director upon the completion
of the Offering. Mr. Ballard is of counsel to the law firm, Greenebaum, Doll &
McDonald in Louisville, Kentucky. He retired in 1992 after 22 years as the Chief
Financial Officer and a director of Humana Inc. Mr. Ballard serves on the board
of directors of American Safety Razor Co., Atria Communities, Inc., Healthcare
REIT, Inc., LG&E Energy Corp., Mid-America Bankcorp, United HealthCare Corp. and
Vencor, Inc.

JILL L. FORCE has agreed to become a Director upon the completion of the
Offering. Since June 1989 Ms. Force has served as Senior Vice President, General
Counsel and Corporate Secretary of Vencor, Inc., located in Louisville,
Kentucky.

JOHN H. NEWMAN has agreed to become a Director upon the completion of the
Offering. Mr. Newman has been a partner in the law firm of Brown & Wood LLP
since 1980.

ELAINE J. ROBINSON has agreed to become a Director upon the completion of
the Offering. Ms. Robinson has served as Vice President and Treasurer of
Providian Corporation since December of 1991.

CHRIS B. VAN ARSDEL has agreed to become a Director upon the completion of
the Offering. Since August 1995, Mr. Van Arsdel has served as Vice President of
Operations in EDS' Corporate Client/Server Group. From October 1989 to August
1995, Mr. Van Arsdel was Director Corporate Quality at EDS.

DAVID E. MCDOWELL has agreed to resign as a member of the Company's Board
of Directors upon the completion of the Offering. He has been Chairman and Chief
Executive Officer of Medaphis since 1996. From 1992 to 1996, Mr. McDowell was
President and Chief Operating Officer of McKesson Corporation.

WILLIAM R. SPALDING has agreed to resign as a member of the Company's Board
of Directors upon the completion of the Offering. He is presently Executive Vice
President -- Strategic Planning of Medaphis. From 1996 to February 1997, Mr.
Spalding was Senior Vice President -- Administration and General Counsel of
Medaphis. From 1991 to 1995, Mr. Spalding was a partner in the law firm of King
& Spalding.

The Company's Board of Directors is divided into three classes serving
staggered, three-year terms. At each annual meeting of the Company's
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected and qualified. Mr. McGinnis and Ms. Force shall serve for an initial
term of three years, Mr. Ballard and Ms. Robinson for an initial term of two
years, and Mr. Newman and Mr. Van Arsdel shall serve for an initial term of one
year.

COMMITTEES OF THE BOARD

Subsequent to the Offering, the Board of Directors will establish an Audit
Committee. The Audit Committee will be comprised solely of independent directors
and will be charged with recommending the firm to be appointed as independent
accountants to audit the Company's financial statements, discussing the scope
and results of the audit with the independent accountants, reviewing the
functions of the Company's management and independent auditors pertaining to the
Company's financial statements and performing such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors.

Also, subsequent to the Offering, the Board of Directors will establish a
Compensation Committee. The Compensation Committee will be comprised solely of
"Non-Employee Directors" as such term is used in Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
"outside directors" as such term is used in Treasury Regulation Section
1.162-27(c)(3) promulgated under the Internal Revenue Code of 1986, as amended
(the "Code"). The Compensation Committee will be responsible for reviewing
general policy matters relating to compensation and benefits of employees and
officers, determining the total compensation of the officers and directors of
the Company and administering the Company's Stock Option Plan. See
"-- Non-Qualified Stock Option Plan for Eligible Employees."

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<PAGE> 35

COMPENSATION OF DIRECTORS

Non-employee Directors of the Company, after completion of the Offering,
will receive $1,500 per board meeting attended and will receive initial grants
of nonqualified stock options at the initial public offering price and
thereafter annual grants of nonqualified stock options at the then
current market price of the Common Stock for their services and are reimbursed
for their reasonable expenses in attending meetings of the Board of Directors.
See "-- Directors' Stock Option Plan."

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named Executive
Officers"), with respect to the year ended December 31, 1996. As of August 28,
1995, HRI was a wholly-owned subsidiary of Medaphis.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#) COMPENSATION($)
- ------------------ ---- --------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis.......... 1996 $ 97,850 $ 86,093 $85,343(1) 0 $0
Chairman, Chief Executive
Officer, Director
Kathleen K. Harreld.......... 1996 112,935 54,917 3,535(2) 0 0
Senior Executive Vice
President -- Business
Development
Douglas R. Sharps............ 1996 104,920 54,123 0 0 0
Executive Vice President --
Finance and
Administration, Chief
Financial Officer and
Secretary
Bobby T. Tokuuke............. 1996 89,960 15,370 3,227(3) 0 0
Senior Vice President --
Systems
Debra M. Murphy.............. 1996 90,973 17,447 1,785(4) 0 0
Senior Vice
President -- Sales &
Marketing
</TABLE>

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

(1) Includes $79,343 paid to Mr. McGinnis for his services as President of
Medaphis Healthcare Information Technology Company, a subsidiary of
Medaphis, $4,500 of matching contributions to the Medaphis Employees'
Retirement Savings Plan and $1,500 of matching contributions to the
Medaphis Deferred Compensation Plan.
(2) Includes $3,535 of matching contributions to the Medaphis Employees'
Retirement Savings Plan.
(3) Includes $2,151 of matching contributions to the Medaphis Employees'
Retirement Savings Plan and $1,076 of matching contributions to the
Medaphis Deferred Compensation Plan.
(4) Includes $1,785 of matching contributions to the Medaphis Employees'
Retirement Savings Plan.

31
<PAGE> 36

STOCK OPTION GRANTS

During the year ended December 31, 1996, Medaphis granted or repriced a
total of 183,000 stock options to the Named Executive Officers pursuant to
various Medaphis stock option plans. The following table sets forth the grants
and repricings for each Named Executive Officer during the year ended December
31, 1996.

OPTION GRANTS IN 1996
INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF POTENTIAL REALIZABLE VALUE AT
UNDERLYING TOTAL ASSUMED RATES OF STOCK PRICE
OPTIONS OPTIONS APPRECIATION FOR OPTION
GRANTED GRANTED TO EXERCISE TERM ($)/(2)
AND/OR EMPLOYEES PRICE EXPIRATION -----------------------------
NAME REPRICED(#) OF COMPANY ($/SHARE) DATE(1) 0% 5% 10%
---- ----------- ---------- ---------- ---------------- --- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis... 100,000 36.56% $ 13.25 , 1997 $0 $941,200 $2,455,380
Kathleen K. Harreld... 31,000 11.33% 8.5-9.875 , 1997 0 190,392 491,242
Douglas R. Sharps..... 17,000 6.22% 8.5-9.875 , 1997 0 103,030 264,589
Bobby T. Tokuuke...... 18,000 6.58% 8.5-9.875 , 1997 0 111,707 288,065
Debra M. Murphy....... 17,000 6.22% 8.5-9.875 , 1997 0 105,061 270,993
</TABLE>

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

(1) The initial terms of these options range from June 1, 2006 to November 19,
2007. However, under the terms of the options, vesting is accelerated to
, 1997 upon the closing of the Offering.

(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission based on the initial
option expiration dates ranging from June 1, 2006 to November 19, 2007. The
actual value, if any, a Named Executive Officer may realize will depend on
the excess of the stock price over the exercise price on the date the
option is exercised. Because the options will expire sixty days after the
closing of the Offering, it is very unlikely that the value realized by a
Named Executive Officer will be at or near the assumed 5% or 10% levels.

OPTION EXERCISES AND YEAR-END HOLDINGS

During the year ended December 31, 1996, none of the Named Executive
Officers exercised stock options. The following table sets forth certain
information with respect to unexercised stock options to purchase Medaphis
common stock held by each Named Executive Officer as of December 31, 1996.

AGGREGATED OPTION EXERCISES DURING FISCAL YEAR
ENDED DECEMBER 31, 1996 AND 1996 FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL "IN-THE-MONEY" OPTIONS
YEAR-END (#) AT FISCAL YEAR-END($)/(1)
SHARES ACQUIRED VALUE ----------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick B. McGinnis.... 0 $ 0 8,400 123,600 $ -0- $ -0-
Kathleen K. Harreld.... 0 0 7,594 38,391 14,912 82,555
Douglas R. Sharps...... 0 0 7,594 24,391 14,912 51,806
Bobby T. Tokuuke....... 0 0 3,497 18,299 10,970 37,299
Debra M. Murphy........ 0 0 2,698 17,199 8,649 35,608
</TABLE>

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

(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $11.185 per share, the market value of the
Common Stock issuable upon exercise of the options at December 31, 1996 (as
determined by the Board of Directors), and the exercise price of the
option, multiplied by the applicable number of shares underlying the
options.

32
<PAGE> 37

NON-QUALIFIED STOCK OPTION PLAN FOR ELIGIBLE EMPLOYEES

The Company plans to adopt the Healthcare Recoveries, Inc. Non-Qualified
Stock Option Plan for Eligible Employees (the "Plan"). The Plan provides for the
award of stock options to certain officers and key employees of the Company at
the time of the Offering. The Company has reserved shares of Common Stock
for issuance under the Plan. At the time of the Offering, options to purchase
shares will be granted to Mr. McGinnis, options to purchase
shares will be granted to Mr. Burge, options to purchase shares will be
granted to Mr. Sharps, options to purchase shares will be granted to Mr.
Tokuuke, and options to purchase shares will be granted to Ms. Murphy.
Such options shall be exercisable at the initial public offering price and shall
vest ratably over a three year period. It is the intention of Company management
to propose to the Compensation Committee a grant of up to additional
options to key managers of the Company (not including the Named Executive
Officers) as soon as practical after the Offering at the market price on the
date of grant. In accordance with Treasury regulations, in the event the value
realized upon the exercise of options by any covered employee (the difference
between the per share exercise price and the market price on the date of
exercise multiplied by the number of options exercised) when combined with such
employee's other covered compensation in the year of exercise exceeds $1.0
million, the Company will be unable to deduct the amount of such excess
compensation.

The Plan shall be administered by the Compensation Committee of two of more
non-employee directors. Subject to the terms of the Plan, the Compensation
Committee has the authority to determine the employees to whom options or rights
may be granted, the exercise price and the number of shares subject to each
option or right and the time or times when each option shall become exercisable,
to interpret the Plan and prescribe and rescind rules and regulations consistent
with the Plan and to determine certain other provisions with respect to each
option or right.

Options granted under this Plan are generally nontransferable by the
optionee and, unless otherwise determined by the Compensation Committee, must be
exercised by the optionee during their period of employment or service with the
Company or within a specified period following termination of employment or
service. In the event of a Change of Control (as defined by the Plan), the
unexercised portion of all outstanding options under the Plan will become fully
vested and immediately exercisable and will remain exercisable until the
occurrence of such event, after which time all outstanding options will
immediately terminate as to any portion thereof not exercised.

SUPPLEMENTAL RETIREMENT SAVINGS PLAN

The Company plans to adopt a non-qualified deferred compensation plan under
which certain key employees of the Company may defer up to 15% of their
compensation (reduced by the amount they could have deferred under the Company's
401(k) Plan). The Company will match employee contributions equal to the
contributions that would have been made under the Company's 401(k) Plan but for
certain tax restrictions. Participants will be entitled to receive distributions
upon termination of employment. The Company may fund all or part of its
obligations under this plan in a trust reachable by the Company's general
creditors.

ANNUAL BONUS PLAN

The Board of Directors of the Company intends to adopt an annual
performance-based bonus plan in which the Named Executive Officers will
participate. The plan will provide for cash bonuses to its participants based on
certain performance-based thresholds determined by the Board of Directors. The
Company estimates that the maximum bonus for the Named Executive Officers and
participating key employees would be between % and % of their
respective base annual salaries.

DIRECTORS' STOCK OPTION PLAN

The Company plans to adopt the Healthcare Recoveries, Inc. Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the grant
of options to purchase Common Stock to each

33
<PAGE> 38

Director who will be a member of the Board upon the consummation of the
Offering. No Director who is an employee of the Company or any subsidiary is
eligible to participate in the Directors' Plan.

The Directors' Plan provides that each eligible Director who will be a
member of the Board of Directors will be awarded options to purchase
shares of Common Stock at an exercise price equal to the initial public offering
price per share. Thereafter, option grants under the Directors' Plan will be
made at each annual meeting of the Board of Directors, beginning in 1998 and
each subsequent annual meeting until 2002, and on such dates each eligible
Director will receive options to purchase shares of Common Stock, for so
long as shares are available under the Director's Plan. One-third of the shares
of Common Stock covered by an option shall vest on the March 1st next following
the date of grant and on each succeeding March 1st until fully vested, provided
that the optionee must be an eligible Director of the Company on March 1st.
Subject to readjustment in accordance with the provisions of the Directors'
Plan, the total amount of Common Stock on which options may be granted to
Directors under the Directors' Plan shall not exceed in the aggregate
shares.

The Directors' Plan shall be administered by the Compensation Committee.
Subject to the terms of the Directors' Plan, the Compensation Committee has the
authority to determine the Directors to whom options or rights may be granted,
the exercise price and the number of shares subject to each option or right and
the time or times when each option shall become exercisable, to interpret the
Directors' Plan and prescribe and rescind rules and regulations consistent with
the Directors' Plan and to determine certain other provisions with respect to
each option or right. If an optionee ceases to be a non-employee Director due to
voluntary resignation as a Director, voluntary decision not to stand for
reelection or removal as a Director by the stockholders for cause, then the
unvested portion of any option shall terminate on the earlier of the option's
expiration date or the date of termination of service as a non-employee
Director. If an optionee ceases to be Director for any other reason, the
unvested portion of options shall vest on the date of termination of service and
may thereafter be exercised pursuant to their terms. The obligations of the
Company under the Directors' Plan shall be binding upon any successor to
substantially all of the Company's assets and business, and the Company has
agreed that it will make appropriate provision for the preservation of the
optionee's rights in any agreement or plan which it may enter into or adopt to
effect any such transfer of assets or ownership. The Directors' Plan, with
respect to the granting of options, shall terminate at midnight on March 31,
2002.

DIVESTITURE BONUS

In connection with the Offering, the Company has agreed to grant to certain
members of the Company's management team shares of Common Stock,
representing 2% of the Common Stock to be outstanding after the Offering (the
"Divestiture Bonus"). Upon the consummation of the Offering, , ,
, , and of these shares will be granted to Messrs.
McGinnis, Burge, Sharps, Tokuuke, Ms. Murphy and Ms. Harreld, respectively. The
remaining shares are reserved for other members of the HRI management team
upon the consummation of the Offering. These shares will be "restricted
securities" within the meaning of Rule 144 under the Securities Act, and each
member of the management team receiving the Divestiture Bonus has agreed with
the Company not to sell more than 50% of such member's Divestiture Bonus shares
within the first year after the consummation of the Offering. In the quarter
ending June 30, 1997, the Company will recognize a noncash, nondeductible
compensation charge equal to the market price of these shares on the date of
grant.

EMPLOYMENT AGREEMENTS

The Company and Mr. McGinnis have entered into an employment agreement
pursuant to which Mr. McGinnis will serve as Chairman and Chief Executive
Officer of the Company. The employment agreement is for a term of three years,
with automatic two year renewals, unless a notice of termination is delivered by
either party within not less than sixty (60) days prior to the end of a term or
a renewal term. Under the terms of the agreement, Mr. McGinnis will receive a
salary at an annual rate of $200,000. The Company may terminate the employment
agreement and all of its obligations thereunder if Mr. McGinnis (i) materially
breaches any term of the employment agreement, (ii) commits any act in bad faith
materially detrimental to the Company, (iii) engages in illegal or dishonest
activities or is convicted of any crime

34
<PAGE> 39

involving fraud, deceit, or moral turpitude, or (iv) dies or becomes mentally or
physically disabled and is unable to perform his obligation under the employment
agreement. The Company's obligations under the employment agreement to pay
salary, to provide for the continued vesting of stock option awards and to
provide for health insurance benefits shall continue for the greater of the
remainder of the term (or the renewal term) or two years if the Company
terminates the employment agreement for any other reason, or if Mr. McGinnis
terminates the agreement for one of the following reasons (i) the Company
materially breaches any term of the employment agreement, (ii) the Company
assigns Mr. McGinnis duties, or significantly reduces his assigned duties, in a
manner inconsistent with his position with the Company (without his consent),
(iii) the Company requires Mr. McGinnis's relocation outside of the metropolitan
Louisville, Kentucky area (without his consent), (iv) the Company fails to
obtain the assumption of the employment agreement by any successors to the
Company, or (v) a Change in Control Event (as defined in the employment
agreement) occurs, and Mr. McGinnis's employment is terminated by Mr. McGinnis
or the Company, for whatever reason, within 120 days thereafter (in this latter
event, Mr. McGinnis may also be entitled to receive a certain Gross-Up Payment
(as defined in the employment agreement)).The employment agreement contains
certain confidentiality and noncompete provisions in favor of the Company.

The Company and Messrs. Burge, Sharps, Tokuuke, and Ms. Murphy have entered
into employment agreements, each with a term of three years. Under the terms of
the agreements, Messrs. Burge and Sharps will receive a salary at an annual rate
of $125,000, and Mr. Tokuuke and Ms. Murphy will receive a salary at an annual
rate of $110,000. The Company may terminate an employment agreement with Messrs.
Burge, Sharps, Tokuuke, and Ms. Murphy in the following circumstances: (i)
material breach of any term of the employment agreement, (ii) commission of any
act in bad faith materially detrimental to the Company, (iii) engagement in
illegal or dishonest activities or conviction of any crime involving fraud,
deceit, or moral turpitude or (iv) death or mental or physical disability
resulting in an inability to perform one's obligations under the employment
agreement. Each employment agreement contains certain confidentiality and
noncompete provisions in favor of the Company.

35
<PAGE> 40

CERTAIN TRANSACTIONS

MEDAPHIS

Medaphis is selling HRI as part of its restructuring plan to divest
non-core businesses and is required to use the net proceeds of the Offering to
retire bank debt. Since August 1995, HRI has been a wholly-owned subsidiary of
Medaphis. During this period, certain corporate functions that had been
performed by HRI internally were performed by Medaphis. These functions
consisted primarily of payroll and benefits administration. See Note 1 to the
Audited Financial Statements of HRI.

In connection with the closing of the Offering, HRI and Medaphis will enter
into a Separation Agreement, negotiated at arms-length between Medaphis
management and HRI management, pursuant to which certain insurance, tax and
other administrative matters are addressed.

Messrs. McGinnis, Sharps and Tokuuke, and Ms. Harreld and Ms. Murphy
possess incentive options to purchase shares of Medaphis Common Stock that will
automatically vest, pursuant to the terms of such options, in connection with
the Offering. See "Management -- Option Exercises and Year-End Holdings."

In connection with the acquisition of HRI by Medaphis, Messrs. McGinnis,
Sharps and Tokuuke, and Ms. Harreld and Ms. Murphy received 273,456, 51,948,
43,016, 56,943 and 6,693 shares, respectively, of Medaphis common stock in
exchange for their holding of Common Stock.

Effective the date of this Prospectus, the Company and Medaphis entered
into a Separation Agreement (the "Separation Agreement") that provides for the
separation of HRI from Medaphis. The Separation Agreement provides that on the
date the Offering is consummated (i) HRI will have a nominal amount of
unrestricted cash, and will not owe any amount to Medaphis (except as discussed
below with respect to purchased goods and services and certain employee benefit
plan payments) and (ii) Medaphis will not owe any amount to HRI.

The Separation Agreement also provides that (i) HRI will owe (without
markup or markdown) Medaphis after the consummation of the Offering for any
goods or services purchased from or through Medaphis prior to consummation but
not paid for prior to such consummation; (ii) Medaphis will cause its bank
lenders to release in connection with the Offering the HRI guaranty of Medaphis'
bank debt, all liens on HRI's assets and the Common Stock to be sold by Medaphis
pursuant to the Offering; (iii) HRI will upon consummation of the Offering
assume responsibility for providing health insurance or coverage to former HRI
employees (and their eligible dependents) who have exercised their right under
federal law to obtain such insurance or coverage in accordance with applicable
federal law; (iv) assets and liabilities under the Medaphis "cafeteria" employee
benefit plan relating to HRI employees will be transferred to a new HRI
"cafeteria" benefit plan, together with an adjusting payment to or from HRI to
reflect any difference between plan assets and liabilities; (v) after
consummation of the Offering, Medaphis will transfer assets in the Medaphis
401(k) retirement plan that relate to HRI employees to a new HRI 401(k)
retirement plan in a manner that satisfies legal requirements for interplan
asset transfers; (vi) all stock options held by HRI employees as of the
consummation of the Offering shall, in accordance with the particular option
plan under which such options are granted, become immediately vested as of such
date and any such optionees shall be entitled to exercise their options in
accordance with the terms of the particular option agreements relating to the
granting of such options; (vii) effective as of the consummation of the
Offering, HRI must have in place certain insured and self-funded welfare benefit
plans and arrangements to cover those HRI employees who were covered by such
types of plans prior to such date; and (viii) Medaphis shall pay, in one lump
sum, the account balances under the Medaphis Executive Deferred Compensation
Plan due to those Plan participants who will be continuing employment with HRI
after consummation of the Offering.

With respect to indemnification, the Separation Agreement provides that (i)
HRI will indemnify Medaphis for federal, state and local income and other tax
liability relating to HRI for all periods ending on or prior to August 28, 1995,
the date Medaphis acquired HRI and for all periods after the consummation of the
Offering; (ii) Medaphis will indemnify HRI for federal income tax liability
relating to Medaphis or any

36
<PAGE> 41

subsidiary (including HRI), and for state and local income and other tax
liability relating to Medaphis or any subsidiary other than HRI, from August 29,
1995, to the date of consummation of the Offering; (iii) HRI will indemnify
Medaphis from liability due to or arising out of acts or failures to act of HRI
in the periods described in clause (i); (iv) Medaphis will indemnify HRI from
liability due to or arising out of the acts or failures to act of Medaphis or
any subsidiary (other than HRI) for all periods described in (i) and (ii); and
(v) Medaphis will indemnify Messrs. Ballard, Newman and Van Arsdel and Ms. Force
and Ms. Robinson from certain liabilities arising out of the Offering, including
liabilities under the Securities Act.

Prior to the date of this Prospectus, HRI began performing for itself
certain functions previously performed for HRI by Medaphis. These functions
include such items as payroll, processing of accounts payable, employee health
plan administration and HRI's workers' compensation and other business insurance
coverages.

SHARPS & ASSOCIATES

As part of its obligations under client contracts, HRI generally pays for
the legal representation of clients, as required in the recovery process. A
portion of those payments is made in the form of a retainer to Sharps &
Associates, a law firm solely owned by Douglas R. Sharps, HRI's Executive Vice
President -- Finance and Administration, Chief Financial Officer and Secretary.
This law firm employs nine attorneys and three paralegals at its offices in
Louisville, Kentucky; Oakland, California; Chicago, Illinois; and Dallas, Texas.
HRI paid $432,159, $562,875 and $748,273, to such related party during the
periods ended December 31, 1994, 1995 and 1996, respectively, for legal
services; HRI spent $1,314,650, $1,568,023 and $2,059,706 during the same
periods, respectively, on other outside legal representation related to its
recovery activities. However, Mr. Sharps receives no personal benefit from his
ownership of the firm. See Note 6 to the Company's Financial Statements.

37
<PAGE> 42

PRINCIPAL AND SELLING STOCKHOLDER

The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of December 31, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby and
the grant of the Divestiture Bonus, of (i) each person known by the Company to
be the beneficial owner of more than 5% of any class of the Common Stock; (ii)
each director of the Company; (iii) all executive officers and directors of the
Company as a group and (iv) the Selling Shareholder:

<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENTAGE OF SHARES OWNED
------------------------ -------------------------------- --------------------------------
BEFORE OFFERING AFTER OFFERING BEFORE OFFERING AFTER OFFERING
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Medaphis Corporation(1).................... 0 100% 0%
Patrick B. McGinnis(2)..................... 0 0 *
Dennis K. Burge(3)......................... 0 0 *
Kathleen K. Harreld(4)..................... 0 0 *
Douglas R. Sharps(3)....................... 0 0 *
Bobby T. Tokuuke(5)........................ 0 0 *
Debra M. Murphy(5)......................... 0 0 *
David E. McDowell.......................... 0 0 0 0
William R. Spalding........................ 0 0 0 0
All executive officers and directors as a
group (7 persons)........................ 0 0% 2.0%
</TABLE>

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

* Less than 1%.
(1) The address of Medaphis is 2700 Cumberland Parkway, Suite 300, Atlanta,
Georgia 30339.
(2) Includes shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon consummation
of the Offering because none of such options will be presently exercisable.
(3) Includes shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon consummation
of the Offering because none of such options will be presently exercisable.
(4) Includes shares of Common Stock to be granted pursuant to the
Divestiture Bonus.
(5) Includes shares of Common Stock to be granted pursuant to the
Divestiture Bonus and excludes shares of Common Stock that may be
acquired upon the exercise of stock options to be granted upon the
consummation of the Offering because none of such options will be presently
exercisable.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock having a par value of $.001 per share ("Common Stock") and
2,000,000 shares of Preferred Stock, having a par value of $.001 per share
("Preferred Stock").

As of January 31, 1997, there were issued and outstanding shares
of Common Stock that were held of record by one (1) stockholder. There will be
shares of Common Stock outstanding after giving effect to the sale of
the shares of Common Stock offered hereby and the grant of the Divestiture Bonus
and shares of Common Stock outstanding if the Underwriters exercise
their entire over-allotment option. As of the date hereof, there are no shares
of Preferred Stock outstanding.

COMMON STOCK

Except as otherwise required by law or as provided by the Board of
Directors with respect to any class or series of Preferred Stock, the entire
voting power and all voting rights are vested exclusively in the Common

38
<PAGE> 43

Stock. Each holder of shares of Common Stock is entitled to one vote for each
share outstanding in his or her name on the books of the Company.

Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. The Company has no current
plans to pay dividends on its Common Stock.

In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after the distribution or payment to the
holders of shares of any series of Preferred Stock as provided by the Board of
Directors with respect to any such series of Preferred Stock, the remaining
assets of the Company available for distribution to stockholders shall be
distributed among and paid to the holders of Common Stock ratably in proportion
to the number of shares of Common Stock held by them respectively.

PREFERRED STOCK

The Board of Directors is authorized to issue shares of Preferred Stock at
any time and from time to time, in one or more series, and to fix or alter the
designations, preferences and relative participating, optional or other special
rights and qualifications, limitations or restrictions of such shares of
Preferred Stock, including without limitation of the generality of the
foregoing, dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices and liquidation preferences of any wholly unissued series of
preferred shares and the number of shares constituting any of such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of a series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. Furthermore, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may have
the effect of delaying or preventing a change in control of the Company,
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.

The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy consent, tender
offer, merger, or otherwise, and thereby protect the continuity of the Company's
management.

CERTAIN CHARTER AND BYLAW PROVISIONS

Stockholders' rights and related matters are governed by the Delaware
General Corporation Law, the Company's Certificate of Incorporation and its
Bylaws. Certain provisions of the Certificate of Incorporation and Bylaws of the
Company, which are summarized below, tend to limit stockholders' ability to
influence matters pertaining to corporate governance.

39
<PAGE> 44

Classified Board of Directors. The Company's Board of Directors is divided
into three classes of directors serving staggered terms of three years each. See
"Management -- Directors and Executive Officers." As a result, it will be more
difficult to change the composition of the Company's Board of Directors, which
may discourage or make more difficult any attempt by a person or group of
persons to obtain control of the Company.

Special Meeting Call Restrictions. Under the Company's Bylaws, special
meetings of the stockholders may only be called by the Chairman of the Board, a
majority of the Board of Directors or upon the written demand of the holders of
a majority of the outstanding shares of Common Stock entitled to vote at any
such meeting. This provision makes it more difficult for stockholders to require
the Company to call a special meeting of stockholders to consider any proposed
corporate action, including any sale of the Company, which may be favored by the
stockholders.

Restrictions on Amendments to Bylaws. Under the Company's Certificate of
Incorporation, the Company's Bylaws may not be amended by the stockholders and
any contrary provision may not be adopted without the affirmative vote of at
least two-thirds of the shares entitled to vote generally in the election of
directors. This supermajority restriction makes it more difficult for the
stockholders of the Company to amend the Bylaws and thus enhances the power of
the Company's Board of Directors vis-a-vis stockholders with regard to matters
of corporate governance that are governed by the Bylaws.

Limited Action by Written Consent of Stockholders. In general, stockholder
action may only be taken at a special or annual stockholder meeting called for
such purpose or with the unanimous written consent of the stockholders. These
requirements may delay stockholder action on matters requiring stockholder
approval.

DIRECTORS' LIABILITY

The Company's Certificate of Incorporation includes provisions to eliminate
the personal liability of its directors for monetary damages resulting from
breaches of their fiduciary duty (provided that such provision does not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, violations under Section 174 of the Delaware General Corporation Law (the
"DGCL") or for any transaction from which the director derived an improper
personal benefit). The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to Section 203 of the DGCL. Section 203 may have the
effect of delaying, deferring or preventing a change of control of the Company.
In general, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the time such stockholder
became an "interested stockholder," unless (a) prior to such time the board of
directors of the corporation approved either the "business combination" or the
transaction which resulted in the stockholder becoming an "interested
stockholder," or (b) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (i) persons who are directors and
also officers and (ii) by employee stock plans, in which employee participants
do not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer, or (c) at or subsequent
to such time the "business combination" is approved by the board of directors
and authorized at the annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
combination" includes certain mergers, stock or asset sales and other
transactions resulting in a financial benefit to the "interested stockholder."
An "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.

40
<PAGE> 45

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is .

LISTING

The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "HCRI."

CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

General. The following discussion concerns the material United States
federal income and estate tax consequences of the ownership and disposition of
shares of Common Stock applicable to Non-U.S. Holders of such shares of Common
Stock. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident, as specifically defined for U.S. federal income and estate tax
purposes, of the United States, (ii) a corporation, partnership or any entity
treated as a corporation or partnership for U.S. federal income tax purposes
created or organized in the United States or under the laws of the United States
or of any State thereof (including the District of Columbia), (iii) an estate
the income of which is includible in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust if a court within
the United States is able to exercise primary jurisdiction over the trust's
administration and one or more United States fiduciaries have the authority to
control all the substantial decisions of such trust. The discussion is based on
current law, which is subject to change retroactively or prospectively, and is
for general information only. The discussion does not address all aspects of
United States federal income and estate taxation and does not address any
aspects of state, local or foreign tax laws. The discussion does not consider
any specific facts or circumstances that may apply to a particular Non-U.S.
Holder. Accordingly, prospective investors are urged to consult their tax
advisors regarding the current and possible future United States federal, state,
local and non-U.S. income and other tax consequences of holding and disposing of
shares of Common Stock.

Dividends. In general, dividends paid to a Non-U.S. Holder will be subject
to United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States, or (ii) if a tax treaty applies, attributable to a United States
permanent establishment or, in the case of an individual, a fixed base in the
United States, maintained by the Non-U.S. Holder. Dividends effectively
connected with such a trade or business or, if a tax treaty applies,
attributable to such permanent establishment or a fixed base will generally not
be subject to withholding (if the Non-U.S. Holder files certain forms annually
with the payor of the dividend) but will generally be subject to United States
federal income tax on a net income basis at regular graduated individual or
corporate rates. In the case of a Non-U.S. Holder that is a corporation, such
effectively connected income also may be subject to the branch profits tax
(which is generally imposed on a foreign corporation on the deemed repatriation
from the United States of effectively connected earnings and profits) at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
The branch profits tax may not apply if the recipient is a qualified resident of
certain countries with which the United States has an income tax treaty.

To determine the applicability of a tax treaty providing for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current United States Treasury Regulations to be paid to a resident of
that country, unless the payor has definite knowledge that such presumption is
not warranted or an applicable tax treaty (or United States Treasury Regulations
thereunder) requires some other method for determining a Non-U.S. Holder's
residence. However, under proposed regulations, in the case of dividends (paid
after December 31, 1997 or December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or at a reduced
rate under an income tax treaty, unless certain certification procedures (or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are complied with, directly or

41
<PAGE> 46

through an intermediary. Under current regulations, the Company must report
annually to the United States Internal Revenue Service (the "IRS") and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of these information returns also may be made available under the
provisions of a specific treaty or agreement with the tax authorities of the
country in which the Non-U.S. Holder resides.

A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.

Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax on any gain realized upon the sale or other
disposition of such holder's shares of Common Stock unless (i) the gain is
effectively connected with a trade or business carried on by the Non-U.S. Holder
within the United States and, if a tax treaty applies, the gain is attributable
to a permanent establishment or a fixed base maintained by the Non-U.S. Holder
in the United States; (ii) the Non-U.S. Holder is an individual who holds the
shares of Common Stock as a capital asset and is present in the United States
for 183 days or more in the taxable year of the disposition, and either (a) such
Non-U.S. Holder has a "tax home" (as specifically defined for U.S. federal
income tax purposes) in the United States (unless the gain from disposition is
attributable to an office or other fixed place of business maintained by such
non-U.S. Holder in a foreign country and a foreign tax equal to at least 10% of
such gain has been paid to a foreign country), or (b) the gain from the
disposition is attributable to an office or other fixed place of business
maintained by such Non-U.S. Holder in the United States; (iii) the Non-U.S.
Holder is subject to tax pursuant to the provisions of U.S. tax law applicable
to certain United States expatriates, or (iv) the Company is or has been during
certain periods a "U.S. real property holding corporation" for U.S. federal
income tax purposes (which the Company does not believe that it has been,
currently is or is likely to become) and, assuming that the Common Stock is
deemed for tax purposes to be "regularly traded on an established securities
market," the Non-U.S. Holder held, at any time during the five-year period
ending on the date of disposition (or such shorter period that such shares were
held), directly or indirectly, more than five percent of the Common Stock.

Estate Tax. Shares of Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and may
be subject to United States federal estate tax.

Backup Withholding and Information Reporting. As a general rule, under
current United States federal income tax law, backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons that fail to furnish the information required under the U.S. information
reporting requirements) and information reporting requirements apply to the
actual and constructive payment of dividends. The United States backup
withholding tax and information reporting requirements generally, under current
regulations, will not apply to dividends paid on Common Stock to a Non-U.S.
Holder at an address outside the United States, unless the payor has knowledge
that the payee is a U.S. person. Backup withholding and information reporting
generally will apply to dividends paid to addresses inside the United States on
shares of Common Stock to beneficial owners that are not entitled to an
exemption, as discussed above and that fail to provide in the manner required
certain identifying information. However, under proposed regulations, in the
case of dividends paid after December 31, 1997, a Non-U.S. Holder generally
would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.

The payment of the proceeds from the disposition of shares of Common Stock
to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under penalties
of perjury, certifies, among other things, its status as a Non-U.S. Holder, or
otherwise establishes an exemption. Generally, the payment of the proceeds from
the disposition of shares of Common Stock to or through a non-U.S. office of a
non-US. broker will not be subject to backup withholding and will

42
<PAGE> 47

not be subject to information reporting. In the case of the payment of proceeds
from the disposition of shares of Common Stock to or through a non-U.S. office
of a broker that is a U.S. person or a "U.S.-related person," existing
regulations require (i) backup withholding if the broker has actual knowledge
that the owner is not a Non-U.S. Holder, and (ii) information reporting on the
payment unless the broker receives a statement from the owner, signed under
penalties of perjury, certifying, among other things, its status as a Non-U.S.
Holder, or the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes or (ii) a foreign person 50% or more
of whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is derived from activities that are
effectively connected with the conduct of a United States trade or business. The
IRS recently proposed regulations addressing the withholding and information
reporting rules which could affect the treatment of the payment of proceeds
discussed above. Non-U.S. Holders should consult their tax advisors regarding
the application of these rules to their particular situations, the availability
of an exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed regulations addressing
the withholding and information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be allowed
as a credit against such holder's United States federal income tax liability, if
any, provided that such holder files the required information or appropriate
claim for refund with the IRS.

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<PAGE> 48

UNDERWRITING

The underwriters of the U.S. Offering named below (the "U.S.
Underwriters"), for whom Bear, Steams & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and The Robinson-Humphrey Company, Inc. are acting as
representatives, have severally agreed with the Company, subject to the terms
and conditions of the U.S. Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Selling Stockholder the aggregate
number of U.S. Shares set forth below:

<TABLE>
<CAPTION>
NUMBER OF
NAME OF U.S. UNDERWRITER U.S. SHARES
- ------------------------ -----------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
The Robinson-Humphrey Company, Inc..........................
----------
Total.............................................
==========
</TABLE>

The Managers of the concurrent International Offering named below (the
"Managers"), for whom Bear, Stearns International Limited, Donaldson, Lufkin &
Jenrette Securities Corporation and The Robinson-Humphrey Company, Inc. are
acting as lead Managers, have severally agreed with the Company, subject to the
terms and conditions of the International Underwriting Agreement (the form of
which has been filed as an exhibit to the Registration Statement on Form S-1 of
which this Prospectus is a part), to purchase from the Company the aggregate
number of International Shares set forth below:

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL
NAME OF MANAGER SHARES
- --------------- -------------
<S> <C>
Bear, Stearns International Limited.........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
The Robinson-Humphrey Company, Inc..........................
----------
Total.............................................
==========
</TABLE>

The nature of the respective obligations of the U.S. Underwriters and the
Managers is such that all of the U.S. Shares and all of the International Shares
must be purchased if any are purchased. Those obligations are subject, however,
to various conditions, including the approval of certain matters by counsel. The
Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the Managers against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the U.S. Underwriters and the Managers may be
required to make in respect of such liabilities.

The Company has been advised that the U.S. Underwriters propose to offer
the U.S. Shares in the United States and Canada and the Managers propose to
offer the International Shares outside the United States and Canada, initially
at the public offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not to exceed $0.
per share; that the U.S. Underwriters and the Managers may allow, and such
selected dealers may reallow, a concession to certain other dealers not to
exceed $0. per share; and that after the commencement of the Offering, the
public offering price and the concessions may be changed.

The Company has granted the U.S. Underwriters and the Managers options to
purchase in the aggregate up to additional shares of Common Stock
solely to cover over-allotments, if any. The options may be exercised in whole
or in part at any time within 30 days after the date of this Prospectus. To the
extent the options are exercised, the U.S. Underwriters and the Managers will be
severally committed, subject to certain conditions, to purchase the additional
shares of Common Stock in proportion to their respective purchase commitments as
indicated in the preceding tables.

Pursuant to an agreement between the U.S. Underwriters and the Managers
(the "Agreement Between"), each U.S. Underwriter has agreed that, as part of the
distribution of the U.S. Shares and subject

44
<PAGE> 49

to certain exceptions, (a) it is not purchasing any U.S. Shares for the account
of anyone other than a U.S. or Canadian Person (as defined below) and (b) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any U.S. Shares or distribute any prospectus relating to the U.S.
Offering outside the United States or Canada or to anyone other than a U.S. or
Canadian Person or a dealer who similarly agrees. Similarly, pursuant to the
Agreement Between, each Manager has agreed that, as part of the distribution of
the International Shares and subject to certain exceptions, (a) it is not
purchasing any of the International Shares for the account of any U.S. or
Canadian Person and (b) it has not offered or sold, and will not offer, sell,
resell or deliver, directly or indirectly, any of the International Shares or
distribute any prospectus relating to the International Offering in the United
States or Canada or to any U.S. or Canadian Person or to a dealer who does not
similarly agree. As used herein, "U.S. or Canadian Person" means any individual
who is a resident or citizen of the United States or Canada, any corporation,
pension, profit sharing or other trust or any other entity organized under or
governed by the laws of the United States or Canada or of any political
subdivision thereof (other than the foreign branch of any U.S. or Canadian
Person), any estate or trust the income of which is subject to United States or
Canadian federal income taxation regardless of the source of such income, and
any United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the
District of Columbia), its territories, its possessions and other areas subject
to its jurisdiction; "Canada" means the provinces of Canada, its territories,
its possessions and other areas subject to its jurisdiction.

Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of shares of Common Stock as may be
mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for the Common Stock being sold by the U.S.
Underwriters and the Managers, less an amount no greater than the selling
concession allocable to such Common Stock. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement
Between, the number of shares of Common Stock initially available for sale by
the U.S. Underwriters or by the Managers may be more or less than the amount
specified on the cover page of this Prospectus.

Each Manager has represented and agreed that (i) it has not offered or
sold, and, prior to the expiration of six months following the consummation of
the Offering, it will not offer or sell, any shares of Common Stock to any
person in the United Kingdom other than persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances that have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom and (iii) it has only issued or passed on, and will
only issue or pass on, in the United Kingdom any document received by it in
connection with the issue of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom such document may
otherwise lawfully be issued or passed on.

Purchasers of the International Shares offered in the International
Offering may be required to pay stamp taxes and other charges in accordance with
the laws and practices of the country of purchase in addition to the initial
public offering price set forth on the cover page hereof.

The Underwriters have informed the Company that they do not expect to
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

The Company and its executive officers and directors have agreed that for a
period of 180 days following the Offering, without the prior written consent of
Bear, Stearns & Co. Inc., they will not, directly or indirectly, offer or agree
to sell, hypothecate, pledge or otherwise dispose of any shares of Common Stock
(or securities convertible into, exchangeable for or exercisable for or
evidencing the right to purchase shares of Common Stock).

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company, the Selling Stockholder,

45
<PAGE> 50

the representatives of the U.S. Underwriters and the Managers. Among the factors
to be considered in making such determination will be the Company's financial
and operating history and condition, its prospects and such prospects for the
industry in which it does business in general, the management of the Company,
prevailing equity market conditions and the demand for securities considered
comparable to those of the Company.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company or the
Selling Stockholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of Common Stock are effected.
Accordingly, any resale of the Common Stock in Canada must be made in accordance
with applicable securities laws, which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Confirmations of the acceptance of offers to purchase shares of Common
Stock will be sent to Canadian residents to whom this Prospectus has been sent
and who have not withdrawn their offers to purchase prior to the issuance of
such confirmations. Each purchaser of Common Stock in Canada who receives a
purchase confirmation will be deemed to represent to the Company, the Selling
Stockholder and the dealer from whom such purchase confirmation is received that
(i) such purchaser is entitled under applicable Canadian provincial securities
laws to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, such purchaser is
purchasing as principal and not as agent, (iii) such purchaser has reviewed the
text above under "Notice to Canadian Residents -- Resale Restrictions," (iv) if
such purchaser is located in Manitoba, such purchaser is not an individual and
is purchasing for investment only and not with a view to resale or distribution,
(v) if such purchaser is located in Ontario, a dealer registered as an
international dealer in Ontario may sell shares of Common Stock to such
purchaser and (vi) if such purchaser is located in Quebec, such purchaser is a
"sophisticated purchaser" within the meaning of Section 43 of the Securities Act
(Quebec).

TAXATION

Canadian residents should consult their own legal and tax advisers with
respect to the tax consequences of an investment in the Common Stock in their
particular circumstances and with respect to the eligibility of the Common Stock
for investment by the purchaser under relevant Canadian legislation.

ENFORCEMENT OF LEGAL RIGHTS

The Company is organized under the laws of the State of Delaware. All or
substantially all of the directors and officers of the Company reside outside
Canada and substantially all of the assets of the Company are located outside
Canada. As a result, it may not be possible for Canadian investors to effect
service of process within Canada upon the Company or to enforce against the
Company in Canada judgments obtained in Canadian courts that are predicated upon
the contractual rights of action, if any, granted to certain purchasers by the
Company. It may also not be possible for investors to enforce against the
Company in the United States judgments obtained in Canadian courts.

Furthermore, although the requirement for an issuer to provide to certain
purchasers the contractual right of action for damages and/or rescission
described below is consistent with contractual considerations associated with a
private placement which constitutes a primary distribution of the issuer's
securities by the issuer, an investor may not be able to enforce a contractual
right of action for rescission against the issuer

46
<PAGE> 51

where the offer or sale of the issuer's securities is a secondary distribution
being made by a third-party such as the sale of the Common Stock by the Selling
Stockholder.

NOTICE TO ONTARIO RESIDENTS

The Common Stock offered hereby is being issued by a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

All the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or persons outside of Canada.

LANGUAGE OF DOCUMENTS

All Canadian purchasers of shares of Common Stock acknowledge that all
documents evidencing or relating in any way to the sale of such shares will be
drawn in the English language only. Tous les acheteurs canadiens d'actions
ordinaires reconnaissent par les presentes que c'est a leur volonte expresse que
tous les documents faisant foi ou se rapportant de quelque maniere a la vente
des valeurs mobilieres soient rediges en anglais seulement.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by King & Spalding, Atlanta, Georgia. King &
Spalding also advises and represents the Selling Stockholder with respect to
various matters. The Selling Stockholder will pay King & Spalding's fees and
expenses in connection with the Offering. Certain legal matters in connection
with the Common Stock offered hereby will be passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996
and for the years ended December 31, 1994, 1995 and 1996 included in this
Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their report with respect thereto, and are included
herein and in the Registration Statement in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by reference to such contract or document. For further
information regarding the

47
<PAGE> 52

Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and the exhibits and schedules thereto which may be
inspected without charge at the Commission's principal office at 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, at the
following regional offices of the Commission: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
Suite 1300, New York, New York 10048 and the Commission web site at
(http://www.sec.gov). Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.

The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the Offering, the Company will become subject to the informational
requirements of the Exchange Act. The Company will fulfill its obligations with
respect to such requirements by filing periodic reports with the Commission. In
addition, the Company will furnish its shareholders with annual reports
containing audited financial statements certified by its independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited summary financial information.

48
<PAGE> 53

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1995 and 1996............. F-3
Statements of Income for the Years Ended December 31, 1994,
1995 and 1996............................................. F-4
Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996.................... F-5
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 54

After consummation of the proposed stock split, as discussed in Note 9, we will
be in a position to render the following report.

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying balance sheets of Healthcare Recoveries,
Inc. (the "Company") as of December 31, 1995 and 1996 and the related statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

Louisville, Kentucky
February 28, 1997, except for
Note 9 as to which the
date is , 1997

F-2
<PAGE> 55

HEALTHCARE RECOVERIES, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. -- $ 53
Restricted cash........................................... $ 9,508 18,755
Accounts receivable, less allowance for doubtful accounts
of $65 in 1995 and $100 in 1996........................ 1,296 1,926
Other current assets...................................... 364 275
------- -------
Total current assets.............................. 11,168 21,009
------- -------
Property and equipment, at cost:
Furniture and fixtures.................................... 1,210 1,713
Office equipment.......................................... 835 975
Computer equipment........................................ 2,461 3,076
Leasehold improvements.................................... 295 598
------- -------
4,801 6,362
Accumulated depreciation and amortization................. (2,984) (3,865)
------- -------
1,817 2,497
------- -------
Other assets................................................ 405 463
------- -------
Total assets...................................... $13,390 $23,969
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 290 $ 586
Accrued expenses.......................................... 2,278 3,740
Funds due clients......................................... 6,925 14,953
------- -------
Total current liabilities......................... 9,493 19,279
Other liabilities........................................... 623 580
------- -------
Total liabilities................................. 10,116 19,859
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued or outstanding............ -- --
Common stock, $.001 par value, 20,000,000 shares
authorized, shares issued and outstanding....
Equity funding from Medaphis Corporation..................
Retained earnings (deficit)...............................
------- -------
Total stockholders' equity........................ 3,274 4,110
------- -------
Total liabilities and stockholders' equity........ $13,390 $23,969
======= =======
</TABLE>

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

F-3
<PAGE> 56

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Subrogation............................................... $16,941 $22,496 $30,248
Other revenues............................................ -- -- 1,171
------- ------- -------
Total revenues.................................... 16,941 22,496 31,419
Cost of services............................................ 7,947 10,265 15,026
------- ------- -------
Gross profit.............................................. 8,994 12,231 16,393
Support expenses............................................ 6,066 6,899 8,093
------- ------- -------
Operating income.......................................... 2,928 5,332 8,300
Interest income............................................. 320 580 486
------- ------- -------
Income before income taxes................................ 3,248 5,912 8,786
Provision for income taxes.................................. 1,363 2,486 3,685
------- ------- -------
Net income........................................ $ 1,885 $ 3,426 $ 5,101
======= ======= =======
</TABLE>

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

F-4
<PAGE> 57

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
EQUITY
FUNDING
COMMON STOCK CAPITAL IN RETAINED FROM (TO)
------------------ EXCESS OF EARNINGS MEDAPHIS
SHARES AMOUNT PAR VALUE (DEFICIT) CORPORATION TOTAL
--------- ------ ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994............. $ $ $(5,752) $(5,731)
Net income.......................... 1,885 1,885
Issuance of common stock............ -- 185
Preferred stock dividends accrued... (400) (400)
--------- ---- -------- ------- ------- -------
Balances, December 31, 1994........... (4,267) (4,061)
Net income.......................... 3,426 3,426
Issuance of common stock............ -- 75
Exercise of stock options........... -- 568
Preferred stock dividends accrued... (342) (342)
Conversion of preferred stock....... 11,000
Medaphis recapitalization........... $11,840 --
Distributions to Medaphis
Corporation...................... (7,392) (7,392)
--------- ---- -------- ------- ------- -------
Balances, December 31, 1995........... -- (1,183) 4,448 3,274
Net income.......................... 5,101 5,101
Distributions to Medaphis
Corporation...................... (4,265) (4,265)
--------- ---- -------- ------- ------- -------
Balances, December 31, 1996........... $ $ -- $ 3,918 $ 183 $ 4,110
========= ==== ======== ======= ======= =======
</TABLE>

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

F-5
<PAGE> 58

HEALTHCARE RECOVERIES, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,885 $ 3,426 $ 5,101
Adjustment to reconcile net income to net cash provided by
(used in) operations:
Depreciation and amortization.......................... 568 695 878
Deferred income taxes.................................. 1,207 1,743 (27)
Changes in operating assets and liabilities:
Increase in restricted cash.......................... (1,578) (3,253) (9,247)
Increase in accounts receivable...................... (362) (475) (630)
(Increase) decrease in other current assets.......... (138) (19) 89
(Increase) decrease in other assets.................. (300) 33 (42)
Increase (decrease) in trade accounts payable........ (68) 105 296
Increase (decrease) in accrued expenses.............. 397 (151) 1,558
Increase in funds due clients........................ 1,095 2,460 8,028
Increase (decrease) in other liabilities............. 506 117 (128)
------- ------- -------
Net cash provided by operations................... 3,212 4,681 5,876
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (758) (1,280) (1,558)
------- ------- -------
Net cash used in investing activities............. (758) (1,280) (1,558)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock.................................. 185 75 --
Payment of preferred stock dividends...................... -- (2,602) --
Exercise of stock options................................. -- 568 --
Distributions to Medaphis Corporation..................... -- (7,392) (4,265)
Other..................................................... (9) -- --
------- ------- -------
Net cash provided by (used in) financing
activities...................................... 176 (9,351) (4,265)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 2,630 (5,950) 53
Cash and cash equivalents, beginning of period.............. 3,320 5,950 --
------- ------- -------
Cash and cash equivalents, end of period.................... $ 5,950 $ -- $ 53
======= ======= =======
Income tax payments......................................... $ 154 $ 743 $ 3,712
======= ======= =======
</TABLE>

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

F-6
<PAGE> 59

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Healthcare Recoveries, Inc. (the "Company") was incorporated on June 30,
1988 under the laws of the State of Delaware. The Company's services comprise
the complete outsourcing of the identification, investigation and recovery of
accident-related medical benefits incurred by its clients for which other
persons or entities have primary responsibility. The rights of the Company's
clients to recover the value of these medical benefits arise 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 operated as an independent entity until August 28, 1995 when
the Company was merged with and into a subsidiary of Medaphis Corporation
("Medaphis") in a transaction accounted for as a pooling of interests (the
"Merger"). Prior to the Merger, the Company's redeemable convertible preferred
stock was converted to common stock. As of the effective time of the Merger,
each share of the then issued and outstanding Company common stock was exchanged
for Medaphis common stock. Employee stock options of the Company outstanding at
the effective time of the Merger were also substituted with similar options on
Medaphis common stock. Subsequent to the Merger, Medaphis recapitalized the
Company effectively cancelling all but 100 shares of common stock (not adjusted
for the stock split discussed in Note 9), pledged the assets and shares as
collateral for Medaphis' bank debt, and made the Company a guarantor for
Medaphis' bank debt.

In anticipation of the Offering (as discussed in Note 9), certain revisions
to allocations and estimates have been made by management in the accompanying
financial statements for the periods during which the Company was a subsidiary
of Medaphis to present the financial position, results of operations and cash
flows of the Company as an independent entity. Costs previously incurred by
Medaphis on behalf of the Company include executive salaries, employee benefits,
insurance, telecommunications, payroll processing and other general and
administrative expenses. Total costs allocated to the Company were $56,000 and
$361,000 for the period August 28, 1995 to December 31, 1995 and the year ended
December 31, 1996, respectively. Management believes that, in the aggregate,
these costs reflect the fair value of services rendered by Medaphis and that it
would have incurred similar costs as an independent entity.

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.

The Company's cash, cash equivalents and restricted cash have been placed
with one financial institution.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the respective assets or the terms of the leases, if shorter. Estimated useful
lives of property and equipment range from three to five years.

F-7
<PAGE> 60

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
Substantially all settlements are collected within 90 days.

OTHER REVENUES

Other revenues represent amounts associated with non-recurring subrogation
services for clients in connection with class action tort claims from the use of
breast implants.

PROVISION FOR INCOME TAXES

The provisions for income taxes have been prepared as if the Company was an
independent entity for all periods presented and in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect (a) the reported amounts of assets and liabilities,
(b) disclosure of contingent assets and liabilities at the date of the financial
statements and (c) reported amounts of revenues and expenditures during the
reporting period. Actual results could differ from those estimates.

3. LEASES

The Company leases office space and certain equipment. 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, 1996, are
as follows (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 869
1998........................................................ 1,004
1999........................................................ 1,024
2000........................................................ 1,066
2001........................................................ 1,037
2002 and thereafter......................................... 512
------
$5,512
======
</TABLE>

Rental expense, which includes amounts applicable to short-term leases, was
approximately $457,000, $606,000 and $806,000 for the years ended December 31,
1994, 1995 and 1996, respectively.

F-8
<PAGE> 61

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

The provisions for income taxes for the years ended December 31, 1994, 1995
and 1996, consist of the following (in thousands):

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $ 117 $ 557 $2,784
State and local........................................... 39 186 928
------ ------ ------
156 743 3,712
------ ------ ------
Deferred:
Federal................................................... 1,011 1,460 (22)
State and local........................................... 196 283 (5)
------ ------ ------
1,207 1,743 (27)
------ ------ ------
$1,363 $2,486 $3,685
====== ====== ======
</TABLE>

The following is a reconciliation of the effective tax rate to the federal
statutory rate for the years ended December 31, 1994, 1995 and 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit........... 6.8 6.8 6.8
Other, net.................................................. 0.2 0.3 0.1
---- ---- ----
42.0% 42.1% 41.9%
==== ==== ====
</TABLE>

Temporary differences giving rise to net deferred tax liabilities included
in the accompanying balance sheets at December 31, 1995 and 1996, respectively,
consist of the following (in thousands):

<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Accrued bonuses...................................... $297 $386
Accounts receivable.................................. $542 $805
Accrued litigation................................... 169 325
Depreciation......................................... 17 15
Deferred rent........................................ 14 31
Other assets......................................... 14 30
Other liabilities.................................... 45 87
---- ---- ---- ----
$525 $573 $829 $850
==== ==== ==== ====
</TABLE>

5. MAJOR CLIENTS

The number of clients comprising 10% or more of total revenues for the
years ended December 31, 1994, 1995 and 1996 amounted to two, three and two,
respectively. Total revenues from these clients aggregated 35%, 41% and 37%,
respectively, of total revenues. The largest client accounted for 19%, 15% and
25% of total revenues for the years ended December 31, 1994, 1995 and 1996,
respectively.

F-9
<PAGE> 62

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. RELATED PARTY TRANSACTIONS

Revenues from a related party approximated 9% and 7% of total revenues for
the years ended December 31, 1994 and 1995, respectively. The party continued as
a client in 1996 but was no longer a related party due to the Merger.

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 purposes of minimizing the
costs of the legal services purchased by the Company on behalf of its clients.
For the years ended December 31, 1994, 1995 and 1996, approximately $432,000,
$563,000 and $748,000, respectively, was paid to this law firm for such legal
services.

7. EMPLOYEE BENEFIT PLANS

PENSION PLAN

The Company's employees participate in the 401(k) defined contribution
pension plan of Medaphis. Annual expense provisions are 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 $106,000, $212,000 and
$165,000, for the years ended December 31, 1994, 1995 and 1996, respectively.

OTHER

Accrued bonuses included in the accompanying balance sheets at December 31,
1995 and 1996, approximated $1.9 million and $2.7 million, respectively.

8. CONTINGENCIES

9. SUBSEQUENT EVENTS -- RECAPITALIZATION

On , 1997, the Board of Directors of Medaphis approved the
sale of shares of the Company's common stock in an initial public
offering (the "Offering").

The accompanying financial statements reflect the Company's intent to amend
its Certificate of Incorporation to authorized 2,000,000 shares of $.001 par
value preferred stock and 20,000,000 shares of $.001 par value common stock of
which will be issued and outstanding, after a -for-1 common stock
split ("Stock Split"), which the Company intends to declare and to be effective
immediately prior to the Offering. The Stock Split will be effected in the form
of a stock dividend. Accordingly, all references in the accompanying financial
statements to number of shares and related per share amounts have been stated to
reflect these changes.

F-10
<PAGE> 63

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. OTHER SUBSEQUENT EVENTS (UNAUDITED)

LINE OF CREDIT

On , 1997 the Company entered into an agreement which provides,
upon the successful completion of the Offering, an unsecured revolving line of
credit (the "Line of Credit") for borrowings up to a maximum of $10 million. The
interest rate on outstanding indebtedness, at the Company's option, will be
either (i) the greater of the bank's prime rate or the effective Federal Funds
rate plus 0.5% or (ii) the LIBOR plus 2.25%. The maturity date for all
outstanding indebtedness under the Line of Credit is , 1999. The
agreement contains customary covenants, including covenants to maintain certain
minimum interest coverage and leverage ratios and a minimum level of net worth.

SEPARATION AGREEMENT WITH MEDAPHIS

Effective , the Company and Medaphis entered into a Separation
Agreement (the "Separation Agreement") that provides for the separation of the
Company from Medaphis. The Separation Agreement provides that on the date the
Offering is consummated (i) the Company will (assuming none of the underwriters'
over-allotment option has been exercised) have a nominal amount of unrestricted
cash, and will not owe any amount to Medaphis (except as discussed below with
respect to purchased goods and services and certain employee benefit plan
payments) and (ii) Medaphis will not owe any amount to the Company.

The Separation Agreement also provides that (i) the Company will owe
(without markup or markdown) Medaphis after the consummation of the Offering for
any goods or services purchased from or through Medaphis prior to consummation
but not paid for prior to such consummation; (ii) Medaphis will cause its bank
lenders to release in connection with the Offering the Company's guaranty of
Medaphis' bank debt, all liens on the Company's assets and the Common Stock to
be sold by Medaphis pursuant to the Offering; (iii) the Company will upon
consummation of the Offering assume responsibility for providing health
insurance or coverage to former Company employees (and their eligible
dependents) who have exercised their right under federal law to obtain such
insurance or coverage in accordance with applicable federal law; (iv) assets and
liabilities under the Medaphis "cafeteria" employee benefit plan relating to the
Company's employees will be transferred to a new Company "cafeteria" benefit
plan, together with an adjusting payment to or from the Company to reflect any
difference between plan assets and liabilities; (v) after consummation of the
Offering, Medaphis will transfer assets in the Medaphis 401(k) retirement plan
that relate to the Company's employees to a new 401(k) retirement plan in a
manner that satisfies legal requirements for interplan asset transfers; (vi) all
stock options held by the Company's employees as of the consummation of the
Offering shall, in accordance with the particular option plan under which such
options are granted, become immediately vested as of such date and any such
optionees shall be entitled to exercise their options in accordance with the
terms of the particular option agreements relating to the granting of such
options; (vii) effective as of the consummation of the Offering, the Company
must have in place certain insured and self-funded welfare benefit plans and
arrangements to cover those Company employees who were covered by such types of
plans prior to such date; and (viii) Medaphis shall pay, in one lump sum, the
account balances under the Medaphis Executive Deferred Compensation Plan due to
those Plan participants who will be continuing employment with the Company after
consummation of the Offering.

With respect to indemnification, the Separation Agreement provides that (i)
the Company will indemnify Medaphis for federal, state and local income and
other tax liability relating to the Company for all periods ending on or prior
to August 28, 1995, the date of the Merger and for all periods after the
consummation of the Offering; (ii) Medaphis will indemnify the Company for
federal income tax liability relating to Medaphis or any subsidiary (including
the Company), and for state and local income and other tax liability relating to
Medaphis or any subsidiary other than the Company, from August 29, 1995, to the
date of consummation of the Offering; (iii) the Company will indemnify Medaphis
from liability due to or arising out of acts or failures to act of the Company
in the periods described in clause (i); (iv) Medaphis will indemnify

F-11
<PAGE> 64

HEALTHCARE RECOVERIES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. OTHER SUBSEQUENT EVENTS (UNAUDITED) -- (CONTINUED)
the Company from liability due to or arising out of the acts or failures to act
of Medaphis or any subsidiary (other than the Company) for all periods described
in (i) and (ii); and (v) Medaphis will indemnify the non-employee directors of
the Company from certain liabilities arising out of the Offering, including
liabilities under the Securities Act of 1933.

NON-CASH COMPENSATION CHARGE

The Company will recognize a non-recurring, non-cash compensation charge of
approximately $
million in the quarter ending June 30, 1997 relating to a divestiture bonus
granted by the Company to certain members of the Company's management upon
consummation of the Offering.

NON-QUALIFIED STOCK OPTION PLAN FOR ELIGIBLE EMPLOYEES

The Company plans to adopt the Healthcare Recoveries, Inc. Non-Qualified
Stock Option Plan for Eligible Employees (the "Plan"). The Plan provides for the
award of stock options to certain officers and key persons of the Company. The
Company has reserved under the Plan and will grant, at the time of the Offering,
options to purchase shares of the Company's common stock. Such options
are exercisable at the initial public offering price per share and will vest
ratably over a three-year period.

DIRECTORS' STOCK OPTION PLAN

The Company plans to adopt the Healthcare Recoveries, Inc. Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the grant
of options to purchase the Company's common stock to each Director who will be a
member of the Company's Board of Directors upon the consummation of the
Offering. No Director who is an employee of the Company or any subsidiary is
eligible to participate in the Directors' Plan.

The Company reserved and granted options on shares of the
Company's common stock at the time of the Offering under the Directors' Plan.
Such options are exercisable at the initial public offering price. One-third of
the shares of Common Stock covered by an option shall vest on the March 1st next
following the date of grant and on each succeeding March 1st until fully vested,
provided that the optionee must be an eligible director of the Company on March
1st.

F-12
<PAGE> 65

======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDER, ANY UNDERWRITER, OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................
Risk Factors........................
Use of Proceeds.....................
Dividend Policy.....................
Dilution............................
Capitalization......................
Selected Financial Data.............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.....................
Business............................
Management..........................
Certain Transactions................
Principal and Selling Stockholder...
Description of Capital Stock........
Certain United States Federal Tax
Considerations for Non-U.S.
Holders of Common Stock...........
Underwriting........................
Notice to Canadian Residents........
Legal Matters.......................
Experts.............................
Additional Information..............
Index to Financial Statements.......
</TABLE>

------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================

======================================================

SHARES
HEALTHCARE RECOVERIES, INC.
COMMON STOCK
--------------------------

PROSPECTUS
--------------------------
BEAR, STEARNS & CO. INC.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

THE ROBINSON-HUMPHREY COMPANY, INC.
, 1997
======================================================
<PAGE> 66

TABLE OF CONTENTS

======================================================

SHARES
HEALTHCARE RECOVERIES, INC.
COMMON STOCK
--------------------------

PROSPECTUS
--------------------------
BEAR, STEARNS
INTERNATIONAL LIMITED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

THE ROBINSON-HUMPHREY COMPANY, INC.
, 1997
======================================================
<PAGE> 67

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 50,800
NASD filing fee............................................. 17,264
Nasdaq National Market Listing Fee.......................... 42,591
Accounting fees and expenses................................ 125,000
Legal fees and expenses..................................... 250,000
Blue Sky fees and expenses (including counsel fees)......... 8,000
Printing and Engraving expenses............................. 130,000
Transfer Agent and Registrar fees and expenses.............. 2,000
Miscellaneous Expenses...................................... 30,000
--------
Total............................................. $655,655
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a
court to award, or a corporation's board of directors to grant, indemnity to
directors and officers under certain circumstances for liabilities incurred in
connection with their activities in such capacities (including reimbursement for
expenses incurred). Article VII of the Company's Certificate of Incorporation
provides that no director shall be liable for monetary damages to the Registrant
or its stockholders for any breach of fiduciary duty, except to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the Registrant or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporate Law or (iv) for
any transaction from which such director derived an improper personal benefit.
Article IX of the Company's Certificate of Incorporation provides that the
Company will indemnify its directors and officers to the full extent permitted
by law. In addition, the Registrant is obligated, to the fullest extent
permissible by the DGCL, as it currently exists or may be amended, to indemnify
and hold harmless its directors, from and against all expense, liability and
loss reasonably incurred or suffered by such directors.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following list describes sales by the Registrant of securities in the
past three years which were not registered under the Securities Act in reliance
upon Sections 4(2), 3(b) and/or 3(a)(2) of the Securities Act. Prior to
Medaphis' acquisition of the Company in August 1995, Mr. William Ballard was
awarded options to purchase 1,200 shares (unadjusted to reflect Medaphis'
acquisition of the Company or the Stock Split) at an exercise price of $9.04 per
share of Common Stock in connection with service as a director of the Company as
of July 1, 1994, which options were exercised. These shares were converted into
shares of Medaphis Common Stock in connection with Medaphis' purchase of the
Company in August 1995. Mr. Randy Brown was awarded options to purchase 800
shares of Common at an exercise price of $9.04 per share, which options have
expired, in connection with his service as a Director of the Company.

II-1
<PAGE> 68

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Underwriting Agreement
3.1* -- Restated Certificate of Incorporation of the Company
3.2* -- Bylaws of the Company
4.1* -- Specimen Stock Certificate
4.2 -- Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan
of Eligible Employees
4.3 -- Healthcare Recoveries, Inc. Directors' Stock Option Plan
5.1* -- Opinion of King and Spalding as to the legality of the
Common Stock being registered
10.1* -- Separation Agreement between Medaphis and the Company
10.2 -- Employment Agreement between the Company and Patrick B.
McGinnis
10.3 -- Form of Employment Agreement between the Company and Douglas
R. Sharps, Dennis K. Burge, Bobby T. Tokuuke and Debra M.
Murphy
10.4* -- Divestiture Bonus Agreement
10.5* -- Supplemental Retirement Savings Plan
10.6 -- Lease between W&M Kentucky, Inc. and Healthcare Recoveries,
Inc.
23.1* -- Consent of King and Spalding (contained in Exhibit 5.1)
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3* -- Consent of William C. Ballard, Jr.
23.4* -- Consent of Jill L. Force
23.5* -- Consent of Elaine J. Robinson
23.6* -- Consent of John H. Newman
23.7* -- Consent of Chris B. Van Arsdel
24.1 -- Powers of Attorney (contained on signature page)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>

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

* To be filed by amendment

(b) Financial Statement Schedules.

Not Applicable

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933, as amended (the "Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

II-2
<PAGE> 69

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-3
<PAGE> 70

SIGNATURES AND POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Louisville, State of Kentucky, on March 14, 1997.

HEALTHCARE RECOVERIES, INC.

By: /s/ PATRICK B. McGINNIS
------------------------------------
Patrick B. McGinnis
Chairman and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Patrick B. McGinnis and Douglas R. Sharps, and
each of them, his or her true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution, from such person and in each person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission and to sign and file any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

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

/s/ PATRICK B. McGINNIS Chairman, Chief Executive March 14, 1997
- ----------------------------------------------------- Officer and Director
Patrick B. McGinnis (Principal Executive
Officer)

/s/ DOUGLAS R. SHARPS Executive Vice President -- March 14, 1997
- ----------------------------------------------------- Finance and Administration,
Douglas R. Sharps Chief Financial Officer and
Secretary
(Principal Financial Officer
and Principal Accounting
Officer)

/s/ DAVID E. McDOWELL Director March 14, 1997
- -----------------------------------------------------
David E. McDowell

/s/ WILLIAM R. SPALDING Director March 14, 1997
- -----------------------------------------------------
William R. Spalding
</TABLE>

II-4

<PAGE> 1
EXHIBIT 4.2

HEALTHCARE RECOVERIES, INC.

NON-QUALIFIED STOCK OPTION PLAN

FOR ELIGIBLE EMPLOYEES

<PAGE> 2

<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C> <C>
Section 1. PURPOSE........................................................................................ 1

Section 2. DEFINITIONS.................................................................................... 1
2.1. Board................................................................................ 1
2.2. Code................................................................................. 1
2.3. Committee............................................................................ 1
2.4. Company.............................................................................. 1
2.5. Eligible Employee.................................................................... 1
2.6. Exchange Act......................................................................... 1
2.7. Fair Market Value.................................................................... 2
2.8. 1933 Act............................................................................. 2
2.9. Option............................................................................... 2
2.10. Option Agreement..................................................................... 2
2.11. Option Price......................................................................... 2
2.12. Plan................................................................................. 2
2.13. Stock................................................................................ 3

Section 3. SHARES RESERVED UNDER THE PLAN................................................................ 3

Section 4. EFFECTIVE DATE................................................................................ 3

Section 5. ADMINISTRATION................................................................................ 3

Section 6. ELIGIBILITY................................................................................... 4

Section 7. GRANT OF OPTIONS.............................................................................. 4

Section 8. OPTION PRICE.................................................................................. 5

Section 9. EXERCISE PERIOD............................................................................... 5

Section 10. NONTRANSFERABILITY............................................................................ 6

Section 11. SECURITIES REGISTRATION....................................................................... 6

Section 12. LIFE OF PLAN.................................................................................. 7

Section 13. ADJUSTMENT.................................................................................... 8
</TABLE>

<PAGE> 3

<TABLE>
<S> <C> <C>
Section 14. CHANGE OF CONTROL AND CERTAIN OTHER EVENTS................................................... 8
14.1. Change of Control Events............................................................ 8
14.2. The Company......................................................................... 9
14.3. Notice.............................................................................. 9
14.4. Disposition of Stock Following Change of Control of Company......................... 9
14.5. Fractional Shares................................................................... 11

Section 15. AMENDMENT OR TERMINATION..................................................................... 11

Section 16. MISCELLANEOUS................................................................................ 11
16.1. No Stockholder Rights............................................................... 11
16.2. No Contract of Employment........................................................... 11
16.3. Other Conditions.................................................................... 12
16.4. Withholding......................................................................... 12
16.5. Construction........................................................................ 12
16.6. No "Incentive Stock Option" Treatment............................................... 12
16.7. References.......................................................................... 12
</TABLE>

<PAGE> 4

HEALTHCARE RECOVERIES, INC.
NON-QUALIFIED STOCK OPTION PLAN
FOR ELIGIBLE EMPLOYEES

Section 1.

PURPOSE
The purpose of this Plan is to provide options to purchase
stock to Eligible Employees in order for such Eligible Employees to acquire or
increase their proprietary interest in the Company, and for such Eligible
Employees to share in the success of the Company and to encourage them to remain
in the employ of the Company.

Section 2.

DEFINITIONS

Each capitalized term set forth in this Section 2 shall have
the meaning set forth opposite such capitalized term for purposes of this Plan
and, for purposes of such definitions, the singular shall include the plural
and the plural shall include the singular.

2.1. Board -- means the Board of Directors of the Company.

2.2. Code --means the Internal Revenue Code of 1986, as amended.

2.3. Committee -- means the committee appointed by the Board to
administer this Plan and at all times shall consist of two or more members of
the Board who constitute "NonEmployee Directors" as such term is defined in
Rule 16b-3 under the Exchange Act.

2.4. Company -- means Healthcare Recoveries, Inc., a Delaware
corporation, and any successor to such corporation.

2.5. Eligible Employee -- means an officer of the Company who the
Committee, acting in its absolute discretion, has determined to be eligible for
the grant of an Option under this plan.

<PAGE> 5

2.6. Exchange Act -- means the Securities Exchange Act of 1934, as
amended.

2.7. Fair Market Value -- means for any date (i) the closing price for
such date for a share of Stock as reported by The Wall Street Journal under the
quotation system then used and reported on by any national securities exchange
(as defined under the Exchange Act) on which the stock is listed or, (ii) if the
Stock is not traded on a national securities exchange, as reported for such date
by The Wall Street Journal under the NASDAQ National Market quotation system or
under the quotation system under which such closing price is reported or, (iii)
if The Wall Street Journal does not report such closing price, such closing
price as reported for such date by a newspaper or trade journal selected by the
Committee or, (iv) if no such closing price is available for such date, such
closing price as so reported or so quoted in accordance with Section 2.7(i),
(ii) or (iii) for the immediately preceding business day, or, (v) if no
newspaper or trade journal reports such closing price or if no such price
quotation is available, the price that the Committee acting in good faith
determines through any reasonable valuation method that a share of Stock might
change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell and both having reasonable knowledge of the
relevant facts.

2.8. 1933 Act -- means the Securities Act of 1933, as amended.

2.9. Option -- means an option granted under this Plan to purchase
Stock.

2.10. Option Agreement -- means the written agreement that sets forth
the terms of an Option granted to an Eligible Employees under this Plan.

2.11. Option Price -- means the price that shall be paid to purchase
one share of Stock upon the exercise of an Option granted under this Plan.

<PAGE> 6

2.12. Plan -- means this Healthcare Recoveries, Inc., Corporation
Non-qualified Stock Option Plan for Eligible Employees, as amended from time to
time.

2.13. Stock -- means the common stock of the Company, par value $.001
per share.

Section 3.

SHARES RESERVED UNDER THE PLAN

There shall be _________ shares of Stock reserved for issuance under
this Plan, and such shares of Stock shall be reserved to the extent that the
Company deems appropriate from authorized but unissued shares of Stock and from
shares of Stock which have been repurchased by the Company. Furthermore, any
shares of Stock subject to an Option that remain unissued after the cancellation
or expiration of such Option thereafter shall again become available for use
under this Plan.

Section 4.

EFFECTIVE DATE

The effective date of this Plan shall be _______________, 1997,
provided that the Company's stockholders (acting at a duly called meeting of
such shareholders) approve the establishment of this Plan within twelve months
after the date the Board adopts this Plan. Any Option granted before such
stockholder approval automatically shall be granted subject to such approval. If
there is no such approval by the Company's stockholders, this Plan shall not go
into effect and the grant of any Options under this Plan shall be null and void.

Section 5.

ADMINISTRATION

<PAGE> 7

This Plan shall be administered by the Committee. The Board may from
time to time remove members from, or add members to, the Committee. Vacancies on
the Committee shall be filled by the Board and the Board shall designate the
Chairman of the Committee. The Committee shall hold meetings at such times and
places as it may determine. The Committee acting in its absolute discretion
shall exercise such powers and take such action as expressly called for under
this Plan and, further, the Committee shall have the power to interpret this
Plan and to take such other action (except to the extent the right to take such
action is expressly and exclusively reserved for the Board) in the
administration and operation of this Plan as the Committee deems equitable under
the circumstances, which action shall be binding on the Company, on each
affected Eligible Employee and on each other person directly or indirectly
affected by such action. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to this Plan or
any Option granted under this Plan.

Section 6.

ELIGIBILITY

Only Eligible Employees shall be eligible for the grant of Options
under this Plan.

Section 7.

GRANT OF OPTIONS

The Committee, acting in its absolute discretion, shall have the right
to grant Options to Eligible Employees under this Plan. Each grant of an Option
shall be evidenced by an Option Agreement, and each Option Agreement shall
incorporate such terms and conditions as the Committee, acting in its absolute
discretion, deems consistent with the terms of this Plan;

<PAGE> 8

provided that (unless the Committee decides otherwise with respect to any
Option grant or Option grants) each Option Agreement shall provide that if the
Eligible Employee ceases to be an employee of the Company or of any parent or
subsidiary of the Company (other than as a result of a transaction contemplated
by Section 14) before the Option is fully vested, any portion of the Option
which is not fully vested on the date of such termination of employment shall
be automatically forfeited as of such employment termination date, and the
vested portion of the Option which is unexercised shall expire, terminate and
become unexercisable no later than the earlier to occur of: (i) the expiration
of three months from the date on which the Eligible Employee ceases to be an
employee of the Company or of any parent or subsidiary of the Company for any
reason other than death or disability (within the meaning of Code Section
22(e)(3)), or (ii) the expiration of six months from the date the Eligible
Employee ceases to be employed by the Company or any parent or subsidiary of
the Company for reasons of death or disability (within the meaning of Code
Section 22(e)(3)).

Section 8.

OPTION PRICE

The Option Price for each share of Stock subject to an Option may (in
the absolute discretion of the Committee) be more or less than or equal to the
Fair Market Value of a share of Stock on the date such Option is granted;
provided, however, that in no event shall the Option Price be less than adequate
consideration as determined by the Committee.

<PAGE> 9

Section 9.

EXERCISE PERIOD

Each Option granted under this Plan shall be exercisable in
whole or in part if and when it is vested and at such time or times as set forth
in the related Option Agreement, but no Option Agreement shall make an Option
exercisable after the earlier of

(a) the date such option is exercised in full or
forfeited, or

(b) the date which is the tenth anniversary of the date
such Option is granted.

Section 10.

NONTRANSFERABILITY

No Option granted under this Plan shall be transferable by an Eligible
Employee other than by will or by the laws of descent and distribution at his or
her death, and an Option shall be exercisable during an Eligible Employee's
lifetime only by the Eligible Employee or, if the Eligible Employee is determine
under applicable law to be incompetent to act on his or her own behalf, by the
person authorized under such applicable law to act on the Eligible Employee's
behalf. The Company shall treat any person to whom an Option is transferred by
will or by the laws of descent and distribution the same as an Eligible Employee
for purposes of exercising such Option.

Section 11.

SECURITIES REGISTRATION

Each Option Agreement shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option, the Eligible Employee shall, if
so requested by the Company, hold such shares of Stock for investment and not
with a view to resale or distribution to the public and, if so requested by the
Company, shall deliver to the Company a written statement satisfactory to

<PAGE> 10

the Company to that effect. Each Option Agreement also shall provide that, if so
requested by the Company, the Eligible Employee shall make a written
representation to the Company that he or she will not sell or offer to sell any
of such Stock unless a registration statement shall be in effect with respect to
such stock under the 1933 Act and any applicable state securities law or unless
he or she shall have furnished to the Company an opinion, in form and substance
satisfactory to the Company, of legal counsel acceptable to the Company, that
such registration is not required. Certificates representing the Stock
transferred upon the exercise of an Option granted under this Plan may at the
discretion of the Company bear a legend to the effect that such Stock has not
been registered under the 1933 Act or any applicable state securities law and
that such Stock may not be sold or offered for sale in the absence of an
effective registration statement as to such Stock under the 1933 Act and any
applicable state securities law or an opinion, in form and substance
satisfactory to the Company, of counsel acceptable to the Company, that such
registration is not required.

Section 12.

LIFE OF PLAN

No Option shall be granted under this Plan on or after the earlier of

(a) the tenth anniversary of the effective date of this
Plan (as determined under Section 4), in which event
this Plan thereafter shall continue in effect until
all outstanding Options have been exercised in full
or no longer are exercisable, or

(b) the date on which all of the Stock reserved under
Section 3 has (as a result of the exercise of Options
granted under this Plan) been issued or no longer is

<PAGE> 11

available for use under this Plan, in which
event this Plan also shall terminate on such date.

Section 13.

ADJUSTMENT

The number of shares of Stock reserved under Section 3, the number of
shares of Stock subject to Options granted under this Plan and the Option Price
of such Options shall be adjusted by the Committee in a equitable manner to
reflect any change in the capitalization of the Company, including, but not
limited to, such changes as stock dividends or stock splits, a subdivision or
combination of the Stock, a reclassification of the Stock, a merger or
consolidation of the Company or any like changes in the Stock or in the value
of a share of Stock. If any adjustment under this Section 13 would create a
fractional share of Stock or a right to acquire a fractional share of Stock,
such fractional share shall be disregarded and the number of shares of Stock
reserved under this Plan and the number subject to any Options granted under
this Plan shall be the next lower number of shares of Stock, rounding all
fractions downward. Any adjustment made under this Section 13 by the Committee
shall be conclusive and binding on affected persons.

Section 14.

CHANGE OF CONTROL AND CERTAIN OTHER EVENTS

14.1. Change of Control Events. The following events shall constitute
"Change of Control" events for purposes of this Plan: (1) The adoption of a plan
of merger or consolidation of the Company with any other corporation as a result
of which the holders of the outstanding voting stock of the Company as a group
would receive less than fifty percent of the voting stock of the surviving or
resulting corporation; (2) The adoption of a plan of liquidation or the approval

<PAGE> 12

of the dissolution of the Company; (3) The sale or transfer of substantially all
of the assets of the Company; (4) The sale or transfer of substantially all of
the assets or stock of an operating subsidiary of the Company, other than as
security for obligations of the Company; or (5) The sale or transfer of
substantially all of the assets of an operating division of the Company or its
subsidiaries, other than as security for obligations of the Company.

14.2. The Company. In the event of a Change of Control event described
in Section 14.1(1), the unexercised portion of all outstanding Options under
this Plan will become fully vested and immediately exercisable and will remain
exercisable until the occurrence of such Change of Control event, after which
time all outstanding Options will immediately terminate as to any portion
thereof not exercised.

14.3. Notice. Subject to compliance with applicable federal and state
securities laws, the Committee will undertake to provide applicable Eligible
Employees with reasonable notice of any Change of Control event described in
Section 14.1 prior to the occurrence of such Change of Control event.

14.4. Disposition of Stock Following Change of Control of Company. In
the event of a Change of Control event described in Section 14.1(1), each
Eligible Employee electing to exercise any outstanding Option will have the
right in connection with the closing of such Change of Control event either to
(1) sell to the Company or the surviving or resulting corporation, the shares
of Stock which the Eligible Employee received upon exercise of such Option at a
cash price per share equivalent of the Fair Market Value of the Stock as of the
date of such Change of Control event, or (2) receive the number and class of
shares of stock or other securities or any other property to which the terms of
the agreement of merger, consolidation, or other reorganization

<PAGE> 13

would entitle the Eligible Employee to receive as the holder of record of the
number of shares of Stock which the Eligible Employee received upon exercise of
such Option; provided, however, that in the event a Change of Control event
contemplated by this Section 14.4 involves a merger to be accounted for under
the "pooling of interest" accounting method, then the Committee shall have the
authority hereunder to modify the rights of an Eligible Employee under this
Section 14.4 to the extent necessary in order to preserve the "pooling of
interest" accounting treatment for such merger.

14.5. Fractional Shares. No Change of Control event contemplated by
this Section 14 shall create a right to acquire a fractional share of Stock, and
any such fractional share shall be forfeited by the Eligible Employee.

Section 15.

AMENDMENT OR TERMINATION

This Plan maybe amended by the Committee from time to time to the
extent that the Committee deems necessary or appropriate except, the Committee
shall not amend this Plan absent the approval of the stockholders of the Company
if stockholder approval of the amendment is required by a national securities
exchange on which the stock is listed or is required in order to comply with
Rule 16b-3 under the Exchange Act. The Committee also may suspend the granting
of Options under this Plan at any time and may terminate this Plan at any time;
provided; however, the Committee shall not have the right unilaterally to
modify, amend or cancel any Option granted before such modification, amendment
or cancellation unless the Eligible Employee consents in writing to such
modification, amendment or cancellation.

<PAGE> 14

Section 16.

MISCELLANEOUS

16.1. No Stockholder Rights. No Eligible Employee shall have any rights
as a stockholder of the Company as a result of the grant of an Option to him or
to her under this Plan or his or her exercise of such Option pending the actual
delivery of Stock subject to such Option to such Eligible Employee.

16.2. No Contract of Employment. The grant of an Option to an Eligible
Employee under this Plan shall not constitute a contract of employment and shall
not confer on an Eligible Employee any rights upon his or her termination of
employment in addition to those rights, if any, expressly set forth in the
Option Agreement which evidences his or her Option.

16.3. Other Conditions. Each Option Agreement may require that an
Eligible Employee (as a condition to the exercise of an Option) enter into any
agreement or make such representations requested by the Company, including any
agreement which restricts the transfer of Stock acquired pursuant to the
exercise of such Option and provides for the repurchase of such Stock by the
Company under certain circumstances.

16.4. Withholding. The exercise of any Option granted under this Plan
shall constitute an Eligible Employee's full and complete consent to whatever
action the Committee deems necessary to satisfy the federal and state tax
withholding requirements, if any, which the Committee acting in its discretion
deems applicable to such exercise.

16.5. Construction. This Plan shall be construed under the laws of the
State of Delaware.

<PAGE> 15

16.6. No "Incentive Stock Option" Treatment. No Option granted under
this Plan shall be treated as an "incentive stock option" within the meaning of
Section 422 of the Code.

16.7. References. Any reference in this Plan to a section (Section)
shall be to a section (Section) of this Plan unless otherwise specified in such
reference.

<PAGE> 1
EXHIBIT 4.3

HEALTHCARE RECOVERIES, INC.
DIRECTORS' STOCK OPTION PLAN

1. Purpose. The Healthcare Recoveries, Inc. Directors'
Stock Option Plan (the "Plan") is intended as an incentive and as a means of
encouraging stock ownership by non-employee members of the Board of Directors
of Healthcare Recoveries, Inc. (the "Company").

2. Administration.

(a) The Plan shall be administered, construed and
interpreted by the Compensation Committee (the "Committee") of the Board of
Directors. During any time that the Board of Directors does not have a
Compensation Committee, the duties of the Committee under the Plan shall be
performed by the Board of Directors.

(b) The interpretation and construction by the Committee of
any provision of the Plan, any option granted under it or any Stock Option
Agreement and any determination by the Committee, pursuant to any provision of
the Plan, any such option or any provisions of a Stock Option Agreement, shall
be final and conclusive. The terms and conditions of each individual Stock
Option Agreement shall be in accordance with the provisions of the Plan, but
the Committee may provide for such additional terms and conditions, not in
conflict with the provisions of the Plan, as it deems advisable.

3. Eligibility. Members of the Board of Directors who are
not employees of the Company or any subsidiary shall be granted options under
and pursuant to the terms of the Plan.

4. Stock. The stock subject to the options and other
provisions of the Plan shall be authorized but unissued or reacquired shares of
the $.001 par value Common Stock of the Company (the "Common Stock"). Subject
to readjustment in accordance with the provisions of Section 6(h), the total
amount of Common Stock on which options may be granted to Directors under the
Plan shall not exceed in the aggregate shares.

If any outstanding option (or portion thereof) under the Plan for
any reason expires unexercised or is terminated without exercise prior to the
end of the period during which options may be granted, the shares of Common
Stock allocable to the unexercised portion of such option again may be
subjected to an option under the Plan.

5. Grant of Options. Each eligible Director shall be
granted on the later of the date of consummation of the initial public offering
of the Common Stock, or the date he or she first becomes a Director an option
to purchase shares of Common Stock, and each eligible Director shall be
granted on the date of each annual meeting of stockholders of the Company
beginning in 1998 an option to purchase shares of Common Stock, for so
long as shares are available under the Plan, but no option shall be granted
after March 31, 2002. Options granted shall be subject to the vesting and
other terms and conditions of the Plan and each optionee's Stock Option

<PAGE> 2

Agreement.

6. Terms and Conditions of Options. Stock options granted
pursuant to the Plan shall be evidenced by Stock Option Agreements in such form
as the Committee from time to time shall approve; such agreements and the stock
options granted by such agreements shall comply with and be subject to the
following terms and conditions:

(a) Number of Shares. Each Stock Option
Agreement shall state the total number of shares of Common Stock
to which it pertains.

(b) Exercise Price. In the case of options
granted on the date of consummation of the initial public
offering of the Common Stock, the exercise price per share shall
be the initial public offering price per share. In all other
cases, the exercise price per share shall be the arithmetic
average of the Fair Market Value per share of the Common Stock on
the ten trading days that precede the date of grant, including
the date of grant as the tenth trading day, on which shares of
the Common Stock are traded.

(c) Medium and Time of Payment. The exercise
price shall be payable upon the exercise of the option, or as
provided in Section 6(f) if the Company adopts a broker-directed
cashless exercise/resale procedure, in each case in an amount
equal to the number of shares then being purchased times the per
share exercise price. Payment at the election of the optionee,
shall be (i) in cash; (ii) by delivery to the Company of a
certificate or certificates for shares of Common Stock, duly
endorsed for transfer to the Company with signature guaranteed by
a member firm of the New York Stock Exchange or by a national
banking association; (iii) by the withholding by the Company of
shares of stock that otherwise would be issued to the optionee as
a result of the exercise of such option to the extent that the
optionee elects to pay such exercise price through such withheld
shares of Common Stock; or (iv) by a combination of (i), (ii) and
(iii). In the event of any payment by delivery or withholding of
shares of Common Stock, such shares shall be valued on the basis
of their Fair Market Value determined as of the day prior to the
date of delivery or withholding. If payment is made by delivery
of shares of Common Stock, the value of such shares may not
exceed the total exercise price payment; but the preceding clause
shall not prevent delivery of a stock certificate for a number of
shares having a greater value, if the number of shares to be
applied to payment of the exercise price is designated by the
optionee and the optionee requests that a certificate for the
remainder shares be delivered to the optionee.

In addition to the payment of the purchase price of the
shares then being purchased, an optionee shall also, pursuant to
Section 12, pay to the Company or otherwise provide for an amount
equal to the amount, if any, which the Company at the time of
exercise is required to withhold under the income tax withholding
provisions of the Internal Revenue Code and other applicable
income tax laws.

- 2 -
<PAGE> 3

(d) Fair Market Value. For purposes of Sections
6(b) and (c), Fair Market Value of Common Stock shall be
determined on the applicable date as follows. If the Common
Stock is registered on a national securities exchange (as such
term is defined by the Securities Exchange Act of 1934) or is
regularly traded in the over-the-counter market on the date of
determination, the Fair Market Value per share of the Common
Stock shall be determined as the price equal to the mean between
the high and low sales prices of a share of the Common Stock on
said national securities exchange on that day [or, for purposes
of Section 6(c), if no shares of the stock are traded on that
date but there were shares traded on dates within a reasonable
period both before and after such date, the Fair Market Value
shall be the weighted average of the means between the high and
low sales prices of the stock on the nearest date before and the
nearest date after that date on which shares of the stock are
traded] or of the mean between the high "bid" and low "asked"
prices per share in said over-the-counter market on that day, as
reported by the National Association of Securities Dealers. If
the Common Stock is traded on two national securities exchanges,
the Fair Market Value shall be determined by the weighted average
Fair Market Value on such exchanges unless one of such exchanges
is the New York Stock Exchange in which case Fair Market Value
shall be determined by prices on that exchange. If the Common
Stock is traded both on a national securities exchange and in the
over-the-counter market, the Fair Market Value shall be
determined by the prices on the national securities exchange,
unless transactions on such exchange and in the over-the-counter
market are jointly reported on a consolidated reporting system in
which case the Fair Market Value shall be determined by reference
to such consolidated reporting system. If the Common Stock is
not listed for trading on a national securities exchange and is
not regularly traded in the over-the-counter market, then the
Committee shall determine the Fair Market Value of the stock from
all relevant available facts which may include opinions of
independent experts as to value and may take into account any
recent sales and purchases of such stock to the extent they are
representative.

(e) Terms of Options; Date of Exercise. Terms of
options granted under the Plan shall commence on the date of
grant and shall expire on March 31, 2007, subject to Section
6(g). Each option shall become exercisable when vested.

(f) Method of Exercise. Options shall be
exercised (i) by written notice directed to the Secretary of the
Company at its principal place of business, accompanied by
payment [made in accordance with Section 6(c)], in cash or
personal check (which will be accepted subject to collection), or
by certificates for shares of the Common Stock, or by directions
for withholding of shares, or by a combination of the foregoing,
of the option price for the number of shares specified in the
notice of exercise and by any documents required by Section 6(j),
or (ii) by complying with the exercise and other

- 3 -
<PAGE> 4

provisions of any broker-directed cashless exercise/resale
procedure adopted by the Company and approved by the Committee,
and by delivery of any documents required by Section 6(j). The
Company shall make delivery of such shares within a reasonable
period of time or in accordance with applicable provisions of any
such broker-directed cashless exercise/resale procedure;
provided, however, that if any law or regulation requires the
Company to take any action (including but not limited to the
filing of a registration statement under the Securities Act of
1933 and causing such registration statement to become effective)
with respect to the shares specified in such notice before the
issuance thereof, then the date of delivery of such shares shall
be extended for the period necessary to take such action.

(g) Effect of Termination of Service as a
Director. If an optionee during his life ceases to be a
non-employee Director of the Company (including its subsidiaries)
due to voluntary resignation as a Director, voluntary decision
not to stand for reelection or removal as a Director by the
stockholders for cause, then the unvested portion of any option
shall terminate on the earlier to occur of (i) the expiration
date of the option, or (ii) the date of termination of service as
a non-employee Director. If an optionee ceases to be a Director
for any other reason, the unvested portion of options shall vest
on the date of termination of service and may thereafter be
exercised in accordance with their terms. In the event of the
death of the optionee while he is a non-employee Director of the
Company or after termination of such service, the vested portion
any option may be exercised by his personal representatives,
heirs or legatees at any time prior to the expiration of six
months from the date of death of the optionee, but in no event
later than the date of expiration of the option.

(h) Adjustments Upon Changes in Capitalization.
If the Common Stock should, as a result of a stock split or stock
divided, combination of shares, recapitalization or other change
in the capital structure of the company or exchange of Common
Stock for other securities by reclassification or otherwise, be
increased or decreased or changed into, or exchanged for, a
different number or kind of shares of other securities of the
Company, or any other corporation, then the number of shares
covered by options, the number and kind of shares which
thereafter may be distributed or issued under the Plan and the
per share option price of options shall be appropriately adjusted
consistent with such change in such manner as the Committee may
deem equitable to prevent dilution of or increase in the rights
granted to, or available for, optionees.

(i) Who May Exercise. No option shall be
assignable or transferable by the optionee except by will or by
the laws of descent and distribution; and, during the lifetime of
an optionee, the option shall be exercisable only by him.

(j) Optionee's Agreement. If, in the opinion of
counsel for the Company, such action is necessary or desirable,
no option shall be granted to any optionee unless

- 4 -
<PAGE> 5

at such time such optionee represents and warrants that the stock
will be acquired for investment only and not for purposes of
resale or distribution and makes such further representation and
warranties as are deemed necessary or desirable by counsel to the
Company with regard to holding and resale of the stock. If at
the time of the exercise of any option, in the opinion of counsel
for the Company, it is necessary or desirable, in order to comply
with any applicable laws or regulations relating to the sale of
securities, that the optionee shall represent and warrant that he
is purchasing the shares that are subject to the option for
investment and not with any present intention to resell or
distribute the same or make other and further representations and
warranties with regard to the holding and resale of the shares,
the optionee, upon the request of the Committee, will execute and
deliver to the Company an agreement or affidavit to such effect.
All certificates issued pursuant to the exercise of any option
shall be marked with a restrictive legend, if such marking, in
the opinion of counsel to the Company, is necessary or desirable.

(k) Rights as a Stockholder. An optionee shall
have no rights as a stockholder with respect to shares covered by
his option until the date of the issuance of the shares to him
and only after such shares are fully paid. Unless specified in
Section 6(h), no adjustment will be made for dividends or other
rights for which the record date is prior to the date of such
issuance.

(l) Vesting. The right to purchase 33 1/3% of
the shares of Common Stock covered by an option shall vest on the
March 1st next following the date of grant and on each succeeding
March 1st until fully vested, provided that the optionee must be
a non-employee Director of the Company on a March 1st in order for
options to vest on such March 1st.

(m) Miscellaneous Provisions. The Stock Option
Agreements authorized under the Plan shall contain such other
provisions, including, without limitation, restrictions upon the
exercise of the option as the Committee shall deem advisable.

7. Effective Date and Termination of Plan.

(a) The Plan shall become effective upon adoption by the
Board of Directors of the Company.

(b) The Plan, with respect to the granting of options,
shall terminate at midnight on March 31, 2002, but the Board of Directors may
terminate the Plan at any time prior to said time and date. Such termination
of the Plan by the Board of Directors shall not alter or impair any of the
rights or obligations under any option theretofore granted under the Plan
unless the affected optionee

- 5 -
<PAGE> 6

shall so consent.

8. Fractional Shares. If any provision of this Plan or a
Stock Option Agreement would create a right to acquire a fractional share, such
fractional share shall be disregarded.

9. Successor Corporation. The obligations of the Company under
the Plan shall be binding upon any successor corporation or organization
succeeding to substantially all of the assets and business of the Company and
shall continue to be binding upon the Company notwithstanding any change in
ownership of the Company. The Company agrees that it will make appropriate
provision for the preservation of optionees' rights under the Plan in any
agreement or plan which it may enter into or adopt to effect any such transfer
of assets or ownership.

10. Non-Alienation of Benefits. Except insofar as applicable
law may otherwise require, (i) no options, rights or interest of optionees or
Common Stock deliverable to any optionee at any time under the Plan shall be
subject in any manner to alienation by anticipation, sale, transfer,
assignment, bankruptcy, pledge, attachment, charge of encumbrance of any kind,
and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge
or otherwise encumber any such amount, whether presently or thereafter payable,
shall be void; and (ii), to the fullest extent permitted by law, the Plan shall
in no manner be liable for, or subject to, claims, liens, attachments or other
like proceedings or the debts, liabilities, contracts, engagements, or torts of
any optionee. Nothing in this Section 10 shall prevent a optionee's rights and
interests under the Plan from being transferred by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or ERISA; provided, however, that no transfer by will or by
the laws of descent and distribution shall be effective to bind the Company
unless the Committee or its designee shall have been furnished before or after
the death of such optionee with a copy of such will or such other evidence as
the Committee may deem necessary to establish the validity of the transfer.

11. Listing and Qualification of Shares. The Company, in its
discretion, may postpone the issuance or delivery of shares of Common Stock
until completion of any stock exchange listing, or other qualification or
registration of such shares under any state or federal law, rule or regulation,
as the Company may consider appropriate, and may require any optionee to
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable laws, rules
and regulations.

12. Taxes. The Company may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of all
federal, state, local and other taxes required by law to be withheld with
respect to options under the Plan, including, but not limited to, (i) deducting
the amount required to be withheld from any amount then or thereafter payable
to an optionee, beneficiary or legal representative, (ii) requiring an optionee
, beneficiary or legal representative to pay to the Company the amount required
to be withheld as a condition of releasing shares, or (iii) complying with
applicable provisions of any broker-directed cashless exercise/resale procedure
adopted by the Company pursuant to Section 6(f). If, in the exercise of an
Option, the Company requires payment pursuant to (ii), then, to the extent
permitted by the Company in its discretion,

- 6 -
<PAGE> 7

payment may be made in any medium provided for in subsection (d) of Section 6.

13. No Liability of Directors. No member of the Board or the
Committee shall be personally liable by reason of any contract or other
instrument executed by such member on his behalf in his capacity as a member of
the Board or Committee, nor for any mistake of judgment made in good faith, and
the Company shall indemnify and hold harmless each employee, officer and
Director of the Company, to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated,
against any cost or expense (including counsel fees) or liability (including
any sum paid in settlement of a claim with the approval of the Board) arising
out of any act or omission to act in connection with the Plan to the fullest
extent permitted or required by the Company's governing instruments and, in
addition, to the fullest extent of any applicable insurance policy purchased by
the Company.

14. Amendment. This Plan may be amended by the Board from time
to time to the extent that the Board deems necessary or appropriate; provided,
however, no such amendment shall be made absent the approval of the
stockholders of the Company: (1) if stockholder approval of such amendment is
required for continued compliance with Rule 16b-3 of the Securities Exchange
Act, or (2) if stockholder approval of such amendment is required by any other
applicable laws or regulations or by the rules of any stock exchange as long as
the Common Stock is listed for trading on such exchange. The Committee also
may suspend the granting of options under this Plan at any time; provided,
however, the Company shall not have the right unilaterally to modify, amend or
cancel any option granted before such suspension unless (1) the optionee
consents in writing to such modification, amendment or cancellation or (2)
there is a dissolution or liquidation of the Company or a transaction described
in Section 6(h) of this Plan.

15. Captions. The captions preceding the sections of the Plan
have been inserted solely as a matter of convenience and shall not, in any
manner, define or limit the scope or intent of any provisions of the Plan.

16. Governing Law. The Plan and all rights thereunder shall be
governed by, and construed in accordance with, the laws of the Commonwealth of
Kentucky, without reference to the principles of conflicts of law thereof.

17. Expenses. All expenses of administering the Plan shall be
borne by the Company.

- 7 -

<PAGE> 1
EXHIBIT 10.2

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into
as of the ___ day of _____________, 1997, by and between HEALTHCARE RECOVERIES,
INC., a Delaware corporation (the "Company"), and PATRICK B. MCGINNIS (the
"Employee").

STATEMENT OF BACKGROUND INFORMATION

The Company provides subrogation and related recovery services for
healthcare payors (the "Business"), including health maintenance organizations,
indemnity insurers, Blue Cross and Blue Shield organizations, third-party
administrators, self-funded employee health welfare benefit plans, and provider
hospital organizations. The Company's services consist of assisting healthcare
payors to recover the cost or reasonable value of healthcare benefits provided
to insureds who are injured under circumstances where a third party, typically
a property or casualty insurer of an individual, is ultimately responsible for
such healthcare benefits.

The Board of Directors (the "Board") has determined that it would be
in the best interest of the Company and its stockholders if Employee were
employed by the Company for a term of three years.

Employee acknowledges the Company's ownership of its goodwill, and the
necessity of the restrictive covenants contained in this Agreement to protect
the Company's interest in such material asset.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, the parties agree as follows:

2. Duties of Employee. Employee agrees to perform and discharge
the usual duties of a Chairman of the Board of Directors and Chief Executive
Officer of a similarly sized

<PAGE> 2

organization, including, without limitation, those presently set forth in the
Bylaws of the Company, and such other duties as may be reasonably assigned by
the Board, and to comply with all of the Company's policies, standards and
regulations. Employee's title shall be Chairman of the Board of Directors and
Chief Executive Officer, and Employee shall report to the Board. All of
Employee's time, attention and energies which are devoted to business endeavors
will be devoted to the Business, and Employee will not, during the term of this
Agreement, be engaged (whether or not during normal business hours) in any
other business or professional activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage, without the prior
written consent of the Board, which consent will not be unreasonably withheld.
This Section will not be construed to prevent Employee from: (a) investing
personal assets in businesses which do not compete with the Company in such
form or manner that will not require any services on the part of Employee in
the operation or the affairs of the companies in which such investments are
made and in which Employee's participation is solely that of an investor; (b)
purchasing securities in any corporation whose securities are listed on a
national securities exchange or regularly traded in the over-the-counter
market, provided that Employee at no time owns, directly or indirectly, in
excess of one percent of the outstanding stock of any class of any such
corporation engaged in a business competitive with that of the Company; or (c)
participating in conferences, preparing and publishing papers or books or
teaching, participating on the board of directors of other companies ("Other
Boards") or providing limited advisory services, so long as these activities
are not contrary to the Company's interests, and, with regard to participation
on Other Boards or the provision of limited advisory services, so long as the
Board approves Employee's participation on any such Other Boards or approves
the provision of such limited advisory services, which approval will not be
unreasonably withheld.

3. Term. The term of this Agreement will be for a period of
three years commencing on ___________, 1997, with automatic two year renewals,
unless a notice of termination is given by either party within not less than
sixty days prior to the end of a term or a renewal term, subject to earlier
termination as provided for in Section 4.

4. Termination and Suspension.

(a) By the Company. Notwithstanding anything contained in Section
3 to the contrary, the Company has the right to terminate this Agreement and
all of its obligations under this Agreement immediately if the Board takes
action to terminate after any of the following events occurs:

(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure such
breach within ten days after Employee's receipt from the
Company of written notice of such breach, which notice
describes in reasonable detail the Company's belief that
Employee is in breach (notwithstanding the foregoing, no cure
period shall be applicable to breaches by Employee of Sections
6, 7 or 8 of this Agreement);

- 2 -
<PAGE> 3

(ii) Employee commits any act in bad faith materially
detrimental to the business or reputation of the Company;

(iii) Employee engages in illegal activities or is
convicted of any crime involving fraud, deceit or moral
turpitude; or

(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be materially unable to
perform Employee's duties under this Agreement. Without
limiting the generality of the foregoing, Employee's inability
to adequately perform services under this Agreement for a
period of ninety consecutive days will be conclusive evidence
of such mental or physical incapacity or disability, unless
such inability to adequately perform services under this
Agreement is pursuant to a mental or physical incapacity or
disability covered by the Family Medical Leave Act, in which
case such ninety-day period shall be extended to a one hundred
fifty-day period.

(b) By Employee or by the Company other than for Cause. If
Employee terminates this Agreement pursuant to any of clauses (i) - (v) below
or if the Company terminates this Agreement other than pursuant to Section
4(a), the Company obligations under this Agreement to pay Employee the annual
salary under Section 5(a), to provide for the continued vesting of stock option
awards under Section 5(b) and to provide for health insurance benefits to
Employee under Section 5(c) shall continue in accordance with the terms of this
Agreement for the greater of (i) the remainder of the term or the renewal term,
or (ii) two years.

(i) the Company materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure its
breach within ten days after its receipt from Employee of
written notice of such breach, which notice describes in
reasonable detail Employee's belief that the Company is in
breach;

(ii) without Employee's express written consent, the
Company assigns to Employee duties, or significantly reduces
Employee's assigned duties, in a manner inconsistent with
Employee's position with the Company;

(iii) without Employee's express written consent, the
Company requires Employee's relocation outside of the
metropolitan Loisville, Kentucky area;

(iv) the Company fails to obtain the assumption of this
Agreement by any successors to the Company; or

(v) a Change in Control Event (as defined herein) occurs,
and Employee's employment is terminated by Employee or the
Company, for whatever reason, within one hundred twenty days
thereafter. Upon a Change in Control Event, the

- 3 -
<PAGE> 4

applicable provisions of Section 4(e) shall apply. For
purposes of this Agreement a "Change in Control Event" shall
mean the occurrence of any of the following:

(1) the adoption of a plan of merger or
consolidation of the Company with any other
corporation as a result of which the holders of the
outstanding voting stock of the Company as a group
would receive less than 50% of the voting stock of
the surviving or resulting corporation;

(2) the adoption of a plan of liquidation or the
approval of the dissolution of the Company;

(3) the sale or transfer of substantially all of
the assets of the Company;

(4) the following individuals cease for any
reason to constitute a majority of the number of
directors then serving: individuals who, on the date
of this Agreement, constitute the Board and any new
director (other than a director whose initial
assumption of office is in connection with an actual
or threatened election contest, including but not
limited to a consent solicitation, relating to the
election of directors of the Company) whose
appointment or election by the Board or nomination
for election by the Company's stockholders was
approved or recommended by a vote of at least
two-thirds of the directors then still in office who
either were directors on the date of this Agreement
or whose appointment, election or nomination for
election was previously so approved or recommended;
or

(5) any individual, entity, group (within the
meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, and the rules
promulgated under such act), or other person acquires
in a single transaction or a series of transactions
more than 30% of the outstanding shares of the
Company's common stock.

(c) Suspension By the Company. If Employee is indicted for any
felony, the Company may immediately suspend Employee without compensation. If
the indictment is dropped, or if Employee is acquitted (the dropping of an
indictment and an acquittal each referred to as an "Acquittal Event"), the
Company shall, within ten days after it receives written notice of any
Acquittal Event, remit to Employee all amounts otherwise payable pursuant to
this Agreement but withheld during the suspension period, together with
interest from each due date paid at the then-current prime rate plus two
percentage points, as reported in The Wall Street Journal. Upon any such
Acquittal Event, the Company's payment obligations to Employee under this
Agreement shall resume and shall continue throughout the remainder of the term
of this Agreement, subject to the terms and conditions of this Agreement, but
the Company shall have the option whether to ask Employee actually to return to
work and to publicly associate with the Company. At the Company's request in
this circumstance, Employee will refrain from working at or for the

- 4 -
<PAGE> 5

Company (notwithstanding his continuing compensation under this Agreement) and
will refrain from representing to any person or entity that he is associated
with the Company.

(d) No Duty to Mitigate. If Employee terminates his employment
under and in accordance with this Agreement or if the Company terminates
Employee's employment under this Agreement for any reason other than those
specified in Section 4(a), Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement (whether seeking new
employment or in any other manner), and the Company's obligations under Section
4(b) shall not be reduced because of any employment of Employee after
termination of employment under this Agreement.

(e) Gross-Up. Upon a Change in Control Event and a termination of
this Agreement by Employee pursuant to Section 4(b)(v), the Company will pay to
Employee (in lieu of an obligation to make further payments to Employee under
or on account of Section 5(a) and to provide benefits to Employee under or on
account of Section 5(c)) the salary that would have been payable to Employee
under this Agreement from the date of termination for the greater of the
remainder of (i) the term or the renewal term, or (ii) two years. The amounts
payable to Employee under the previous sentence of this Section 4(e) shall be
paid by the Company in periodic payments or in a lump sum, at the option of
Employee. If any payment or other benefit (a "Termination Payment") received
or to be received by Employee in connection with a Change in Control Event
(whether or not this Agreement is terminated) or Employee's termination of
employment (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, with any person whose actions result
in a Change in Control Event or with any person affiliated with the Company or
such person) is or will be subject to the tax (the "Excise Tax") imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the
Company shall pay to Employee, a Gross-Up Payment (as defined) to the extent
provided by the second paragraph of this Section 4(e).

A Gross-Up Payment (as defined) shall be payable pursuant to this
Section 4(e) on and subject to the following terms and conditions:

(1) At the time the applicable Termination Payment is
made, an additional amount (the "Gross-Up Payment") shall be paid by the
Company such that the net amount retained by Employee, after deduction of any
Excise Tax on such Termination Payment and any federal, state and local income
tax, employment tax and Excise Tax on the Gross-Up Payment, shall be equal to
the amount or value of such Termination Payment. For purposes of determining
whether any such Termination Payment will be subject to the Excise Tax, all
Termination Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 280G(b)(1) of the Code shall be treated as being
subject to the Excise Tax, unless in the opinion of tax counsel reasonably
acceptable to Employee and selected by the accounting firm which, immediately
prior to the Change in Control Event, was the Company's independent auditors,
such payments (in whole or in part) do not constitute "parachute payments"
within the meaning of Section 280G of

- 5 -
<PAGE> 6

the Code or represent reasonable compensation for services actually rendered in
excess of the "base amount" allocable to such reasonable compensation. The
full amount of the Gross-Up Payment shall be treated as being subject to the
Excise Tax. The value of any non-cash benefits or any deferred payment or
benefit shall be determined in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.

(2) For purposes of determining the amount of any
Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the applicable Termination Payment or Gross-Up Payment is made, and shall be
deemed to pay state and local income taxes at the highest marginal rates of
taxation in the state and locality of his residence on the date the applicable
Termination Payment or Gross-Up Payment is made, net of the maximum reduction
in federal income taxes that could be obtained from deduction of such state and
local taxes.

(3) If the Excise Tax or income tax payable with respect
to a Gross-Up Payment as finally determined exceeds the amount taken into
account or paid to Employee at the time the applicable Termination Payment or
Gross-Up Payment is made (including by reason of any payment the existence or
amount of which cannot be determined at the time of the applicable Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess (plus any interest payable by Employee with respect to such excess)
at the time that the amount of such excess is finally determined.

5. Compensation and Benefits.

(a) Annual Salary. For all services rendered by Employee under
this Agreement, the Company will pay Employee a base salary of a minimum of Two
Hundred Thousand Dollars per annum in equal bi-weekly installments. Such
annual salary may be increased by the Board.

(b) Stock Option Awards. Employee shall be entitled to receive
under the Healthcare Recoveries, Inc., Non- Qualified Stock Option Plan options
to purchase _____ shares of the Company's common stock for an exercise price
equal to the initial offering price of the Company's Common Stock on the Nasdaq
National Market on __________, 1997, which options shall have an effective
grant date of ___________, 1997 and shall vest over three years as follows:
one-third on each of the first three anniversaries of the effective grant date.
All stock options contemplated by this Section 5(b) shall vest upon a Change in
Control Event. In addition to any other rights provided Employee under the
Healthcare Recoveries, Inc. Non-Qualified Stock Option Plan or in the stock
options agreement evidencing the awards contemplated by this Section 5, if an
Employee Event (as defined) shall occur, then Employee shall be deemed to
continue as an "employee of the Company" (within the meaning of the Healthcare
Recoveries, Inc. Non-Qualified Stock Option Plan) solely for purposes of
continued vesting of the stock option awards set forth in this Section 5(b)
until __________________, and the option so awarded shall not expire or
terminate prior to the later of the ninetieth day following said date and the
expiration date otherwise applicable under the Healthcare Recoveries, Inc.
Non-Qualified Stock Option

- 6 -
<PAGE> 7

Plan. For purposes of this Section 5(b), an "Employee Event" shall be deemed
to occur upon: (i) Employee's termination of this Agreement pursuant to the
provisions of Section 4(b); or (ii) involuntary termination of Employee by the
Company for any reason other than set forth in Section 4(a).

(c) Other Benefits. Employee will be entitled to such fringe
benefits as may be provided from time to time by the Company to its executive
employees, including, but not limited to, group health insurance, life and
disability insurance and any other fringe benefits now or hereafter provided by
the Company to its executive employees, if and when Employee meets the
eligibility requirements for any such benefit. The Company reserves the right
to change or discontinue any employee benefit plans or programs now being
offered to its employees; provided, however, that all benefits provided for
executive employees will be provided to Employee on an equal basis.

(d) Business Expenses. Employee will be reimbursed for all
reasonable expenses incurred in the discharge of Employee's duties under this
Agreement pursuant to the Company's standard reimbursement policies.

(f) Withholding. The Company will deduct and withhold from the
payments made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due employees.

6. Non-Disclosure of Confidential Information. Employee
recognizes and acknowledges that the trade secrets and confidential information
of the Company and its affiliates (the "Proprietary Information"), as they may
exist from time-to-time, are valuable, special and unique assets of the
Company's and its affiliates' businesses. Employee further acknowledges that
access to such Proprietary Information is essential to the performance of
Employee's duties under this Agreement. Therefore, in order to obtain access
to such Proprietary Information, Employee agrees that Employee will not, in
whole or in part, disclose such Proprietary Information to any person, firm,
corporation, association or any other entity for any reason or purpose
whatsoever, nor will Employee make use of any such information for Employee's
own purposes or for the benefit of any person, firm, corporation, association
or other entity (except the Company or its affiliates) under any circumstances.
For purposes of this Agreement, the term "trade secrets" means the whole or any
portion of any scientific or technical or non-technical information, design,
process, procedure, formula, computer software product, documentation or
improvement relating to the Company's or its affiliates businesses which: (1)
derives economic value, actual or potential, from not being generally known to
other persons who can obtain economic value from its disclosure or use; and (2)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy or confidentiality. The term "confidential information"
means any and all data and information relating to the Company's or its
affiliates' businesses: (1) which has value to the Company or its affiliates;
(2) is not generally known by its competitors or the public; and (3) is treated
as confidential by the Company or its affiliates. The provisions of this
Section 6 will apply during Employee's employment by the Company and for a
three- year period thereafter (without

- 7 -
<PAGE> 8

regard to the basis or reason for the termination of employment) with respect
to confidential information, and during Employee's employment by the Company
and at any and all times thereafter with respect to trade secrets. For
purposes of this Agreement, "Proprietary Information" will not include
information which is: (1) disclosed by the Company to others on an
unrestricted basis; (2) is or becomes general public knowledge through no fault
of Employee; or (3) is or becomes available to Employee from any source not
known to Employee to have a duty of nondisclosure to the Company. This Section
6, together with Sections 7, 8, 9, 10, 11 and 12, and the applicable provisions
of Sections 4 and 5, of this Agreement, shall survive termination of this
Agreement.

7.A Non-Competition Covenant. During Employee's employment by the
Company and for a period of one year following any termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, compete with the Company within the Geographical Area (as defined in
this Agreement). The term "compete" means to engage, directly or indirectly,
on Employee's own behalf or in the service of or on behalf of any other
individual or entity, either as a proprietor, employee, agent, independent
contractor, consultant, director, officer, partner or stockholder (other than a
stockholder of a corporation listed on a national securities exchange or whose
stock is regularly traded in a nationally-recognized stock exchange, provided
that Employee at no time owns, directly or indirectly, in excess of one percent
of the outstanding stock of any class of any such corporation) in providing
Business products or services. For purposes of this Agreement, the term
"Geographical Area" means the entire United States, and all foreign countries
in which Employee or any member of his staff is or has engaged in providing or
marketing Business products or services while employed by the Company.

B. Non-Interference. During Employee's employment by the Company
and for a period of two years following the termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, interfere with, disrupt, or attempt to disrupt the past, present or
prospective relationships, contractual or otherwise, between the Company and
any supplier, consultant, or client of the Company with whom Employee had
material contact during Employee's employment by the Company. The term
"prospective relationship" is defined as any relationship where the Company has
actively sought an individual or entity as a prospective supplier, consultant,
or client.

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<PAGE> 9

actively sought by the Company as a prospective client during such period, and
(ii) with whom Employee had material contact while employed by the Company, to
provide Business services to such Clients or prospects.

D. Construction. The parties agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 will be empowered
to sever any portion of the Geographical Area, client base, prospective
relationship or prospect list or any prohibited business activity from the
coverage of such Section and to apply the provisions of such Section to the
remaining portion of the Geographical Area, the client base or the prospective
relationship or prospect list, or the remaining business activities not so
severed by such judicial authority. In addition, it is the intent of the
parties that the judicial authority replace each such severed provision with a
provision as similar in terms to such severed provision as may be possible and
be legal, valid and enforceable. It is the intent of the parties that Sections
7 and 8 be enforced to the maximum extent permitted by law. For purposes of
the covenant set forth in Section 7.C, Employee at his own suggestion and not
at the request or direction of the Company, asserts that he has constructive
material contact with each and every Client, and further asserts that such
covenant would be unfair to the Company without application of such
constructive material contact. If any provision of either such Section is
determined not to be specifically enforceable, the Company shall nevertheless
be entitled to bring an action to seek to recover monetary damages as a result
of the breach of such provision by Employee.

8. Non-Solicitation of Employees Covenant. Employee further
agrees and represents that during Employee's employment by the Company and for
a period of two years following any termination of Employee's employment for
whatever reason, Employee will not, directly or indirectly, on Employee's own
behalf or in the service of, or on behalf of any other individual or entity,
divert, solicit or hire away, or attempt to divert, solicit or hire away, to or
for any individual or entity which is engaged in providing Business services,
any person employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such employee is
employed pursuant to written agreement and whether or not such employee is
employed for a determined period or at-will.

9. Existing Restrictive Covenants. Employee represents and
warrants that Employee's employment with the Company does not and will not
breach any agreement which Employee has with any former employer to keep in
confidence confidential information, not to solicit clients or employees, or
not to compete with any such former employer. Employee will not disclose to
the Company or use on its behalf any confidential information of any other
party required to be kept confidential by Employee.

10. Return of Proprietary Information. Employee acknowledges that
as a result of Employee's employment with the Company, Employee may come into
the possession and control of Proprietary Information, such as proprietary
documents, drawings, specifications, manuals, notes, computer programs,
customer lists, customer contracts or other proprietary material. Employee
acknowledges, warrants and agrees that Employee will return to the Company all
such

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<PAGE> 10

items and any copies or excerpts thereof, and any other properties, files or
documents obtained as a result of Employee's employment with the Company,
immediately upon the termination of Employee's employment with the Company.

11. Proprietary Rights. During the course of Employee's
employment with the Company, Employee may make, develop or conceive of useful
processes, machines, compositions of matter, computer software, algorithms,
works of authorship expressing such algorithm, or any other discovery, idea,
concept, document or improvement which relates to or is useful to the Company's
Business (the "Inventions"), whether or not subject to copyright or patent
protection, and which may or may not be considered Proprietary Information.
Employee acknowledges that all such Inventions will be "works made for hire"
under United States copyright law and will remain the sole and exclusive
property of the Company. Employee assigns and agrees to assign to the Company,
in perpetuity, all right, title and interest Employee may have in and to such
Inventions, including without limitation, all copyrights, and the right to
apply for any form of patent, utility model, industrial design or similar
proprietary right recognized by any state, country or jurisdiction. Employee
further agrees, at the Company's request and expense, to do all things and sign
all documents or instruments necessary, in the opinion of the Company, to
eliminate any ambiguity as to the ownership of, and rights of the Company to,
such Inventions, including filing copyright and patent registrations and
defending and enforcing in litigation or otherwise all such rights.

Employee will not be obliged to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to any
business or activity in which the Company is or may become engaged, except that
Employee is so obligated if the same relates to or is based on Proprietary
Information to which Employee will have had access during and by virtue of
Employee's employment or which arises out of work assigned to Employee by the
Company. Employee will not be obligated to assign any Invention which may be
wholly conceived by Employee after Employee leaves the employ of the Company,
except that Employee is so obligated if such Invention involves the utilization
of Proprietary Information obtained while in the employ of the Company.
Employee is not obligated to assign any Invention which relates to or would be
useful in any business or activities in which the Company is engaged if such
Invention was conceived and reduced to practice by Employee prior to Employee's
employment with the Company, provided that all such Inventions are listed at
the time of employment on the attached Exhibit A.

12. Remedies. Employee agrees and acknowledges that the violation
of any of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and
11 of this Agreement would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation would be
inadequate, and that the Company will be entitled, in addition to any other
remedy, to temporary and permanent injunctive or other equitable relief without
the necessity of proving actual damages.

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<PAGE> 11

13. Insurance. The Company covenants and agrees that, for so long
as Employee shall continue to serve as an officer or director of the Company,
it shall use its reasonable efforts to maintain in full force and effect
directors' and officers' insurance in reasonable amounts from established and
reputable insurers, to cover claims asserted against Employee or liabilities
incurred by Employee for actions taken or omitted in the scope of his capacity
as a director or officer of the Company, and if necessary to purchase
applicable "tail coverage" if it can be obtained for a reasonable price as
determined in good faith by the disinterested members of the Board.

14. Indemnification. The Company agrees to indemnify Employee and
hold Employee harmless to the fullest extent permitted by the Delaware General
Corporation Law as it presently exists or to such greater extent as such law
may hereafter be amended for indemnification of corporate officers and
directors by a Delaware corporation. However, the Company shall be required to
so indemnify Employee in connection with a proceeding initiated by Employee
only if the proceeding was authorized by the Board. Without limitation of the
foregoing, the Company agrees to advance, within ten business days of
Employee's request and upon receipt of an undertaking to repay such advances if
repayment is required by the Delaware General Corporation Law, all reasonable
expenses, including, without limitation, attorneys' fees and expenses and court
costs, incurred by Employee in defending any threatened or actual claim, action
or proceeding to which he is entitled to indemnity hereunder, including, but
not limited to, the investigation, defense, settlement or appeal of any such
claim or action, to which the Employee is a party or threatened to be made a
party by reason of the fact that the Employee is or was an officer or director
of the Company. The indemnification and undertaking to advance expenses of the
Company under this Agreement shall be in addition to and shall not be deemed to
limit any other rights to which Employee may be entitled to indemnification or
advancement of expenses under any bylaw, agreement, articles of incorporation,
vote of stockholders or disinterested directors, at law, or otherwise.

15. Attorneys' Fees. Employee shall be reimbursed promptly upon
request for all fees and costs incurred in disputing any breach or default
hereunder or any issue hereunder relating to the termination of Employee's
employment, in seeking to obtain or enforce any benefit or right provided by
this Agreement, or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided under this Agreement or any other plan or agreement referred
to in Section 4(e)(1), including, without limitation, attorneys' fees and
expenses and court costs. Employee will also be reimbursed for all reasonable
fees and costs incurred in connection with the review of Employee's employment
arrangements.

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<PAGE> 12

16. Notices. Any notice or communication under this Agreement
will be in writing and sent by registered or certified mail addressed to the
respective parties as follows:

<TABLE>
<S> <C>
If to the Company: If to Employee:
----------------- --------------

1400 Watterson Tower
Louisville, Kentucky 40218
Attn: General Counsel
</TABLE>

17. Severability. Subject to the application of Section 7(D) to
the interpretation of Sections 7 and 8, if one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, the same will not affect any other provision in
this Agreement, and this Agreement will be construed as if such invalid or
illegal or unenforceable provision had never been contained in this Agreement.
It is the intent of the parties that this Agreement be enforced to the maximum
extent permitted by law.

18. Entire Agreement. This Agreement, the stock option agreements
that evidence the options provided for in Section 5, and the option and other
benefit plans applicable to Employee in accordance with the terms of this
Agreement, constitute the entire agreement of the parties relating to the
subject matter of this Agreement and supersede all other prior agreements,
discussions and negotiations, oral or written, regarding the subject matter of
this Agreement. No amendment or modification of this Agreement will be valid
or binding upon the parties unless made in writing and signed by the parties.

19. Binding Effect. This Agreement will be binding upon the
parties and their respective heirs, representatives, successors, transferees
and permitted assigns. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall be bound by, and shall assume, the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For purposes of this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection or which becomes bound by the terms of this
Agreement by operation of law.

20. Assignment. This Agreement is one for personal services and
will not be assigned by Employee. The Company may assign this Agreement only
upon the prior written consent of Employee.

21. Governing Law. This Agreement is entered into and will be
interpreted and enforced pursuant to the laws of the Commonwealth of Kentucky.
The parties agree that the appropriate forum and venue for any disputes
between any of the parties arising out of this

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<PAGE> 13

Agreement shall be any federal court in the Commonwealth of Kentucky and each
of the parties submits to the personal jurisdiction of any such court. The
foregoing shall not limit the rights of any party to obtain execution of a
judgment in any other jurisdiction. The parties further agree, to the extent
permitted by law, that a final and unappealable judgment against either of them
in any action or proceeding contemplated above shall be conclusive and may be
enforced in any other jurisdiction within or outside the United States by suit
on the judgment, a certified exemplified copy of which shall be conclusive
evidence of the fact and amount of such judgment.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

HEALTHCARE RECOVERIES, INC.: EMPLOYEE:

By:
---------------------------------- ----------------------------------
Patrick B. McGinnis
Title:
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EXHIBIT A

INVENTIONS

Employee represents that there are no Inventions.

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Employee Initials

<PAGE> 1
EXHIBIT 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into
this ___ day of __________, 1997, by and between HEALTHCARE RECOVERIES, INC., a
Delaware corporation (the "Company"), and [NAME OF EMPLOYEE], (the "Employee").

STATEMENT OF BACKGROUND INFORMATION

The Company desires to obtain the services of Employee and Employee
desires to accept such employment.

STATEMENT OF AGREEMENT

In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, the parties agree as follows:

1. Employment. The Company employs Employee and Employee
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 6, 7 and 8 of this Agreement, "employment"
shall mean any period of time during which the Company is paying the Employee
salary under Section 5(a) of this Agreement, whether or not the Employee is
currently performing services for the Company at the time of such payment. For
all other purposes under this Agreement, "employment" shall have its customary
meaning. Notwithstanding anything in this Agreement to the contrary, if the
Company is paying the Employee salary, wages, benefits, severance or any other
sums of money after termination of Employee's employment with the Company, and
Employee obtains any other employment for consideration in any capacity, then
such payments will (i) cease immediately if Employee's employment with the
Company was terminated as a result of the occurrence of any events described in
Section 4(a)(i) through 4(a)(iv) ("terminated for cause"), or (ii) be reduced
by an amount equal to the value of consideration received in connection with or
as a result of such other employment if Employee was terminated other than as
a result of the occurrence of any events described in Section 4(a)(i) through
4(a)(iv) ("terminated without cause").

<PAGE> 2

2. Duties of Employee. Employee agrees to perform and discharge
the Business duties which may be assigned to Employee from time to time by the
Company to the reasonable satisfaction of the Company. Employee also agrees to
comply with all of the Company's policies, standards and regulations, as
promulgated by the officers of the Company. Employee will devote Employee's
full professional and business-related time, skills and best efforts to the
Business and, will not, during the term of this Agreement, be engaged (whether
or not during normal business hours) in any other business or professional
activity, whether or not such activity is pursued for gain, profit or other
pecuniary advantage, without the prior written consent of the President of the
Company, which consent will not be unreasonably withheld. This Section will
not be construed to prevent Employee from (a) investing personal assets in
businesses which do not compete with the Company in such form or manner that
will not require any services on the part of Employee in the operation or the
affairs of the companies in which such investments are made and in which
Employee's participation is solely that of an investor; (b) purchasing
securities in any corporation whose securities are listed on a national
securities exchange or regularly traded in the over-the-counter market,
provided that Employee at no time owns, directly or indirectly, in excess of
one percent of the outstanding stock of any class of any such corporation
engaged in a business competitive with that of the Company; or (c)
participating in conferences, preparing and publishing papers or books or
teaching, so long as the President of the Company gives prior approval to such
participation, preparation and publication or teaching.

3. Term. The term of this Agreement will be for a period of
three years commencing on the date of this Agreement and expiring on the third
anniversary of that date, subject to earlier termination as provided for in
Section 4.

4. Termination.

(a) Termination by Company for Cause. Notwithstanding
anything contained in Section 3 to the contrary, the Company may terminate this
Agreement and all of its obligations under this Agreement immediately if any of
the following events occur:

(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to
cure such breach within ten days after Employee's
receipt from the Company of written notice of such
breach, which notice shall describe in reasonable
detail the Company's belief that Employee is in
breach (notwithstanding the foregoing, no cure period
shall be applicable to breaches by Employee of
Sections 6, 7 or 8 of this Agreement);

(ii) Employee commits any other act materially detrimental
to the business or reputation of the Company;

(iii) Employee intentionally engages in dishonest or
illegal activities or commits or is convicted of any
crime involving fraud, deceit or moral turpitude; or

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<PAGE> 3

(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to
perform Employee's duties under this Agreement.
Without limiting the generality of the foregoing,
Employee's inability adequately to perform services
under this Agreement for a period of sixty
consecutive days will be conclusive evidence of such
mental or physical incapacity or disability, unless
such inability adequately to perform services under
this Agreement is pursuant to a mental or physical
incapacity or disability covered by the Family
Medical Leave Act, in which case such sixty day
period shall be extended to a one hundred and twenty
day period.

(b) Termination by Company Without Cause. Notwithstanding
anything contained in Section 3 to the contrary, the Company may terminate
Employee's employment pursuant to this Agreement without cause upon at least
thirty days' prior written notice to Employee. Subject to the provisions of
clause (ii) of Section 1, if Employee's employment with the Company is
terminated by the Company without cause, the Company shall remain subject to
its obligations hereunder as if Employee remained employed hereunder for the
balance of the term, as provided in Section 3.

5. Compensation and Benefits.

(a) Annual Salary. For all services rendered by Employee under
this Agreement, the Company will pay Employee a base salary of _______ thousand
dollars per annum in equal bi-weekly installments. Such annual salary will be
subject to annual adjustments by any increases given in the normal course of
business.

(b) Stock Option Awards. Employee shall be entitled to receive
under the Healthcare Recoveries, Inc., Non- Qualified Stock Option Plan options
to purchase ____________ shares of the Company's common stock for an exercise
price equal to the initial offering price of the Company's Common Stock on the
Nasdaq National Market on __________, 1997, which options shall have an
effective grant date of ___________, 1997 and shall vest over three years as
follows: one-third on each of the first three anniversaries of the effective
grant date.

(c) Other Benefits. Employee will be entitled to such fringe
benefits as may be provided from time-to-time by the Company to its employees,
including, but not limited to, group health insurance, life and disability
insurance, vacations and any other fringe benefits now or hereafter provided by
the Company to its employees, if and when Employee meets the eligibility
requirements for any such benefit. The Company reserves the right to change or
discontinue any employee benefit plans or programs now being offered to its
employees; provided, however, that all benefits provided for employees of the
same position and status as Employee will be provided to Employee on an equal
basis.

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<PAGE> 4

(e) Withholding. The Company will deduct and withhold from the
payments made to Employee under this Agreement, state and federal income taxes,
FICA and other amounts normally withheld from compensation due employees.

6. Non-Disclosure of Proprietary Information. Employee
recognizes and acknowledges that the Trade Secrets and Confidential Information
of the Company and its affiliates and all physical embodiments of the same (as
they may exist from time-to-time, collectively, the "Proprietary Information")
are valuable, special and unique assets of the Company's and its affiliates'
businesses. Employee further acknowledges that access to such Proprietary
Information is essential to the performance of Employee's duties under this
Agreement. Therefore, in order to obtain access to such Proprietary
Information, Employee agrees that Employee shall hold in confidence all
Proprietary Information and will not reproduce, use, distribute, disclose,
publish or otherwise disseminate any Proprietary Information, in whole or in
part, and will take no action causing, or fail to take any action necessary to
prevent causing, any Proprietary Information to lose its character as
Proprietary Information, nor will Employee make use of any such information for
Employee's own purposes or for the benefit of any person, firm, corporation,
association or other entity (except the Company) under any circumstances.

For purposes of this Agreement, the term "Trade Secrets" means the whole or any
portion of any scientific or technical or other information, design, process,
procedure, formula, computer software product, documentation or improvement
relating to the Company's or its affiliates' businesses which (1) derives
economic value, actual or potential, from not being generally known to other
persons who can obtain economic value from its disclosure or use; and (2) is
the subject of efforts that are reasonable under the circumstances to maintain
its secrecy or confidentiality. The term "Confidential Information" means any
and all data and information relating to the Company's or its affiliates'
Business, other than Trade Secrets, (1) which has value to the Company or its
affiliates; (2) is not generally known by its competitors or the public; and
(3) is treated as confidential by the Company or its affiliates. The provisions
of this Section 6 will apply during Employee's employment by the Company and
for a two year period thereafter with respect to Confidential Information, and
during Employee's employment by the Company and at any and all times thereafter
with respect to Trade Secrets. These restrictions will not apply to any
Proprietary Information which is in the public domain, provided that Employee
was not responsible, directly or indirectly, for such Proprietary Information
entering the public domain without the Company's consent. This Section 6,
together with Sections 7, 8, 9, 10, 11 and 12 of this Agreement, shall survive
termination of this Agreement.

7.A. Non-Competition Covenant. During Employee's employment by the
Company and for a period of two years following any termination of Employee's
employment for whatever reason, Employee will not, directly or indirectly, on
Employee's own behalf or in the service of or on behalf of any other individual
or entity, compete with the Company within the Geographical Area (as defined).
The term "compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any kind to,
directly or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, either as a

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<PAGE> 5

proprietor, employee, agent, independent contractor, consultant, director,
officer, partner or stockholder (other than a stockholder of a corporation
listed on a national securities exchange or whose stock is regularly traded in
the over-the-counter market, provided that Employee at no time owns, directly
or indirectly, in excess of one percent of the outstanding stock of any class
of any such corporation) any business which provides Business services. For
purposes of this Agreement, the term "Geographic Area" means the territory
located within a seventy-five mile radius of each facility for which Employee
has management responsibility during Employee's employment with the Company.

C. Non-Solicitation of Clients Covenant. Employee agrees that
during Employee's employment by the Company and for a period of two years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, divert, solicit or
attempt to solicit or accept business from any individual or entity (i) who is
a client of the Company at any time during the six month period prior to
Employee's termination of employment with the Company ("Client"), or was
actively sought by the Company as a prospective client, and (ii) with whom
Employee had material contact while employed by the Company to provide Business
services to such Clients or prospects. Employee further agrees that during
Employee's employment by the Company and for a period of two years following
the termination of Employee's employment for whatever reason in accordance with
this agreement, Employee will not, directly or indirectly, as an employee,
independent contractor, agent or in any other capacity, be employed by any
Client:

(i) which received Business services from Employee, or
with which Employee otherwise had material contact
while employed by the Company; or

(ii) which received Business services from any employee or
office of the Company over which Employee had
management responsibility;

in either case to provide, directly or indirectly, Business services.

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<PAGE> 6

Geographical Area, the client base or the prospective relationship or prospect
list, or the remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the judicial
authority replace each such severed provision with a provision as similar in
terms to such severed provision as may be possible and be legal, valid and
enforceable. It is the intent of the parties that Sections 7 and 8 be enforced
to the maximum extent permitted by law. If any provision of either such
Section is determined not to be specifically enforceable, the Company shall
nevertheless be entitled to bring an action to seek to recover monetary damages
as a result of the breach of such provision by Employee.

8. Non-Solicitation of Employees Covenant. Employee agrees and
represents that during Employee's employment by the Company and for a period of
two years following any termination of Employee's employment for whatever
reason, Employee will not, directly or indirectly, on Employee's own behalf or
in the service of, or on behalf of any other individual or entity, divert,
solicit or hire away, or attempt to divert, solicit or hire away, to or for any
individual or entity which is engaged in providing Business services, any
person employed by the Company, whether or not such employee is a full-time
employee or temporary employee of the Company, whether or not such employee is
employed pursuant to a written agreement and whether or not such employee is
employed for a determined period or at will.

9. Existing Restrictive Covenants. Employee represents and
warrants that Employee's employment with the Company does not and will not
breach any agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such former
employer. Employee will not disclose to the Company or use on its behalf any
confidential information of any other party required to be kept confidential by
Employee.

10. Return of Confidential Information. Employee acknowledges
that as a result of Employee's employment with the Company, Employee may come
into the possession and control of Proprietary Information, such as proprietary
documents, drawings, specifications, manuals, notes, computer programs, or
other proprietary material. Employee acknowledges, warrants and agrees that
Employee will return to the Company all such items and any copies or excerpts
thereof, and any other properties, files or documents obtained as a result of
Employee's employment with the Company, immediately upon the termination of
Employee's employment with the Company.

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<PAGE> 7

or similar proprietary right recognized by any state, country or jurisdiction.
Employee further agrees, at the Company's request and expense, to do all things
and sign all documents or instruments necessary, in the opinion of the Company,
to eliminate any ambiguity as to the ownership of, and rights of the Company
to, such Inventions, including filing copyright and patent registrations and
defending and enforcing in litigation or otherwise all such rights.

Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to any
business or activity in which the Company is or may reasonably be expected to
become engaged, except that Employee is so obligated if the same relates to or
is based on Proprietary Information to which Employee will have had access
during and by virtue of Employee's employment or which arises out of work
assigned to Employee by the Company. Employee will not be obligated to assign
any Invention which may be wholly conceived by Employee after Employee leaves
the employ of the Company, except that Employee is so obligated if such
Invention involves the utilization of Proprietary Information obtained while in
the employ of the Company. Employee is not obligated to assign any Invention
which relates to or would be useful in any business or activities in which the
Company is engaged if such Invention was conceived and reduced to practice by
Employee prior to Employee's employment with the Company, provided that all
such Inventions are listed at the time of employment on the attached Exhibit A.

12. Remedies. Employee agrees and acknowledges that the violation
of any of the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and
11 of this Agreement would cause irreparable injury to the Company, that the
remedy at law for any such violation or threatened violation thereof would be
inadequate, and that the Company will be entitled, in addition to any other
remedy, to temporary and permanent injunctive or other equitable relief without
the necessity of proving actual damages.

13. Notices. Any notice or communication under this Agreement
will be in writing and sent by registered or certified mail addressed to the
respective parties as follows:

<TABLE>
<S> <C>
If to the Company: If to Employee:

1400 Watterson Tower [NAME]
Louisville, Kentucky 40218 [ADDRESS]

Attn: General Counsel
</TABLE>

14. Severability. Subject to the application of Section 7(D) to
the interpretation of Sections 7 and 8, if one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, the same will not affect any other provision in
this Agreement, and this Agreement will be construed as if such invalid or
illegal or unenforceable provision had never been contained in this Agreement.
It is the intent of the parties that this Agreement be enforced to the maximum
extent permitted by law.

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15. Entire Agreement. This Agreement embodies the entire agreement
of the parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter of this
Agreement. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the parties.

16. Binding Effect. This Agreement will be binding upon the
parties and their respective heirs, representatives, successors, transferees
and permitted assigns.

17. Assignment. This Agreement is one for personal services and
will not be assigned by Employee. The Company may assign this Agreement to any
of its subsidiaries or affiliated companies; provided that such subsidiary or
affiliate fulfills the obligations of the Company under this Agreement.

18. Governing Law. This Agreement is entered into and will be
interpreted and enforced pursuant to the laws of the Commonwealth of Kentucky.
The parties agree that the appropriate forum and venue for any disputes between
any of the parties arising out of this Agreement shall be any federal court in
the Commonwealth of Kentucky and each of the parties submits to the personal
jurisdiction of any such court. The foregoing shall not limit the rights of any
party to obtain execution of judgment in any other jurisdiction. The parties
further agree, to the extent permitted by law, that a final and unappealable
judgment against either of them in any action or proceeding contemplated above
shall be conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on the judgment, a certified exemplified copy
of which shall be conclusive evidence of the fact and amount of such judgment.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

COMPANY: EMPLOYEE:

HEALTHCARE RECOVERIES, INC.

By:
--------------------------------- ---------------------------
Title: [Name]
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EXHIBIT A

INVENTIONS

Employee represents that there are no Inventions.

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Employee Initials

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<PAGE> 1
EXHIBIT 10.6

LEASE

This Lease, dated this 30th day of October 1996, made and entered into
by and between:

W & M Kentucky, Inc.
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"Landlord"

HEALTHCARE RECOVERIES, INC.
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"Tenant"

LANDLORD AND TENANT, in consideration of the covenants herein contained hereby
agree as follows:

ARTICLE 1.00 DEFINITIONS

1.01 Definitions in this Lease: *See Section 28.01

(a) "Premises" means 66,345 square feet, more or less, on the *
floor of the Building as generally indicated as Exhibit "A",
Suite * .

(b) "Land" means that tract located in Louisville, Jefferson
County, Kentucky, and legally described in Exhibit "B" attached
hereto and made a part hereof.

(c) "Building" means that multi-story structure containing 274,488
square feet which is zones for use as office and certain limited
limited commercial (retail) sales space, and in which the
Premises are located.

(d) "Common Areas" means those portions of the Building and Land
which are provided to be used in common by (or by the
sublessees, agents, employees, customers or licensees of)
Landlord, Tenant, and other tenants and shall include any
sidewalks, parking lots or landscaping contained therein or
maintained or used in connection therewith.

(e) "Lease" means this Lease, Exhibits A,B,C,D.E, to this Lease, and
every properly executed instrument which by its terms amends,
modifies or supplements this lease.

(f) "Fiscal Year" means a twelve month period (all or part of which
falls within the Term) from time to time determined by
Landlord with concurrence of the appropriate taxation
authorities, at the end of which Landlord's books are balanced
for auditing and/or taxation purposes.

(g) "Lease Year" means a period of twelve consecutive calendar
months beginning on the Commencement Date or any anniversary
thereof.

(h) "Property" means the Building and such other improvements from
time to time constructed on the Land.

(i) "Project" means the office complex sometimes referred to and
known as the Watterson Tower either for its own interest or for
the interest of others.

* which property is owned by W & M of Kentucky, Inc.

<PAGE> 2

(j) "Operating Cost" means all such costs, charges and expenses
which are attributable to the management, operation, repair and
maintenance of the Property plus a charge for office management
overhead equal to fifteen percent thereof, including but not in
any manner limiting the generality of the foregoing shall be (1)
the cost relating to the heating, ventilating, and air
conditioning of the Building; (2) the aggregate of all taxes and
assessments payable by Landlord and imposed by any authority upon
or in respect of the Property, including any tax imposed on the
capital invested therein and excluding any corporate income,
profits, excess profits and business tax imposed upon the income
of Landlord excepting to the extent that such is levied in lieu
of taxes or assessments in respect to the Property; (3) all
expenses for any capital improvements or structural repair to
the Building incurred after the date of this Lease required by
any change in the laws, rules, regulations or orders of any
governmental unit or instrumentality thereof having
jurisdiction, which expenses shall be amortized over the useful
life of the capital improvement or structural repair but
excluding extraordinary capital expenditures; (4) all salaries,
wages, benefits and payroll taxes for employees of Landlord or
any contractor or agent of Landlord relating to the Property as
well as all cost of energy and other utilities consumed in the
operation of the Property; waste removal; security service;
premiums for all insurance coverage carried by Landlord relating
to the Property; cleaning, repairs maintenance and replacement
to the Property; building supplies and equipment; landscaping
and all other costs and expenses incurred in connection with the
Property, provided, further, certain of the aforementioned items
may be rendered to the Property as it consists of part of the
Project, and in such event where the Landlord shall not receive
a separate statement for such cost directly attributable to the
Property the Landlord shall charge to the Operating Cost the
proportionate portion of all such cost rendered in common to
and for the Property in conjunction with the other properties
comprising the Project, determined by a fraction, the numerator
of which is the number of square feet in the Building and the
denominator of which is the total number of square feet in all
three buildings situated within the Project. The Base Year will
be 1997.

(k)

(l) "Adjusted Rental Period" means the Lease year(s) period
beginning January 1, 1997.

(m) "Landlord's Statement" means a written instrument containing the
computation of Operating Costs together with a "Comparative
Statement" prepared by a firm of independent certified public
accountants setting forth in reasonable detail the Operating
Cost in the base year and those respective items in the rental
period for which additional rental is due.

ARTICLE 2.00 PREMISES

2.01 Subject to all of the terms and conditions of this Lease, Tenant leases
from Landlord and Landlord leases to Tenant the following described
premises (hereinafter called "the Premises"):

*See Article 28.01

A portion of the * floor (as designated on the standard floor
plan attached hereto as Exhibit A and made a part hereof) in
that certain building (hereinafter called "the Building")
located at 1930 Bishop Lane, Louisville, Jefferson County,
Kentucky.

2.02 The Premises shall be provided in "as is" condition. Tenant
acknowledges it has examined the Premises, knows the condition of the
Premises, and accepts the Premises in the condition as currently
existing. Any remodeling construction and/or redecorating within the
Premises shall be performed at the expense of the Tenant.

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2.03 This Lease confers no rights with respect to the Building or that Land
upon which it is situated other than tenancy of the Premises and the
non-exclusive license to use, during such tenancy the "Common Areas".

ARTICLE 3.00 TERM AND POSSESSION

*See Article 28.02

3.01 The term of this Lease shall be * years, beginning on the first day of
the month of * , 19__ and ending on the last day of the month of * ,
19__, unless terminated earlier as provided in this Lease.
<PAGE> 3
4.01 During the term hereof, Tenant shall pay to the landlord without
demand and without deduction or set-off of any amount for any reason
whatsoever, at the times and in the manner hereinafter provided, rent
for the Premises as follows:

Tenant shall pay to Landlord, at Landlord's office in the
Building or at such place as Landlord may from time to time
designate, as rental for the Premises, the sum of *See Article
28.03 per month (the "Base Rent"), payable in advance on the
first day of each calendar month during the term hereof or any
period prior or subsequent thereto while (with Landlord's
consent) tenant is in possession of the Premises. Rent for a
partial month shall be prorated.

4.02 Tenant shall during the term hereof, or any extension thereof, also
pay to Landlord its proportionate part of the Operating Cost over and
above those incurred in the Base Year during the Adjusted Rental
Period(s). Tenant's proportionate part shall be a fraction, the
numerator of which is the number of square feet of floor area in the
Premises and the denominator of which is the total number of net
rentable square feet in the Building of which the Premises are a
part. Should this Lease terminate prior to the end of a calendar
year, the additional rental, if any, due hereunder shall be prorated
to the date of termination of this Lease. Tenant shall pay its
portion of the Operating Costs to wit:

(a) Upon commencement of this Lease, Tenant shall pay to Landlord
simultaneously with each rent payment a sum equal to one-twelfth
of the estimate of the total annual Operating Cost allocable to
Tenant as herein provided. That estimate of the monthly payments
for the first lease year, or portion thereof, shall be $ *.
Said sum shall continue to be paid each month thereafter until
the termination of the Lease or upon written notice form
Landlord prior to the end of any lease year notifying Tenant of
any increase or decrease for the succeedin year. Upon receipt
of such notification, Tenant shall thereafter, commencing with
the first month of the succeeding lease year, pay to Landlord a
monthly installment as based on any revisions as landlord may
direct. Provided, however, upon the conclusion of each lease
year, Landlord shall, where applicable, make an adjustment for
Tenant's portion of its obligation to the Operating Cost of the
preceeding lease year by either sending a written statement to
Tenant for an amount of any balance then due and owing, which
amount shall be paid within ten days from receipt of the
aforesaid written statement; or, should there be determined an
overage had been paid by Tenant for the preceding year, then
such overage shall be credited to the monthly payment of
Operating Cost then to be paid by Tenant. * to be determined

(b) Within 120 days after the end of each Fiscal Year, Landlord shall
furnish Tenant with a comparative statement prepared by a firm of
independent certified public accountants setting forth in
reasonable detail the Operating Cost in the Base year and those
respective items in each of the Adjusted Rental Periods(s) for
which additional rental is due.

(c) Tenant shall have the right to inspect and examine at reasonable
time the Landlord's records pertaining to the Operating Cost for
the Base Year and for the Adjusted Rental Period(s)

4.03 All amounts payable by Tenant to Landlord under this Lease shall be
deemed to be Rent and shall be payable and recoverable as Rent in the
manner herein provided, and Landlord shall have all rights against
Tenant for default in any such payment as in the case of arrears of
rent. Tenant's obligation to pay Rent shall survive the expiration or
earlier termination of this Lease.

4.04 In the event that the Base rent, or any other sum payable by Tenant to
Landlord under this Lease, shall not be received with in 5 days of the
due date thereof, Landlord may, at its options, add a monthly service
charge, at a rate which shall be 1 1/2% for each month or fraction
thereof from such rent due date during which such Base Rent or other
sum remains unpaid. Further, in event that any check which has been
remitted to Landlord by Tenant for payment of the Base Rent, or any
other sum payable under this Lease, shall not be honored upon its
presentation for payment, then the monthly service charge shall be
similarly imposed on said amount from the due date until paid.
Acceptance by the Landlord of such service charge shall not be deemed
to be waiver by Landlord of any default nor shall it restrict the
remedies otherwise available to Landlord hereunder.

ARTICLE 5.00 SECURITY DEPOSIT

5.01 Tenant has paid to Landlord the sum of Five thousand, five hundred
fifty and no/100 dollars ($5,500.00) As security for the performance
of Tenant's obligations hereunder. In the event of a default by
Tenant, Landlord at its option may apply such part of the deposit as
may be necessary to cure the default, and if Landlord does so, Tenant
shall upon demand redeposit with Landlord an amount equal to that so
applied so that Landlord will have the full security deposit on
hand at all times during the term of this Lease. Upon the termination
of this Lease, (provided Tenant is not in default hereunder) Landlord
shall refund to Tenant any then remaining balance of the deposit
without interest. In the event of a sale of the Land and Building or
leasing of the

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<PAGE> 4
Building, of which the demised Premises is a part, Landlord shall have
the right to transfer the security of the vendee or lessee and Landlord
shall thereupon be released by Tenant from all liability for the return
of such security; and Tenant agrees to look only to the new Landlord for
the return of said security; and it is agreed that the provisions
hereof shall apply to every transfer or assignment made of the security
to a new Landlord. Tenant shall not be entitled to and waives any claim
for payment or credit for interest which may be earned so long as said
Security Deposit is held by the Landlord, or its successor.

ARTICLE 6.00 USE

6.01 The Premises are to be used only for the purpose of conducting therein

General Office Use
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and for no other business or purpose without the prior written consent
of Landlord.

6.02 Tenant shall not do or permit to be done in or about the Premises
anything which is illegal or unlawful; or which is of a hazardous or
dangerous nature; or which will increase the rate(s) of insurance upon
the Building.

6.03 Tenant shall (and shall cause its employees to) observe the Rules and
Regulations set forth in Exhibit "C" attached hereto and made a part
hereof, as the same may be amended by Landlord from time to time. Tenant
shall receive written notice of amendments to Rules and Regulations.

6.04 Tenant shall comply with all governmental laws and ordinances and all
regulations applicable to the use and occupancy of the Building.

ARTICLE 7.00 POSSESSION

7.01 If Landlord permits Tenant to enter into possession of the Premises
prior to the Lease Commencement Date, all of the terms and conditions of
this Lease shall apply during such prior period. Tenant's taking of
possession of the Premises shall be deemed a conclusive acknowledgement
by Tenant that the Premises are in good and tenantable condition and
acceptable for Tenant's use thereof as provided in this Lease.

ARTICLE 8.00 SERVICES TO BE PROVIDED

8.01 Landlord shall furnish reasonable amounts of heat, air conditioning,
water, electricity, elevator service and janitor service (collectively
"services") to the Premises during the times and in the manner that
Landlord determines appropriate for the furnishing of such services in
the Building, all such services being subject to energy availability or
Energy Consumption Regulations which may be hereafter promulgated. It
is expressly agreed that should any local, state or federal
governmental body, agency or public utility restrict or reduce the
amount of fuel or energy which may be utilized to provide the utilities
and services as specified above, then such restriction or reduction, and
the reduction in utilities and services which may result therefrom,
shall in no way create or constitute a default on the part of the
Landlord, and there shall be no reduction or abatement in the Base Rent
or any other sum payable by Tenant hereunder. Further, Landlord shall
not be liable for any injury, damage, inconvenience or otherwise which
may arise or result should the furnishing of any such services be
interrupted or prevented by fire, accident, strike, riot, act of God,
the making of necessary repairs or improvements, or any other cause
beyond the reasonable control or prevention of Landlord, nor, subject
only to the provisions of Article 9.00 of this Lease, shall the Base
Rent payable by Tenant hereunder abate.

8.02 Landlord may from time to time

(a) Make repairs, replacements, changes or additions to the
structure, systems, roof, facilities and equipment in the
Premises where necessary to serve the Premises or other parts of
the Building or which Landlord may deem necessary for the
preservation, safety and improvement thereof.

(b) Make changes in or additions to any part of the Building not in
or forming part of the Premises, and

provided that in doing so Landlord shall not disturb or interfere with
Tenant's use of the Premises and operation of its business any more than
is reasonably necessary in the circumstances and shall repair any damage
of the Premises caused thereby.

8.03 Tenant shall permit Landlord to enter the Premises outside normal
business hours, and during normal business hours where such will not
unreasonably disturb or interfere with Tenant's use of the Premises and
operation of its business, to examine, inspect, to provide services or
make repairs, replacements, changes or alterations as set out in this
Lease, and to take such steps as Landlord may deem necessary for

<PAGE> 5

the safety, improvement or preservation of the Premises or the Building
Landlord shall whenever possible, except in an emergency, consult with
or give reasonable notice to Tenant prior to such entry, but no such
entry shall constitute an eviction or entitle Tenant to any abatement of
Rent.

ARTICLE 9.00 MAINTENANCE AND REPAIR: ALTERATIONS

9.01 Tenant shall, at its expense, keep in good order, condition and state of
repair all portions of the Premises, with the exception of the structure
portions thereof which shall be the responsibility of the Landlord.
Tenant shall reimburse Landlord on demand for the cost of repairing any
damage to the Premises or the Building caused by Tenant or its
employees, agents or invitees. In the event Tenant fails to comply with
the requirements of this Section, Landlord may effect such maintenance
and repair and the cost thereof, with interest at the rate of 18% per
annum, shall be payable immediately to Landlord as additional rent.

9.02 Tenant shall not make any alterations, additions or improvements to the
Premises without first obtaining Landlord's prior written consent which
shall not be unreasonably withheld. Provided, however, all such
improvements shall (a) be made at Tenant's expense, and (2) comply with
all governmental laws, regulations and orders, as well as with
Landlord's insurer. All alterations, additions and improvements made
by Tenant shall become the property of Landlord upon the making
thereof and shall be surrendered to Landlord upon the expiration of
this Lease.

ARTICLE 10.00 ACCESS

10.01 Landlord and its agents shall have the right to enter into and upon the
Premises at all reasonable times for the purposes of inspecting,
cleaning, repairing, altering or improving the Premises or the Building.
Landlord shall have the right to show the Premises to prospective
tenants during the 180 day period prior to the expiration of the term of
this lease and shall have the right at all reasonable times to show the
Premises to prospective purchasers of and lenders upon the Building.

ARTICLE 11.00 DAMAGE OR DESTRUCTION

11.01 In the event the Premises are damaged or destroyed by fire, earthquake
or any other casualty to such an extent as to render the same
untenantable in whole or in substantial part, Tenant shall give Landlord
immediate notice of the occurrence of any such casualty. Unless
Landlord, within 90 days after receipt of such notice, notifies Tenant
of its election to repair or restore affected structural portions of the
Building, and the demising partitions of the Premises, this Lease shall
terminate at the end of such 90 day period. If Landlord elects to so
repair or restore the affected structural portions of the Building and
the demising partitions of the Tenant's Premises, Landlord shall restore
the premises to its condition prior to the casualty, Tenant shall, at
Tenant's own expense, repair or restore all improvements, additions,
fixtures, alterations, decorations, installations, furniture,
furnishings, equipment or machinery in and upon the Premises to as good
conditions as they were prior to such damage or destruction. From the
date of the casualty and during such period of repair or restoration the
rent shall be abated in the same proportion as the untenantable portion
of the Premises bears to the former rentable area thereof.

11.02 In the event the Building shall be damaged or destroyed by fire,
earthquake or any other casualty (whether or not the Premises shall also
be damaged or destroyed thereby), and Landlord shall decide not to
restore or not to rebuild the same, or if the Building shall be so
damaged that Landlord shall decide to demolish it or to rebuild it,
then, or in any of such events, Landlord may, within 90 days after such
fire or other cause, give Tenant a notice in writing of such decision,
and thereupon the term of this Lease shall expire by lapse of time upon
the 15th day after such notice is given, and Tenant shall vacate the
demised Premises and surrender the same to Landlord. If Tenant shall
not be in default under this Lease, then, upon the termination of this
Lease under the conditions provided for in the sentence immediately
preceding, Tenant's liability for rent shall cease as of the day
following the casualty. If Landlord, in its sole and absolute judgement,
elects to so repair or restore the affected structural portions of the
Building, and the demising partitions of the Premises if same have been
damaged, Tenant shall, at Tenant's own expense, repair or restore all
Tenant's improvements, additions, fixtures, alterations, decorations,
installation, furniture, furnishings, equipment or machinery in and upon
the Premises to as good condition as they were prior to such damage or
destruction. If the Premises have been damaged, the rent shall be
abated from the date of the casualty and during the period of repair or
restoration in the same proportion as the untenantable portion of the
Premises bears to the aforesaid rentable area thereof; if the Premises
have not been damaged, there shall be no rent abatement. Tenant and
Landlord shall mutually agree on the untenantable portion of the
Premises.

11.03 If the damage to the Premises or the Building is due, directly or
indirectly, to the negligence of intentional acts of Tenant, or its
officers, contractors, licensees, agents, servants, employees, guests,
invitees or visitors, there shall be no abatement of rent.

11.04 Notwithstanding anything contained in this Article to the contrary,
Landlord shall not be required to repair, replace, restore or rebuild
any property which Tenant shall be entitled to remove from the Premises
under the provisions of this Lease; it being agreed that Tenant shall
bear the entire risk of loss, damage or destruction of such property
while it is in the Building.

11.05 In the event of a termination of this Lease pursuant to this Article
11.00 any rent paid in advance and not yet earned as of the date of
termination shall be refunded to Tenant.

<PAGE> 6
ARTICLE 12.00 INDEMNITY

12.01 Each party herein shall indemnify and hold the other one party from
all loss, damage, liability or expense resulting from any
injury to or death of any person or either party any loss of or
damage to any property caused by or resulting from any act or
omission of either party or any officer, agent, employee, guest,
invitee or visitor of either party in or about the Premises or the
Building. Landlord shall not be liable for any injury to or the death
of any person or any loss of or damage to property sustained by
Tenant, or by any other person(s) whatsoever, which may be caused by
the Building or the Premises or any equipment or appurtenances thereto
or thereof being or becoming defective or out of repair, or by any
defect in or failure of plumbing, heating or air conditioning
equipment, electric wiring or equipment and insulation thereof, or by
the bursting or leakage of any water, gas, sewer or steam pipes, or by
theft or by any act or neglect of any tenant or occupant of the
Building, or of any other person, or by any other cause of whatsoever
nature, unless caused by the negligence of Landlord or its officers,
agents or employees.

ARTICLE 13.00 INSOLVENCY

13.01 If leasehold interest of Tenant be levied upon under execution or be
attached, or if any voluntary or involuntary petition or similar
pleading under any Act of Congress relating to bankruptcy shall be
filed by or against Tenant, or if any voluntary proceedings in any
court or tribunal shall be instituted by or against Tenant or any
guarantor of this Lease to declare Tenant or any guarantor of this
Lease insolvent or unable to pay the debts of Tenant or any guarantor
or this Lease, or if Tenant or any guarantor of this Lease makes an
assignment for the benefit of creditors, or if a receiver be appointed
for any property of Tenant, or if Tenant shall default in payment of
any other debt or obligation to Landlord, then in such event Landlord
may, if Landlord so elects and with written notice of such election
and after allowing Tenant ten (10) days to cure default, and with or
without any demand whatsoever, forthwith terminate this Lease upon
notice to Tenant, and upon such termination all rights of Tenant
hereunder shall thereupon cease and Tenant shall surrender possession
and vacate the Premises immediately.

ARTICLE 14.00 REMEDIES

14.01 If at any time Tenant shall (a) fail to remedy any default in the
payment of any sum due under this Lease for 5 days after notice; (b)
fail to remedy any default with respect to any of the other
provisions, covenants or conditions of this Lease to be kept or
performed by Tenant, within 30 days after notice (or, in the event the
default is of such a nature that it cannot be remedied within said 30
day period, then such additional time as may be necessary for Tenant
to cure such default, provided that Tenant commences to cure the
default within the 30 day period and thereafter diligently prosecutes
the same to completion) or (c) vacate or abandon the Premises unless
tenant continue to pay rent, or fail to conduct its business therein,
for a period of 5 consecutive business days, and then fail to reoccupy
and reestablish the conduct of business, in the Premises within 10
days following the date of written notice from Landlord of such
failure; then Landlord shall have all such rights and remedies as are
provided by law in respect of such default, including, at Landlord's
election, the right to terminate this Lease, and all Tenant's rights
hereunder shall be terminated.

Further, Landlord may reenter the Premises using such force as may be
necessary, and repossess itself thereof, as of its former estate, and
remove all persons and property from the Premises. Notwithstanding
any such reentry, the liability of Tenant for the Base Rent, and other
payments provided for herein shall not be extinguished for the balance
of this Lease, and Tenant shall make good to Landlord any deficiency
arising from such reletting of the Premises, plus the costs and
expenses of renovating, altering and reletting the Premises, and
including attorneys' fees or brokers' fees incident to Landlord's
reentry or reletting. Tenant shall pay any such deficiency each
month, as the amount thereof is ascertained by Landlord, or, at
Landlord's option, Landlord may recover, in addition to any other
sums, the amount at the time of judgement by which the unpaid Base
Rent, and other payments for the balance of the term, after judgement,
exceeds the amount thereof which Tenant proves could be reasonably
avoided, discounted at the rate of 7%. In reletting the Premises
Landlord may grant rent concessions and Tenant shall not be credited
therefor. Nothing herein shall be deemed to affect the right of
Landlord to recover for indemnification under Article 12.00 herein
arising prior to the termination of this Lease.

14.02 Landlord shall in no event be in default in the performance of any of
its obligations in this Lease contained unless and until Landlord
shall have failed to perform such obligation within 15 days, or such
additional time as is reasonably required to correct any such default
after notice by Tenant to Landlord properly specifying wherein
Landlord has failed to perform any such obligation.

ARTICLE 15.00 INSURANCE

15.01 Tenant covenants and agrees that from and after the date of delivery
of the Premises from Landlord to Tenant and at all times during
possession thereof, Tenant will procure and maintain in full force and
effect, at its sole cost and expense, the following types of
insurance, (All policies shall be with an insurance company licensed
to do business within Kentucky) in the minimum amounts specified below:

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<PAGE> 7

(a) PUBLIC LIABILITY AND PROPERTY DAMAGE. Personal injury liability,
bodily injury liability and property damage insurance in a
single limit of not less than $1,000,000.00 which insurance
shall insure the performance by Tenant of the indemnity agreement
as to liability for injury to or death of persons and injury or
damage to property as provided in Article 12.00 hereof. All of
such insurance which may be carried by Landlord. The adequacy of
the coverage afforded by said liability and property damage
insurance shall be subject to review by Landlord from time to
time, and Landlord retains the right to reasonably increase or
decrease said limits at such times.

(b) TENANT IMPROVEMENTS. Insurance covering all of the leasehold
improvements, (excepting only the structural components of the
Building and demising partitions), and Tenant's trade fixtures,
and personal property from time to time in and/or upon the
Premises, in an amount not less than the full replacement cost
thereof without deduction for depreciation, providing protection
against any peril included within the classification "Fire and
Extended Coverage", together with insurance against sprinkler
damage, vandalism and malicious mischief. Any policy proceeds
shall be used for the repair or replacement of the property
damaged or destroyed unless this lease shall cease and terminate
under the applicable provisions herein. If the Premises shall not
be repaired or restored following damage or destruction in
accordance with other provision herein, Landlord shall receive
from such insurance proceeds an amount equal to the replacement
cost of Tenant's leasehold improvements.

(c) BUSINESS INTERRUPTION. Business interruption insurance with
sufficient coverage to provide for payment of rent and other
fixed costs during any interruption of Tenant's business by
reason of fire or other similar cause.

15.02 All policies shall be for the mutual and joint benefit and protection of
Landlord and Tenant, with Landlord being named as an additional
insured. Certificates of such policies shall be delivered to Landlord
upon delivery of possession of the Premises to Tenant and thereafter
within 30 days prior to the expiration of the term of each such policy.
All public liability and property damage policies shall contain a
provision that Landlord, although named as an insured, shall
nevertheless be entitled to recovery under paid policies for any loss
occasioned to it, its servants, agents and employees by reason of the
acts, omissions and/or negligence of Tenant. As often as any such
policy shall expire or terminate, renewal or additional policies shall
be procured and maintained by Tenant in like manner and to like extent.
All policies of insurance must contain a provision that the company
writing said policy will give to Landlord 30 days notice, in writing,
in advance of any cancellation or lapse, or the effective date of any
reduction in the amounts of insurance. All public liability, property
damage and other casualty policies shall be written as primary policies,
not contributing with and not in excess of coverage which Landlord may
carry, Landlord may, from time to time, request Tenant to provide
Landlord with a certified copy of all insurance coverages carried by
Tenant.

15.03 Tenant agrees to pay to Landlord forthwith upon demand the amount of
any increase in premiums for insurance against loss by fire that may
be charged during the term of this Lease on the amount of insurance
maintained in forced by Landlord on the Building, of which the Premises
are a part, resulting from Tenant doing any act in or about said
Premises which does so increase the insurance rates, whether or not
Landlord shall have consented to such act on the part of Tenant. If
Tenant installs upon the Premises any electrical equipment which
constitutes an overload on the electrical lines of the Premises, Tenant
shall at its own expense make whatever changes are necessary to comply
with the requirements of the insurance underwriters and any
governmental authority having jurisdiction thereover, but nothing
herein contained shall be deemed to constitute Landlord's consent to
such overloading.

ARTICLE 16.00 LIENS

16.01 Tenant shall keep the Premises free and clear of, and shall indemnify
Landlord against, all mechanics' liens and other liens on account of
work done for or materials, supplies or equipment furnished to Tenant
or persons claiming under it for maintenance, repairs and alterations.
Tenant shall reimburse Landlord for all costs and attorneys' fees
incurred by Landlord in investigating, defending or clearing such lien
to be cleared within 30 days of filing of same unless Tenant shall
have provided security acceptable to Landlord against any loss to
landlord on account thereof. As a condition to Landlord's consent
pursuant to Article 9.00, Landlord may require Tenant to provide
Landlord with reasonable payment and performance bonds in order to
protect the Premises, the Landlord, and any mortgagee from and
against liens of mechanics and materialmen performing work in or
providing services and equipment to the Premises.

ARTICLE 17.00 ASSIGNMENT: SUBLETTING: MORTGAGING

17.01 Tenant shall not voluntarily, involuntarily or by operating of law
assign, transfer, mortgage or other wise encumber all or any part of
Tenant's interest in this Lease, or sublet the Premises or any part
thereof, without first obtaining in each and every instance Landlord's
prior written consent. Which shall not be unreasonably withheld.
Subject to the foregoing, Tenant shall not assign, transfer or sublet
the Premises, or any part thereof, at a rent to Assignee Transferee or
Sublessee greater than the Base Rent

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<PAGE> 8
being paid by Tenant pursuant to Article 4.00 Rent, as adjusted. If
Tenant is a corporation, then any transfer of this Lease by merger,
consolidation or liquidation, resulting in a change of aggregate
voting control of more than 50% of all shares of stock and other
securities entitled to vote shall constitute an assignment for the
purposes of this paragraph. If consent is once given by Landlord to
any such assignment or subletting, such consent shall not operate a
waiver of the necessity for obtaining Landlord's consent to any
subsequent assignment or subletting. Any legal costs incurred by
Landlord related to such assignment or subletting shall be paid by
Tenant to Landlord upon demand. Tenant shall provide Landlord with
executed copies of any Assignment, Transfer or Sublease Agreement
entered into as provided herein.

17.02 Any Assignment, Transfer or Subletting by Tenant of all or any portion
of the Premises shall, regardless of the consent by Landlord pursuant
to Section 1 of this article, automatically operate to terminate any
and every right, option or election belonging to Tenant, under the
provisions of this Lease, to expand the Premises or to extend or renew
the term of this Lease.

ARTICLE 18.00 ESTOPPEL CERTIFICATE

18.01 Tenant shall at any time and from time to time execute, acknowledge
and deliver to Landlord a statement in writing certifying: (a) that
this Lease is unmodified and in full force and effect (or if there has
been any modification hereof that the same is in full force and effect
as modified and stating the nature of the modification or
modifications); (b) that to the best of its knowledge Landlord is not
in default under this Lease (or if any such default exists the
specific nature and extent thereof); and (c) the date to which rent
and other charges have been paid in advance, if any.

ARTICLE 19.00 PRIORITY OF LEASE

19.01 This Lease shall, unless Landlord otherwise elects, be subordinate to
any and all mortgages and other security instruments now existing, or
which may hereafter be made covering the Building and/or the real
property underlying the same or any portion or portions thereof, and
for the full amount of all advances made or to be made thereunder
(without regard to the time or character of such advances), together
with interest thereon, and subject to all the terms and provisions
thereof and to any renewals, extensions, modifications and
consolidations thereof; and Tenant covenants within 10 days of demand
to make, execute, acknowledge and deliver upon request any and all
documents or instruments demanded by Landlord which are or may be
necessary or proper for more fully and certainly assuring the
subordination of this Lease to any such mortgages or other security
instruments, provided, however, than any person or persons purchasing
or otherwise acquiring any interest at any sale and/or other
proceeding under such mortgages or other security instruments may
elect to continue this Lease in full force and effect in the same
manner, and with like effect, as if such person or persons had been
named as Landlord herein, and in the event of such election, this
Lease shall continue in full force and effect as aforesaid, and Tenant
hereby attorns and agrees to attorn to such person or persons. Tenant
hereby irrevocably appoints Landlord the attorney-in-fact of Tenant,
to execute and deliver any document provided for herein, for and in
the name of Tenant, said power is hereby coupled with an interest.

ARTICLE 20.00 FIXTURES AND PERSONAL PROPERTY

20.01 Upon the termination of this Lease, Tenant shall surrender to Landlord
the Premises (including, without limitation, all improvements,
apparatus and fixtures, except trade fixtures and furniture installed
by Tenant, then upon the Premises) in good condition and repair,
reasonable wear, tear and damage by casualty not caused by Tenant or
its agents or employees excepted, and all alterations, improvements,
additions, machinery and equipment which may be made or installed from
time to time by either party hereto, in, upon or about the Premises
(except trade fixtures and furniture installed by Tenant) shall be the
property of Landlord, and upon any such termination, shall be
surrendered to Landlord by Tenant without any injury, damage or
disturbance thereto or payment therefor. Landlord's said property
shall include but not be limited to all lighting fixtures and
fluorescent tubes and bulbs and all permanent partitions installed.

22.02 Trade fixtures, furniture and other personal property installed or
placed in the Premises at the cost of Tenant shall be the property of
Tenant unless otherwise specified in this Lease and Tenant shall
remove the same prior to the termination of this Lease. Tenant shall
at its own cost and expense completely repair any and all damage to
the Premises resulting from or caused by such removal. If Tenant
fails to remove any of such property, Landlord may at Landlord's
option retain all or any of such property and title thereto shall
thereupon vest in Landlord, or Landlord may remove from the Premises
and dispose of in any manner all or any of such property, in which
latter event Tenant shall, upon demand, pay to Landlord the actual
expense of such removal and disposition, and the cost of repair of any
and all damage to the Premises resulting from or caused by such
removal.

ARTICLE 21.00 HOLD OVER TENANCY

21.01 If Tenant shall, without execution of a new Lease or written
extension, and with consent of Landlord, hold over after the
expiration of the terms of this Lease, such tenancy shall be a

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<PAGE> 9
month-to-month tenancy, which may be terminated as provided by law.
During such tenancy Tenant shall pay to Landlord the greater of (a)
the rental rate than being quoted by Landlord for comparable space in
the Building; or (b) the Base Rent pursuant to Article 4.00, as
adjusted. Landlord shall notify Tenant of the rental rate for such
tenancy within 30 days prior to the commencement of the month-to-month
tenancy. During such tenancy, Tenant shall be bound by all of the
terms, covenants and conditions as herein specified, as far as
applicable; provided, however, that if Tenant fails to surrender the
Premises upon the termination of this Lease, in addition to any other
liabilities to Landlord arising therefrom Tenant shall indemnify and
hold Landlord harmless from loss or liability resulting from such
failure, including any claims made by any succeeding Tenant founded on
such failure.

ARTICLE 22.00 WAIVER OF SUBROGATION

22.01 Landlord and Tenant each releases and relieves the other and on behalf
of its insurer(s) waives its entire right of recovery against the
other for loss or damage arising out of or incident to the perils of
fire, explosion, or any other perils generally described in "extended
coverage" insurance endorsements used in Louisville which occur in, on
or about the Building and/or the Premises whether due to the
negligence of such other party, its agents or employees, or otherwise.

ARTICLE 23.00 NOTICES

23.01 Wherever in this Lease it shall be required or permitted that notice,
approval, advice, consent or demand be given or served by either party
to this Lease to or on the other, such notice or demand shall be given
or served and shall not be deemed to have been duly given or served
unless in writing and forwarded by certified or registered mail,
addressed as follows:

To Landlord: W & M of Kentucky, Inc
1930 Bishop Lane, Suite 407
Louisville, KY 40218

To Tenant: Medaphis Corporation
Real Estate Department
2700 Cumberland Parkway, Suite 300
Atlanta, GA 30339

Either party may change such address by written notice by certified or
registered mail to the other.

ARTICLE 24.00 RIGHTS RESERVED BY LANDLORD

24.01 Landlord shall have the sole and exclusive right to designate (and
from time to time, in its discretion, re-designate) the name,
address, number and/or designation of the Building.

24.02 Tenant shall not use the name, picture or representation of the
Building, or words to that effect, in connection with any business
carried on in the Premises (except as Tenant's address).

ARTICLE 25.00 CONDEMNATION

25.01 If the whole or any part of the demised Premises shall be acquired or
condemned by the Eminent Domain for any public or quasi-public use or
purpose, the term of this Lease shall, at the option of Landlord,
cease and terminate from the date of title vesting in such proceeding.
In no event shall Tenant have any claim or interest in or to any award
of damages for such taking whether or not this Lease be terminated as
herein provided.

ARTICLE 26.00 RELOCATION OF PREMISES

26.01 Landlord shall have the right, at any time during the term of this
Lease, to relocate Tenant to other Premises within Watterson Towers at
1930 Bishop Lane, with such substitute Premises to contain
approximately the same leasable area as the original Premises, upon
the terms and conditions as follows:

(a) Landlord shall provide Tenant with at least 30 days written
notice of its intent to relocate the Premises.

(b) Landlord shall reimburse Tenant for all reasonable expenses
incurred by Tenant in making such relocation, including
reasonable moving expense and the net cost of remodeling
and/or redecorating the substitute Premises so that it is in
approximately the same condition as the original Premises.

(c) The Base Rent for the substitute Premises shall be based on
the per square foot rental rate being paid by Tenant for the
original Premises. However, Tenant shall have the right to
disapprove such relocation to a substitute Premises which is
reasonable for Tenant's needs or which is more than ten
percent larger

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<PAGE> 10
than the original Premises, by notifying Landlord, in writing,
of such disapproval within 10 days after the date of
Landlord's written notice of its intent to relocate the
Premises. The Tenant's annual escalation for operating cost
provided by Section 4.02 hereof shall be computed upon the
square footage of the substitute Premises and the expenses
allocated to that Building in which the substitute Premises
are located.

(d) Upon the Landlord's exercise of this right, Tenant agrees to
execute an Addendum to this Lease which sets forth the
description of the substituted Premises, the square footage of
the substituted Premises, the new monthly rental amount, and a
covenant reaffirming the terms and conditions of this Lease
except as modified in the Addendum thereto.

ARTICLE 27.00 MISCELLANEOUS PROVISIONS

27.01 The term "Landlord", as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to
mean and include only the owner or owners, at the time in question, of
the Premises, and in the event of any transfers of the title to the
Premises, Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall be automatically
released, discharged, freed and relieved from and after the date of
such transfer or conveyance of all liability as respects the
performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed.

27.02 The captions of the Articles of this Lease are for convenience only and
shall not be considered or referred to in resolving questions of
interpretation or construction.

27.03 The terms "Landlord" and "Tenant" wherever used herein shall be
applicable to one or more persons, as the case may be, and the singular
shall include the plural, and the neuter shall include the masculine
and feminine, and If there be more than one, the obligations hereof
shall be joint and several.

27.04 The word "person" and the word "persons" wherever used in this Lease
shall both include individuals, partnerships, firms, associations and
corporations or any other form of business entity.

27.05 The various rights, options, elections, powers and remedies contained
in this Lease shall be construed as cumulative and no one of them shall
be exclusive of any of the others, or of any other legal or equitable
remedy which either party might otherwise have in the event of breach
or default in the terms hereof, and the exercise of one right or remedy
by such party shall not impair its right to any other right or remedy
until all obligations upon the other party have been fully performed.

27.06 Time is of the essence with respect to the performance of each of the
covenants and agreements under this Lease.

27.07 Each and all of the provisions of this Lease shall be binding upon and
inure to the benefit of the parties hereto and, except as set forth in
Section 1 of this Article and as otherwise specifically provided
elsewhere in this Lease, their respective heirs, executors,
administrators, successors and assigns, subject at all times,
nevertheless, to all agreements and restrictions contained elsewhere in
this Lease with respect to the assignment, transfer, encumbering or
subletting of all or any part of Tenant's interest in this Lease.

27.08 This Lease shall be interpreted in accordance with the law of the
Commonwealth of Kentucky.

27.09 No waiver of any default by Tenant hereunder shall be implied from
any omission by Landlord to take any action on account of such default
if such default persists or is repeated, and no express waiver shall
affect any default other than the default specified in the express
waiver, and that only for the time and to the extent therein stated.
The acceptance by Landlord of rent with knowledge of the breach of any
of the covenants of this Lease by Tenant shall not be deemed a wavier
of any such breach. One or more waivers of any breach of any covenant,
term or condition of this Lease shall not be construed as a waiver of
any subsequent breach of the same covenants, term or condition. The
consent or approval by Landlord to or of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent or approval to or of any subsequent
similar acts by Tenant.

27.10 If Tenant shall default in the performance of any covenant on its part
to be performed by virtue of any provisions of this Lease, Landlord
may, after any notice and the expiration of any period with respect
thereto as required pursuant to the applicable provisions of this
Lease, perform the same for the account of Tenant. If Landlord, at any
time, is compelled to pay or elects to pay any sum of money or do any
acts which would require the payment of any sum of money by reason of
the failure of Tenant, after any notice and the expiration of any
period with respect thereto, as required pursuant to the applicable
provisions of the Lease, to comply with any provisions of this Lease,
the sum or sums so paid by Landlord with all interest, costs and
damages, shall be deemed to be additional rental hereunder and shall be
due from Tenant to Landlord on the first day of the month following the
incurring of such respective expenses, except as otherwise herein
specifically provided.

-10-

<PAGE> 11
27.11 If Tenant or Landlord shall bring any action for any relief against the
other, declaratory or otherwise, arising out of this Lease, including
any suit by Landlord for the recovery of rent, additional rent or other
payments hereunder or possession of the Premises, the losing party
shall pay the prevailing party a reasonable sum for attorney's fees in
such suit, at trial and on appeal, and such attorneys' fees shall be
deemed to have accrued on the commencement of such action.

27.12 This Lease contains all covenants and agreements between Landlord and
Tenant relating in any manner to the rental, use and occupancy of the
Premises and Tenant's licensed use of the Building and other matters
set forth in this Lease. No prior agreement or understanding pertaining
to the same shall be valid or of any force or effect, and the covenants
and agreements of this Lease cannot be altered, changed, modified or
added to except in writing signed by Landlord and Tenant. No
representation, inducement, understanding or anything of any nature
whatsoever made, stated or represented on Landlord's behalf, either
orally or in writing (except this Lease), has induced Tenant to enter
into this Lease.

27.13 Any provision or provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate
any other provision hereof, and the remaining provisions hereof shall
nevertheless remain in full force and effect.

27.14 Except with respect to those conditions, covenants and agreements of
this Lease which by their nature could only be applicable after the
commencement of, during, or throughout the term of this Lease, all of
the other conditions, covenants and agreements of this Lease shall be
deemed to be effective as of the date of execution of this Lease.

27.15 Tenant represents and warrants to Landlord that it has not engaged any
broker, finder or other person who would be entitled to any commission
or fee in respect of the negotiation, execution or delivery of this
Lease, and shall indemnify Landlord against loss, cost, liability or
expense incurred by Landlord as a result of any claim asserted by any
such broker, finder or other person on the basis of any arrangements or
agreements made or alleged to have been made by or on behalf of Tenant.

28.00 See Addendum attached.

IN WITNESS WHEREOF, the parties have caused this Lease to be duly
executed and delivered as of the day and year first above written.

ATTEST:

/s/ Robert C. Lanu, II By /s/ Ia & Mury
- --------------------------- ---------------------------

ATTEST:
By /s/ Randolph G. Brown
- --------------------------- ---------------------------
"Tenant"
Randolph G. Brown
Co-Chairman

- 11 -

<PAGE> 12

ARTICLE 28.00

28.01 TENANT'S EXISTING PREMISES

Subject to all the terms of the Lease, Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord, approximately 66,345 rentable square
feet ("RSF") of space located on Floors 12 (Suite 1200), 14A, 14B, 15 and 16
(Suite 1601) of the Building as illustrated on Exhibit "A" attached hereto and
by reference made a part hereof (hereinafter "Tenant's Existing Premises").

28.02 TERM

The term of the Lease for Tenants Existing Premises shall begin on the
first day of the month of February 1997 and shall terminate on July 31, 2002.

28.03 TENANT IMPROVEMENT ALLOWANCE FOR FLOOR SIXTEEN (SUITE
1601).
Landlord shall pay for the tenant improvements to the space in Suite
1601 (approximately 8,360 RSF) being leased up to a maximum cost of Sixty-seven
Thousand One Hundred Sixty Dollars ($ 67,160.00). Landlord shall promptly
reimburse Tenant the tenant improvement cost upon presentation of expenses and
supporting backup material from Tenant's contractor with evidence of payment by
the Tenant of all such costs.

The tenant improvements shall be constructed in a good and workmanlike
manner using materials of a similar quality as to be used in Tenant's Existing
Premises. Tenant shall exercise its best reasonable efforts to prevent the
filing of a mechanics' or materialman's lien on Suite 1601 and/or Landlord's
Building. If such a lien should be filed, Tenant shall promptly notify Landlord
of such a filing, and either cause the lien(s) to be released or post a bond for
the benefit of Landlord in the twice amount of the lien(s) if Tenant contests
the validity of the filed lien.

Suite 1601 shall be available for tenant improvement construction on
January 1, 1997. The rental commencement date for Suite 1601 shall be February
1, 1997.

28.04 RENTAL

The monthly rental for Tenant's Existing Premises (66,345 RSF) shall be
calculated and payable in accordance with the terms and provisions of Article
4.00 of the Lease, and shall be paid as follows:

<TABLE>
<CAPTION>
RENTAL MONTHLY
PERIOD OF TERM RATES PER RSF RENTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
February 1, 1997 thru January 31, 1998 $ 10.80 $ 59,710.50
February 1, 1998 thru January 31, 2000 $ 11.25 $ 62,198.44
February 1, 2000 thru July 31, 2002 $ 11.75 $ 64,962.81
</TABLE>

<PAGE> 13

28.05 TENANT TO LEASE THE REMAINING SPACE LOCATED ON FLOOR
SIXTEEN.

In the event this Lease is then in effect and Tenant is not in
default, Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the remaining 8,388 RSF on Floor 16, pursuant to the terms and
provisions to this Lease, as illustrated on Exhibit "D" hereto (hereinafter
the "Additional Sixteenth Floor Premises"). Additional Sixteenth Floor Premises
shall be as follows:

(a) Additional Sixteenth Floor Premises shall be available for tenant
improvement construction on January 1, 1998.

(b) Landlord shall pay for the tenant improvements to Additional Sixteenth
Floor Premises (approximately 8,388 RSF) being leased up to a
maximum cost of Three Dollars ($3.00) per square foot or Twenty-five
Thousand One Hundred Sixty-four Dollars ($25,164.00). Landlord shall
promptly reimburse Tenant the tenant improvement cost upon presentation
of expenses and supporting backup material from Tenant's contractor
with evidence of payment by the Tenant of all such costs.

(c) The tenant improvements shall be constructed in a good and workmanlike
manner using materials of a similar quality as to be used in the
Additional Sixteenth Floor Premises. Tenant shall exercise its best
reasonable efforts to prevent the filing of a mechanics' or
materialman's lien on Additional Sixteenth Floor Premises and/or
Landlord's Building. If such a lien should be filed, Tenant shall
promptly notify Landlord of such a filing, and either cause the lien(s)
to be released or post a bond for the benefit of Landlord in twice the
amount of the lien(s) if Tenant contests the validity of the filed
lien.

(d) The rental commencement date for Tenant to Lease Subject Premises shall
be February 1, 1998.

28.06 RENTAL RATE FOR TENANT TO LEASE SUBJECT PREMISES.

The monthly rental for Tenant to Lease Subject Premises (8,388 RSF)
shall be calculated and payable in accordance with the terms and provisions of
Article 4.00 of the Lease, and shall be paid as follows:

<TABLE>
<CAPTION>
RENTAL MONTHLY
PERIOD OF TERM RATE PER RSF RENTAL
- --------------------------------------------------------------------------------------
<S> <C> <C>
February 1, 1998 thru. January 31, 2000 $ 11.25 $ 7,863.75
February 1, 2000 thru. July 31, 2002 $ 11.75 $ 8,213.25
</TABLE>

28.07 TENANT'S ADDITIONAL RIGHT TO REMAINING SPACE LOCATED ON
FLOOR TWELVE.

ADDITIONAL RIGHT. In the event this Lease is then in effect,
Tenant is not in default

<PAGE> 14

and, Tenant has leased all of Floor 16, Tenant shall have the Additional Right
to lease the remaining 8,907 RSF of space on Floor 12, pursuant to the terms and
provisions of Article 28.00 to this Lease, as illustrated on Exhibit "E" hereto
(hereinafter the "Premises Subject to Tenant's Additional Right"). Tenant's
rights herein granted shall be as follows:

(a) Tenant's Additional right is subject to the expiration of Landlord's
lease with National Processing Corporation ("National"), the current
occupant of the remaining space on Floor 12. Landlord shall not extend
National's lease beyond December 31, 1998 provided Tenant has given
Landlord written notice to exercise the Additional Right no later than
June 1, 1998.

(b) If Tenant elects to lease the Premises Subject to Tenant's Additional
Right, Tenant shall notify Landlord, in writing, and the parties shall
execute forthwith an addendum to this Lease setting forth the terms and
provisions relative to the leasing of the Premises Subject to Tenant's
Additional Right. The addendum to the Lease shall provide for a
commencement date of February 1, 1999 and a termination date of July
31, 2002.

(c) Tenant shall pay for the tenant improvements to the space in Premises
Subject to Tenant's Additional Right (approximately 8,907 RSF) being
leased.

(d) The tenant improvements shall be constructed in a good and workmanlike
manner using materials of a similar quality as to be used in the
Premises Subject to Tenant's Additional Right. Tenant shall exercise
its best reasonable efforts to prevent the filing of a mechanics' or
materialman's lien on Premises Subject to Tenant's Additional Right
and/or Landlord's Building. If such a lien should be filed, Tenant
shall promptly notify Landlord of such a filing, and either cause the
lien(s) to be released or post a bond for the benefit of Landlord in
twice the amount of the lien(s) if Tenant contests the validity of the
filed lien.

(e) This Additional Right if not exercised for lease commencement by June
1, 1998 shall expire.

28.08 RENTAL RATE FOR PREMISES SUBJECT TO TENANT'S ADDITIONAL
RIGHT.

The monthly rental for Premises Subject to Tenant's Additional
Right (8,907 RSF) shall be calculated and payable in accordance with the terms
and provisions of Article 4.00 of the Lease, and shall be paid as follows:

<TABLE>
<CAPTION>
RENTAL MONTHLY
PERIOD OF TERM RATE PER RSF RENTAL
- -------------------------------------------------------------------------------------
<S> <C> <C>
February 1, 1999 thru. January 31, 2000 $ 11.25 $ 8,350.31
February 1, 2000 thru. July 31, 2002 $ 11.75 $ 8,721.44
</TABLE>

28.09 TENANT IMPROVEMENT FOR TENANT'S EXISTING PREMISES.

In the event this Lease is then in effect and not in default,
Tenant shall request from

<PAGE> 15

Landlord in writing, on or before October 1, 1999, tenant improvements for
Tenant's Existing Premises, not including Suite 1601, (approximately 57,985
RSF) for such items as new carpet and painting of Tenant's Existing Premises.
Such improvements shall be mutually agreed upon by Landlord and Tenant. Any
cost above the tenant improvement allowance shall be prorated over the
remaining term of the Lease beginning February 1, 2000 through July 31, 2002
plus one percent over Citibank Base Rate. Tenant shall pay Landlord for tenant
improvements on a monthly basis computed as follows:

Tenant Improvement Cost + (Tenant Improvement Cost x Citibank, New York
Base Rate + 1.00%)
- --------------------------------------------------------------------------------
30 months

Tenant shall pay to Landlord beginning February 1, 2000 the monthly
payment for the tenant improvement costs.

Tenant may perform the work itself, subject to additional reimbursement
from Landlord (but with Tenant subsequent reimbursement to Landlord as above
provided). In such event, the tenant improvements shall be constructed in a
good and workmanlike manner using materials of a similar quality as to be used
in Tenant's Existing Premises. Tenant shall exercise its best reasonable
efforts to prevent the filing of a machanics' or materialman's lien on Tenant's
Existing Premises and/or Landlord's Building. If such a lien
should be filed, Tenant shall promptly notify Landlord of such a filing, and
either cause the lien(s) to be released or post a bond for the benefit of
Landlord in twice the amount of the lien(s) if Tenant contests the validity of
the filed lien.

** Landlord shall provide up to $125,000 for tenant improvements in tenants
existing premises.

28.10 TENANT'S REQUEST FOR ADDITIONAL SPACE

Because of future expansion(s) of Tenant's business, Tenant, from time
to time, may require rental space in addition to Tenant's Existing Premises,
Floor 16 and the remaining portion of Floor 12. If Tenant shall require, from
time to time, additional rental space because of the good faith intentions of
Tenant to expand its business, Tenant, from time to time, shall notify
Landlord, in writing, of Tenant's expansion requirements and request that
Landlord lease to it additional space in the Building (Tenant's Request for
Additional Space). No Tenant's Request for Additional Space shall be for less
than 8,106 RSF. Landlord shall use its reasonable efforts to satisfy Tenant's
space requirements.

The terms and provisions for Tenant's Request for Additional Space
shall be the terms and rental rates per RSF prevailing for rental of office
space in the suburban Louisville office rental market for similar type space as
the Tenant's Request for Additional Space, the rental rate to be increased to
reflect the cost of any Tenant improvements agreed to by landlord.

28.11 EXTENSION OF TERM OF LEASE FOR TENANT'S EXISTING PREMISES
AND EXPANSION PREMISES AS PROVIDED IN LEASE.

Tenant and landlord shall meet between May 1, 2000 and July 31, 2000 to
consider a Lease extension, provided neither party shall be obligated to enter
into any such lease extension.
<PAGE> 16
Any extension shall be at prevailing market rates (not to exceed $14.75 per RSF)
and the terms shall be acceptable to both parties. If the Lease extension is not
executed by July 31, 2000, Landlord shall have the right to begin leasing
activities for tenant's space for occupancy at the end of this Lease term.

If Tenant and Landlord do not agree to an extension of this Lease on or before
July 31, 2000, Tenant shall permit Landlord to enter the Premises outside normal
business hours, and during normal business hours where such will not
unreasonably disturb or interfere with Tenant's use of the Premises and
operation of its business, to show the Premises to persons wishing to lease
them. Landlord shall whenever possible, except in an emergency, consult with OR
give reasonable notice to Tenant prior to such entry, but no such entry shall
constitute an eviction or entitle Tenant to any abatement of Rent.

28.12 SIGN TO BE CONSTRUCTED WHICH PUBLICIZES TENANT'S OCCUPANCY OF THE
PREMISES,
Landlord agrees, at the sole cost and expense of Tenant, to construct
and maintain a sign on the face of the Building stating its name or logo.
Tenant agrees to pay the total cost and expense to construct and maintain said
sign. The sign shall be subject to the approval of Landlord as to the size,
design, location, and specifications, which approval will not be unreasonably
withheld. The obligations of Landlord herein shall be conditioned upon Tenant's
being able to obtain approval from appropriate regulatory agencies for the
construction of such sign.

28.13 LANDLORD TO INSTALL SPRINKLER SYSTEM IN TENANT'S EXISTING PREMISES
Landlord shall be PERMITTED to install, at Landlord's sole cost and
expenses, a sprinkler system in Tenant's Existing Premises which do not have a
sprinkler system, installation to be coordinated with Tenant. Landlord shall
cause the installation of the sprinkler system in Tenant's Existing Premises to
be completed before December 31, 1998.

28.14 EXCLUSIONS FROM OPERATING EXPENSES.
EXCLUSIONS FROM OPERATING EXPENSES. For purposes of this Lease, And
notwithstanding anything in any other provision of this Lease to the contrary,
"Operating Expenses" shall not include the following:

1. costs of alterations, additions, capital improvements and replacements,
equipment replacements, capital equipment and capital tools, and other
items which under generally accepted accounting principles are properly
classified as capital expenditures.

2. costs (including permit, license and inspection fees) incurred in
renovating, improving, painting or decorating other than in Common
Areas of the Project;

<PAGE> 17

3. any tenant leasehold improvements work performed or alteration of space
leased to Tenant or other Tenant or other tenants or occupants of the
Building, including costs of space planning for such space, whether
such work, alteration or space planning is performed for the initial
occupancy by such tenant or occupant or thereafter;

4. any cash or other consideration paid by Landlord on account of, with
respect to or in lieu of the tenant work or alterations described in
Article 28.14(2,3) above;

5. ground rent;

6. depreciation or amortization

7. repairs necessitated by the gross negligence of Landlord or required to
cure violations of laws in effect on the date of this Lease;

8. interest on indebtedness or any costs of financing or refinancing the
Building, Building equipment, or Building improvements, replacements,
or repairs;

9. compensation paid to officers, executives or administrative personnel
of Landlord above the level of building manager (but it is understood
that the on-site building manager and other on-site employees below the
grade of building manager may carry a title such as vice president and
the salaries and related benefits of these officers/employees of
Landlord would be allowable Operating Expenses);

10. leasing commissions and advertising, marketing and promotion expenses;

11. legal fees or other professional consulting fees arising out of the
construction of the improvements on the Land or the negotiation,
preparation or enforcement of the provisions of any lease affecting the
Land or Project, including this Lease;

12. taxes and assessments imposed on the personal property of the tenants
of the Building;

13. cost of repairs incurred by reason of fire or other casualty or
condemnation; provided, however, Operating Expenses shall include
reasonable deductible amounts under policies maintained by Landlord;

14. the cost of any work or services performed for HVAC or electricity
supplied to any tenant of the Building which shall exceed the greater
of (a) the cost of the standard amount or level of such work, service,
electricity or HVAC available or furnished to other tenants in the
Building or (b) the cost of the amount or level of work, services,
electricity or HVAC made available by Landlord to Tenant under this
Lease;

15. "takeover expenses" (i.e., expenses incurred by Landlord with respect
to space located in another building of any kind or nature in
connection with the leasing of space in the Project);

16. any amounts payable to Landlord by way of indemnity or for damages or
which constitute a fine, interest, or penalty, including interest or
penalties for any late payments of operating costs;

17. any improvements installed or work performed or any other cost or
expense incurred by Landlord in order to comply with the requirements
for the obtaining or renewal of or any space therein;

18. any cost representing an amount paid for services or materials to a
related Person to the extent such amount exceeds the amount that would
be paid for such services such services or materials at the then
existing market rates to an unrelated Person;

<PAGE> 18

19. if any taxes paid by Landlord and previously included in Operating
Expenses are under the Lease has occurred and is continuing, and Tenant
paid Tenant's Forecast Additional Rental for the period to which such
refund relates, Landlord shall promptly pay Tenant an amount equal to
the amount of such refund (less the reasonable expenses incurred by
Landlord in obtaining such refund) multiplied by Tenant's proportionate
share in effect for the period to which such relates. In the event any
third party who is not a tenant of the Building pays any amount to
Landlord comprising an item of Operating Expenses, then such amount
shall be deducted from Operating Expenses, if such amount was included
in Operating Expenses;

20. the cost of correcting defect in construction;

21. the cost of overtime or other expense to Landlord in curing its
defaults;

22. any costs or expenses (including fines, penalties, interest and legal
fees) incurred due to the violation of or failure to timely comply by
Landlord, or any tenant or other occupant of the Building, with the
terms and conditions of any lease pertaining to the Project or any
Legal Requirement to the extent such violation or failure;

23. mark-ups on electricity in excess of Landlord's costs therefor;

24. costs of any extraordinary cleanup, containment, abatement, removal or
Remediation of Hazardous Substances;

25. the cost of correcting any code violations in the Project which are
violations of applicable codes as of the date hereof;

26. any subsidy or other payment made to any tenant or vendor in the
Building to subsidized that tenant's or vendor's expenses, gross
revenues, profits or the like;

27. any bad debt loss, rent loss or reserves for bad debts or rent loss;

28. the cost of any item, service or repair to the extent that such cost is
paid under any warranty, guaranty or insurance policy maintained or
held by Landlord;

29. any increase in the cost of insurance attributable to the particular
activities of any tenant which increases the cost of any fire, extended
coverage or any other insurance policy covering the Project; and

30. accrual of reserves for future repair or replacement costs.

28.15 MISCELLANEOUS.
1. LANDLORD NOT TO LEASE SPACE UNION OF A NIGHT CLUB.
So long as this Lease shall remain in full force and effect, Landlord
shall not lease any space in the Building to anyone for use in the operation
of a night club, or any establishment with live entertainment and the
serving of alcoholic beverage, or any similar type of operation. Further,
Landlord shall not permit the operation of a night club, or any
establishment with live entertainment and the serving of alcoholic
beverages, or any similar type of operation, in any portion of the Building.
If the provisions of this Section 28.15(1) of this Lease shall be violated,
Tenant shall have, in addition to all other legal and equitable remedies
provided it by the laws of Kentucky, the right to injunctive relief, in any
Kentucky court of competent jurisdiction, to enforce the provisions of this
Section 28.15(1).

<PAGE> 19

2. PARTIES TO ACT REASONABLY AND IN GOOD FAITH,
In all aspects of their dealings in connection with the Lease, or as
subsequently amended and modified, the parties shall act reasonably and in
good faith.

3. HAZARDOUS WASTE LANGUAGE,
To the best of Lessor's knowledge there is no asbestos or hazardous
materials in or about the building. If at some future date it is determined
there is, then the removal of such asbestos or hazardous material will be at
Lessor's sole cost and expense.

4. ADA LANGUAGE
To the best of Lessor's knowledge the building complies with all
applicable requirements of the American With Disabilities Act ("ADA"). If at
some future date it does not comply, then such compliance will be at
Lessor's sole cost and expense.

28.16 TERMINATION OF THE ORIGINAL LEASE,
The Original Lease dated August 17, 1990 and all Addenda thereto shall
be and are hereby terminated upon the execution of this Lease by both parties.

<PAGE> 20

EXHIBIT "A"

Layout of Building Floors

TWELFTH

FOURTEEN A

FOURTEENTH B

FIFTEENTH

SIXTEENTH

<PAGE> 21
EXHIBIT "B"

Being Lot 4, WATTERSON CITY SUBDIVISION, Section 1,

Plat of which is recorded in Plat and Subdivision Book 21,

Page 4 in the Office of the Clerk of the County Court of

Jefferson County, Kentucky

<PAGE> 22

1. No advertisment, sign, lettering, notice or device shall be placed in
or upon Premises or Building, including windows, walls and exterior
doors, except such as may be approved in writing by Landlord and then
only for and during the term of the lease.

2. Lettering upon the directory board and the doors shall be made by the
sign company designated by Landlord, but the cost shall be paid by
Tenant. The directories of Building will be provided exclusively for
the display of the name and location of tenants and their manager or
representative only, and Landlord reserves the right to exclude any
other names therefrom.

3. No additional locks shall be placed upon any doors or Premises, and
Tenant agrees not to have any duplicate keys made without the consent
of Landlord. It more than two keys for any door lock are desired, such
additional keys shall be paid for by Tenant. Upon termination of this
Lease, Tenant shall surrender all keys.

4. No furniture, freight, supplies not carried by hand or equipment of any
kind shall be brought into or removed from Building without the consent
of Landlord. Landlord shall have the right to limit the weight and size
and to designate the position of all safes and other heavy property
brought into Building. Such furniture, freight, equipment, safes and
other heavy property shall be moved in or out of Building only at the
times and in the manner permitted by Landlord. Landlord will not be
responsible for loss of or damage to any of the items above referred
to, and all damage done to Premises or Building by moving or
maintaining any of such items shall be repaired at the expense of
Tenant. Any merchandise not capable of being carried by hand shall
utilize hand trucks equipped with rubber tires and rubber side guards.

5. The entrances, corridors, stairways and elevators shall not be
obstructed by Tenant, or used for any other purpose than ingress or
egress to and from Premises. Tenant shall not bring Into or keep any
animal within Building, or any bicycle or other type of vehicle.

6. Tenant shall not disturb other occupants of Building by making any
undue or unseemly noise, or otherwise. Tenant shall not, without
Landlord's written consent, install or operate in or upon Premises any
machine or machinery causing noise or vibration perceptible outside
Premises, electric heater, stove or machinery of any kind, or carry on
any mechanical business thereon, or keep or use thereon oils, burning
fluids, camphene, kerosene, naphtha, gasoline or other combustible
materials. No explosives shall be brought into Building.

7. Tenant shall not mark, drive nails, screw or drill into woodwork or
plaster, paint or in any way deface Building or any part thereof or
Premises or any part thereof, or fixtures therein. The expense of
remedying any breakage, damage or stoppage resulting from a violation
of this rule shall be borne by Tenant.

8. Canvassing, soliciting and peddling in Building are prohibited and each
Tenant shall cooperate to prevent such activity.

9. The requirements of Tenant will be attended to only upon application at
the office of Building. Building employees shall not perform any work
or do anything outside of their regular duties, except on issuance of
special instructions from the office of Building. If Building employees
are made available for the assistance of any tenants, Landlord shall be
paid for their services by such Tenant at reasonable hourly rates. No
Building employee will admit any person (Tenant or otherwise) to any
office without specific instructions from the office of Building.

10. Landlord reserves the right to close and keep locked all entrances and
exit doors of Building on Sundays, legal holidays, and between the
hours of 7:00 p.m. of any day and 7:00 a.m. of the following day, and
during such further hours as Landlord may deem advisable for the
adequate protection of Building and the property of the Tenants.

11. If Landlord utilizes an outside agency to control access to Building
when it is locked, Tenant shall pay a reasonable charge each time this
access service is used. Landlord assumes no responsibility for and
shall not be liable for any damage resulting from any error in regard
to any identification of Tenant or its employees and from admission to
or exclusion from Building by such outside agency.

12. Landlord shall, at its cost and expense, operate the air conditioning
system from 8:00 a.m. until 6:00 p.m. on business days, except on
Saturdays, when the hours shall be from 8:00 a.m. to 1:00 P. M.

13. Landlord shall supply janitor services throughout the Building,
excepting those Tenants who have agreed to provide their own janitorial
service.

EXHIBIT C

- 1 -
<PAGE> 23

14. Tenant shall exercise care and caution to insure that all water faucets
or water apparatus, electricity and gas are carefully and entirely
shutoff and all windows closed before Tenant or its employees leave
Building, so as to prevent waste or damage. Tenant shall be responsible
for any damage or injuries sustained by other tenants or occupants of
Building arising from Tenant's failure to observe this provision.

15. Landlord reserves the right to exclude or expel from Building any
person who, in the judgement of Landlord, is under the influence of
liquor or drugs, or who shall in any manner do any act in violation of
any of the rules and regulations of Building.

16. Landlord reserves the right to make such other and further reasonable
regulations as in its judgement may from time to time be needed or
desireable for the safety, care and cleanliness of Premises or Building
and the preservation of good order therein.

17. Tenant and its employees, representatives and invitees shall have the
right at such time(s) when the Building is open to park their
respective vehicles upon the parking lot in the manner as the Landlord
may provide, however, Tenant, employees, representatives and invitees
shall not store overnight or otherwise park any vehicles in the parking
lot.

18. Tenant and it's employees, representatives, and invitees shall not
cause a deposit or accumulation of litter in the common areas of the
Building including the corridors, lobby, parking lot, and landscaped
areas. Any tenant permitting littering by any of it's employees,
representatives, and invitees shall be separately charged for the
actual additional cost of removing such litter.

/s/ Ia & Mury /s/ Randolph G. Brown
- --------------------------- ----------------------------------
Landlord Tenant
Randolph G. Brown
Co-Chairman

- 2 -

<PAGE> 24
EXHIBIT "D"

Layout of Building Floors

SIXTEENTH

<PAGE> 25
EXHIBIT "E"

Layout of Building Floors

TWELFTH

<PAGE> 1
EXHIBIT 23.2

After consummation of the proposed stock split, as discussed in Note 9 to the
audited financial statements, Coopers & Lybrand L.L.P. will be in a position to
render the following consent.

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 28, 1997, except for Note 9, as to which the date is
____________, 1997, on our audit of the financial statements of Healthcare
Recoveries, Inc. as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996. We also consent to the reference
to our firm under the caption "Experts".

Louisville, Kentucky
__________, 1997

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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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