Back to GetFilings.com
FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
Commission File No. 1-9972
Hooper Holmes, Inc.
-------------------------------------------------------
(Exact name of registrant as specified in
its charter)
New York 22-1659359
- --------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 Mt. Airy Rd., Basking Ridge, NJ 07920
- --------------------------------------- --------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (908) 766-5000
None
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at June 30, 2002
- ---------------------------------------- ---------------------------------
Common stock, $.04 par value 65,206,623
HOOPER HOLMES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - Financial Information (unaudited)
ITEM 1 - Financial Statements
Consolidated Balance Sheets 1
as of June 30, 2002 and
December 31, 2001
Consolidated Statements of Income 2
for the Three and Six Months Ended
June 30, 2002 and 2001
Consolidated Statements of Cash Flows 3
for the Six Months Ended
June 30, 2002 and 2001
Notes to Consolidated
Financial Statements 4-9
ITEM 2 - Management's Discussion and Analysis 10-17
of Financial Condition and Results
of Operations
ITEM 3 - Quantitative and Qualitative Disclosures 18
About Market Risk
Part II - Other Information
ITEM 4 - Submission of matters to a vote of 19
Security Holders
HOOPER HOLMES, INC.
Consolidated Balance Sheets
(unaudited)
06/30/02 12/31/01
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 49,826,958 $ 52,571,616
Marketable securities 35,723,292 31,225,891
Accounts receivable, net 29,124,858 24,939,364
Other current assets 6,272,980 5,676,399
------------ ------------
Total current assets 120,948,088 114,413,270
Property, plant and equipment:
Land and land improvements 618,972 618,972
Building 4,883,305 4,634,145
Furniture, fixtures and equipment 23,039,377 22,507,894
Leasehold improvements 440,719 427,897
------------ ------------
Total property, plant and equipment 28,982,373 28,188,908
Less: Accumulated depreciation and amortization 21,438,329 20,355,456
------------ ------------
Property, plant and equipment, net 7,544,044 7,833,452
Goodwill 85,412,900 81,515,202
Intangible assets, net 10,359,009 11,995,686
Investment 4,682,499 5,218,750
Other assets 1,162,660 994,383
------------ ------------
Total assets $230,109,200 $221,970,743
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 124,649 $ 239,669
Accounts payable 7,639,343 7,479,797
Accrued expenses:
Insurance benefits 199,037 386,093
Salaries, wages and fees 1,503,803 3,368,318
Payroll and other taxes 354,045 289,779
Income taxes payable 3,585,135 4,683,762
Other 3,899,497 3,906,662
------------ ------------
Total current liabilities 17,305,509 20,354,080
Long term debt, less current maturities 3,346,902 3,280,496
Deferred income taxes 1,560,781 1,741,617
Minority interest 478,419 187,676
Stockholders' equity:
Common stock, par value $.04 per share; authorized 240,000,000 2,699,963 2,699,963
shares, issued 67,499,074 in 2002 and 2001.
Additional paid-in capital 131,443,659 134,482,010
Accumulated other comprehensive income 142,916 201,589
Retained earnings 92,742,679 84,308,815
------------ ------------
227,029,217 221,692,377
Less: Treasury stock at cost (2,292,451 and 2,949,459 shares) 19,611,628 25,285,503
------------ ------------
Total stockholders' equity 207,417,589 196,406,874
------------ ------------
Total liabilities and stockholders' equity $230,109,200 $221,970,743
============ ============
See accompanying notes to unaudited consolidated financial statements.
- 1-
HOOPER HOLMES, INC.
Consolidated Statements Of Income
(unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Revenues $66,015,123 $60,730,318 $132,504,956 $124,356,682
Cost of Operations 47,034,682 43,828,854 92,935,271 88,603,912
----------- ----------- ------------ ------------
Gross profit 18,980,441 16,901,464 39,569,685 35,752,770
Selling, general and admini-
strative expenses 11,288,646 11,618,316 22,525,049 23,298,506
Loss on Investment 1,630,000 - 1,630,000 -
----------- ----------- ------------ ------------
Operating income 6,061,795 5,283,148 15,414,636 12,454,264
Other income (expense):
Interest expense (28,675) (54,649) (57,514) (119,136)
Interest income 717,296 830,564 1,272,892 1,835,453
Other Income (expense), net (238,073) (104,292) (428,328) (158,638)
----------- ----------- ------------ ------------
450,548 671,623 787,050 1,557,679
----------- ----------- ------------ ------------
Income before income taxes 6,512,343 5,954,771 16,201,686 14,011,943
----------- ----------- ------------ ------------
Income taxes 2,592,000 2,462,000 6,468,000 5,841,000
----------- ----------- ------------ ------------
Net income $ 3,920,343 $ 3,492,771 $ 9,733,686 $ 8,170,943
=========== =========== ============ ============
Earnings per share:
Basic $ 0.06 $ 0.05 $ 0.15 $ 0.13
Diluted $ 0.06 $ 0.05 $ 0.14 $ 0.12
=========== =========== ============ ============
Weighted average number of shares:
Basic 65,265,493 64,936,162 65,069,706 65,069,858
Diluted 68,087,145 67,899,474 67,905,998 68,077,624
=========== =========== ============ ============
See accompanying notes to unaudited consolidated financial statements.
- 2 -
HOOPER HOLMES, INC.
Consolidated Statements Of Cash Flows
(unaudited)
Six months ended June 30,
------------------------------
2002 2001
----------- ------------
Cash flows from operating activities:
Net income $ 9,733,686 $ 8,170,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,504,498 4,647,042
Loss on investment 1,630,000 -
Provision for bad debt expense 150,000 150,000
Deferred tax benefit (180,836) (158,215)
Net realized loss (gain) on marketable securities available for sale 22,007 (158,107)
Issuance of stock awards - 5,689
Loss on sale of fixed assets 14,140 16,837
Change in assets and liabilities:
Accounts receivable (4,335,495) (571,377)
Other current assets (764,858) (472,561)
Accounts payable and accrued expenses (751,807) (1,483,801)
------------ -------------
Net cash provided by operating activities 8,021,335 10,146,450
------------ -------------
Cash flows from investing activities:
Purchases of marketable securities 16,196,668) (15,305,540)
Redemptions of marketable securities 11,618,587 13,078,992
Business acquisitions, net of cash acquired (3,651,770) (4,364,136)
Investment in and advances to e-nable Corporation (1,093,750) (5,000,000)
Capital expenditures (838,480) (344,362)
------------ -------------
Net cash used in investing activities 10,162,081) (11,935,046)
------------ -------------
Cash flows from financing activities
Issuance of long term debt -- 250,000
Principal payments on long term debt (48,615) (63,628)
Proceeds from employee stock purchase plan 551,821 --
Proceeds related to the exercise of stock options 1,431,192 874,758
Treasury stock acquired (1,238,489) (7,359,429)
Dividends paid (1,299,821) (975,761)
------------ -------------
Net cash used in financing activities (603,912) (7,274,060)
------------ -------------
Net decrease in cash and cash equivalents (2,744,658) (9,062,656)
Cash and cash equivalents at beginning of year 52,571,616 45,680,471
------------ -------------
Cash and cash equivalents at end of period $49,826,958 $ 36,617,815
============ =============
Supplemental disclosure of non-cash investing activity
Change in net unrealized gain on marketable securities available for sale $ (58,673) $ 270,685
Supplemental disclosure of cash flow information
Cash paid during the quarter for:
Interest $ 61,030 $ 123,278
Income taxes $ 4,451,210 $ 6,086,487
See accompanying notes to unaudited consolidated financial statements.
- 3 -
HOOPER HOLMES, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2002
Note 1: Basis of Presentation
The financial information included herein is unaudited however, such information
reflects all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K.
The results of operations for the three and six month periods ended June 30,
2002 are not necessarily indicative of the results to be expected for the full
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional information.
Note 2: Earnings Per Share
"Basic" earnings per share equals net income divided by weighted average common
shares outstanding during the period. "Diluted" earnings per share equals net
income divided by the sum of weighted average common shares outstanding during
the period plus dilutive common stock equivalents. Common stock equivalents
(2,821,652 and 2,963,312 for the three months ended and 2,836,292 and 3,007,766
for the six months ended June 30, 2002 and 2001, respectively) are shares
assumed to be issued if outstanding stock options were exercised.
Options to purchase 1,499,500 and 1,515,300 shares of common stock were excluded
from the calculation of diluted earnings per share for the three months ended
June 30, 2002 and 2001, respectively, and 1,500,625 and 1,535,100 shares for the
six months ended June 30, 2002 and 2001, respectively, because their exercise
prices exceeded the average market price of outstanding common shares for the
period.
Note 3: Comprehensive Income
Comprehensive income includes net income and other comprehensive income (loss)
which refers to those revenues, expenses, gains and losses which are excluded
from net income. Other comprehensive income includes unrealized gains and losses
on marketable securities classified as available-for-sale.
- 4 -
Three Month Period Ended Six Month Period Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Net income .......................... $ 3,920,343 $ 3,492,771 $ 9,733,686 $ 8,170,943
Other comprehensive income:
Unrealized holding gains (losses)
arising during period ........... 79,293 85,124 (80,680) 251,292
Less: reclassification adjustment for
(gains) losses included in net
income .......................... (4,697) (94,114) 22,007 (158,107)
----------- ----------- ----------- -----------
Net unrealized gain (loss) on
securities........................... 74,596 (8,990) (58,673) 93,185
----------- ----------- ----------- -----------
Total comprehensive income .......... $ 3,994,939 $ 3,483,781 $ 9,675,013 $ 8,264,128
=========== =========== =========== ===========
4: Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of available-for sale securities by major security type
and class of security at June 30, 2002 and December 31, 2001, was as follows:
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gain Loss Value
----------- ----------- ------------ ------------
At June 30, 2002
Government Agencies ..... $ 4,076,450 $ 11,423 $ 0 $ 4,087,872
Government Bonds & Notes 7,626,100 28,344 (62) 7,654,382
Corporate Debt Securities 23,877,826 130,030 (26,819) 23,981,038
----------- ----------- ----------- -----------
Total ................... $35,580,376 $ 169,797 ($ 26,881) $35,723,292
=========== =========== =========== ===========
At December 31, 2001
Government Agencies ..... $ 1,915,840 $ 6,001 -- $ 1,921,841
Government Bonds & Notes 2,149,010 8,390 (2,048) 2,155,352
Corporate Debt Securities 26,959,452 194,617 (5,371) 27,148,698
----------- ----------- ----------- -----------
Total ................... $31,024,302 $ 209,008 ($ 7,419) $31,225,891
=========== =========== =========== ===========
Maturities of debt securities classified as available-for-sale were as follows
at June 30, 2002 (maturities of mortgage-backed securities and collateralized
mortgage obligations have been presented based upon estimated cash flows,
assuming no change in the current interest rate environment):
Amortized Fair
Cost Value
----------- -----------
Due within one year .................. $10,574,723 $10,615,037
Due after one year through five years 23,197,241 23,292,362
Due after five years through ten years 1,808,412 1,815,893
----------- -----------
$35,580,376 $35,723,292
=========== ===========
- 5-
Proceeds from the sale of investment securities available for sale were $
11,618,587 and $13,078,992 in the six months ended June 30, 2002 and 2001,
respectively. Gross realized gains included in income in the six months ended
June 30, 2002 and 2001 were $15,862 and $158,107 respectively, and gross
realized losses included in income in the six months ended June 30, 2002 and
2001 were $37,869 and $0, respectively.
Note 5: Capital Stock
The net tax benefit derived from the exercise of stock options was $ 1.9 million
and $1.0 million for the six months ended June 30, 2002 and 2001, respectively.
Options exercised for the six months ended June 30, 2002 totaled 733,700 shares,
all of which were issued from Treasury Stock.
On May 30, 2000, the Board of Directors authorized the repurchase in any
calendar year of up to 2.5 million shares of the Company's common stock for an
aggregate purchase price not to exceed $ 25 million. For the six months ended
June 30, 2002, the Company purchased 149,300 shares at a total cost of $ 1.2
million.
Note 6: Legal Matters
The Company is a party to a number of legal actions arising in the ordinary
course of its business. The Company was a defendant in an action arising out of
the Company's resale of a drug screening business it acquired and subsequently
sold in 1995. The plaintiff claimed to have suffered damages from the Company's
alleged failure to comply with the terms of a non-competition agreement and a
first right of refusal, as well as incomplete disclosure about the transaction.
This action was settled in July 2002 and the Company paid $1.5 million, an
amount provided for in its financial statements. In the opinion of management,
the Company has substantial legal defenses and/or insurance coverage with
respect to all of its other pending legal actions; accordingly, none of these
actions is expected to have a material adverse effect on the Company, its
consolidated results of operations or its consolidated financial position.
Note 7: Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the new statement. Other
identifiable intangible assets will continue to be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Useful lives of
amortizable intangible assets are required to be re-evaluated each reporting
period with any changes in estimated useful lives being accounted for
prospectively over the revised remaining useful life.
- 6 -
The Company adopted SFAS 142 on January 1, 2002. Effective January 1, 2002,
the Company reclassified $ 1.2 million of previously recorded value related to
acquired workforce into goodwill and ceased amortizing this amount. Upon
adoption, the Company no longer amortizes goodwill. The following table presents
the effect the adoption of SFAS 142 would have had on the quarters ended June
30, 2001 and 2002, and the six months ended June 30, 2002 and 2001 had SFAS 142
been applied retroactively:
Three months ended Six months ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
(dollars in thousands except for earnings
per share)
Net income ................................ $ 3,920 $ 3,493 $ 9,734 $ 8,171
Addback: Goodwill amortization, net of tax -- 549 -- 1,075
--------- --------- --------- ---------
Adjusted net income ....................... $ 3,920 $ 4,042 $ 9,734 $ 9,246
========= ========= ========= =========
Basic earnings per share:
Net income .............. $ .06 $ .05 $ .15 $ .13
Goodwill amortization ... -- .01 -- .02
--------- --------- --------- ---------
Adjusted net income ..... $ .06 $ .06 $ .15 $ .15
========= ========= ========= =========
Diluted earnings per share
Net income .............. $ .06 $ .05 $ .14 $ .12
Goodwill amortization ... -- .01 -- .02
--------- --------- --------- ---------
Adjusted net income ..... $ .06 $ .06 $ .14 $ .14
========= ========= ========= =========
During the first quarter of 2002, the Company completed its goodwill impairment
evaluation and has concluded that goodwill is not impaired. The annual
impairment test will be performed in the fourth quarter of each fiscal year.
Amortizable intangible assets are to be reviewed for impairment in accordance
with SFAS No. 144 which supercedes SFAS No. 121 and further refines SFAS 121's
requirement that companies recognize an impairment loss if the carrying amount
of a long-lived asset is not recoverable based on its undiscounted future cash
flows and measure an impairment loss as the difference between the carrying
amount and fair value of the asset. In addition, SFAS 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be disposed of
by sale. SFAS 144 also extends the presentation of discontinued operations to
include more disposal transactions. The application of SFAS 144 in January 2002
did not have a material effect on our consolidated results of operations or
financial position. As of January 1, 2002, the Company re-evaluated the carrying
value and remaining useful lives of all previously recognized intangible assets
and did not adjust either. As of June 30, 2002, there has been no triggering
event that would cause the Company to re-evaluate the recoverability of its
intangible assets.
During the six months ended June 30, 2002, the Company completed several
acquisitions which has resulted in $3.1 million of goodwill and $.5 million of
intangible assets. Intangible assets consist of customer base of $.3 million,
and non-competition agreements of $.2 million. Amortization expense related to
the acquired intangible assets for the six months ended June 30, 2002 was
approximately $11,750.
- 7 -
All intangible assets are being amortized over their estimated useful lives, as
indicated below. Intangible assets consist of:
June 30, 2002 December 31, 2001
------------ ----------------
Non-Competition Agreements (3-5 years) $ 4,492,500 $ 4,267,500
Referral Base (9-11 years) ............ 9,599,000 9,296,000
Contractor Network (7 years) .......... 5,600,000 5,600,000
Assembled workforce ( 6 years) ........ -- 1,238,000
Trademarks and tradenames (10-15 years) 409,000 409,000
------------ ------------
20,100,500 20,810,500
Less accumulated amortization ......... (9,741,491) (8,814,814)
------------ ------------
$ 10,359,009 $ 11,995,686
============ ============
The aggregate acquired intangible amortization expense for the six months ended
June 30, 2002 and June 30, 2001, was approximately $1,362,000 and $1,550,000,
respectively. The estimated acquired intangible amortization expense for the
fiscal years ending December 31, 2002 to December 31, 2006 is $2,665,000,
$2,423,000, $2,222,000, $1,633,000, and $1,327,000, respectively.
Note 8: Investment
On January 31, 2001, the Company entered into a marketing and equity investment
agreement with e-Nable Corporation (e-Nable), at a total original cost of $ 5.0
million. e-Nable provides Internet-based business processing solutions that
allow integration of data sources, underwriting intelligence, distribution
channels and insurance products. In August 2001, the Company executed a
convertible promissory note agreement with e-Nable, to provide additional
financing for up to $1.75 million of which $ 1.3 million was funded and
outstanding as of June 30, 2002. The Company has no future commitment to
contribute additional funds to e-Nable other than the additional financing
referred to above. Under the cost method of accounting, investments are carried
at cost and are adjusted only for other-than-temporary declines in fair value,
distributions of earnings and additional investments.
During the second quarter of 2002, the Company recorded a 25% write down to the
carrying value of its investment in and advances to e-Nable Corporation, which
resulted in a pre-tax charge of $ 1.6 million. The adjustment was estimated
based on an assessment of the fair value of the investment and was mainly the
result of the difficulty e-Nable has had in securing additional capital in the
capital markets. If demand for the e-Nable products does not materialize or if
e-Nable's financing efforts are not successful, the Company will continue to
review the value of the investment to determine if the carrying value of the
e-Nable investment should be further reduced.
- 8 -
Note 9: Commitments and Contingencies
On June 20, 2002, the Company, and subsequently its three principal competitors
have been notified by the California Department of Health Services that they are
in violation of the California Business and Professions Code, with respect to
the drawing of blood by phlebotomists on a mobile basis. The Company disagrees
with the Department's interpretation of the law, has retained legal counsel and
is working with the Department to develop a reasonable interpretation of the law
and a plan that will allow the Company to continue using phlebotomists to draw
blood. There is no assurance that the Company will be able to continue utilizing
the services of phlebotomists in California. However, the Company is exploring
alternative collection methods, as well as expanding its network of licensed
nurses and physicians, who are unaffected by the Department's interpretation of
the law. It is expected this will minimize the impact to the Company and its
insurance company customers should the Department ultimately prevail. The
Company continues to service its customers in the State of California without
interruption.
- 9 -
Item 2
HOOPER HOLMES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operation - Three months ended June 30, 2002 compared to
Three months ended June 30, 2001
Revenues for the second quarter of 2002 increased 9% to $ 66.0 million from $
60.7 million for the second quarter of 2001. The number of paramedical
examinations performed increased 7 % to 772,000 from 724,000. The increase in
revenue and the increase in the number of paramedical exams performed is the
result of the overall improvement in the life insurance industry in the second
quarter. The revenue increase is also due to an increase in the average revenue
per examination of approximately 3.4 %. Management believes the percentage
increase in the average revenue per examination is due to higher prices per
examination based on selling value added services such as Portamedic Select and
Portamedic F.A.S.T.
On June 20, 2002, the Company, and subsequently its three principal competitors
have been notified by the California Department of Health Services that they are
in violation of the California Business and Professions Code, with respect to
the drawing of blood by phlebotomists on a mobile basis. The Company disagrees
with the Department's interpretation of the law, has retained legal counsel and
is working with the Department to develop a reasonable interpretation of the law
and a plan that will allow the Company to continue using phlebotomists to draw
blood. There is no assurance that the Company will be able to continue utilizing
the services of phlebotomists in California. However, the Company is exploring
alternative collection methods, as well as expanding its network of licensed
nurses and physicians, who are unaffected by the Department's interpretation of
the law. It is expected this will minimize the impact to the Company and its
insurance company customers should the Department ultimately prevail. The
Company continues to service its customers in the State of California without
interruption.
The number of Infolink reports increased to approximately 113,000 reports for
the second quarter of 2002 from 108,000 reports for the second quarter of 2001.
The average price per unit of service decreased approximately 3 % for the second
quarter of 2002 compared to the second quarter of 2001. This percentage decrease
is the result of certain competitive pressures and the Company's efforts to
control medical fees associated with Infolink reports.
The Company's cost of operations for the second quarter of 2002 totaled $47.0
million compared to $43.8 million for the second quarter of 2001. Cost of
operations as a percentage of revenues improved to 71.2% for the second quarter
of 2002, compared to 72.2% for the second quarter of 2001. The reduction, as a
percentage of revenues, is due to the Company's ability to leverage its field
expenses, despite the 9% increase in revenues, and is offset by increased blood
kit charges.
Selling, general and administrative expenses (SG&A) totaled $ 11.3 million for
the second quarter of 2002 compared to $ 11.6 million for the second quarter of
2001, and as a percentage of revenues totaled 17.1% compared to 19.1%,
respectively. The decrease, as a percentage of revenues, is due to higher
revenue levels in the second quarter of 2002. Amortization of intangible assets
was $ .7 million for the second quarter of 2002 compared to amortization of
goodwill and intangible assets of $ 1.7 million for second quarter 2001. The
decrease is attributable to the adoption of FASB Statement No. 142 "Goodwill and
other Intangible Assets", which the Company adopted January 1, 2002. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized.
- 10 -
The favorable effect of SFAS 142 in the second quarter of 2002, was offset by
increased SG&A costs primarily in the areas of general insurance and employee
programs insurance, which increased over the second quarter of 2001. These
insurance costs, given current renewal trends in the insurance industry, are
expected to increase in 2002, as the Company renews its insurance policies.
During the second quarter of 2002, the Company recorded a 25% write down to the
carrying value of its investment in and advances to e-Nable Corporation, which
resulted in a pre-tax charge of $ 1.6 million. The adjustment was estimated
based on an assessment of the fair value of the investment and was mainly the
result of the difficulty e-Nable has had in securing additional capital in the
capital markets. If demand for the e-Nable products does not materialize or if
e-Nable's financing efforts are not successful, the Company will continue to
review the value of the investment to determine if the carrying value of the
e-Nable investment should be further reduced.
The Company's operating income increased to $6.1 million from $5.3 million and
as a percentage of revenues, increased to 9.2% from 8.7% for the second quarter
of 2002 compared to the second quarter of 2001.
Interest income decreased to $ .7 million for the second quarter of 2002 from $
..8 million for the second quarter 2001, due primarily to lower interest rates.
The effective tax rates were 40% and 41% for the quarters ended June 30, 2002
and 2001, respectively. The reduction in the effective tax rate is due to the
adoption of Statement 141 and 142 and the resultant elimination of certain
non-deductible goodwill amortization.
Net income and earnings per diluted share for the second quarter of 2002 were
$3.9 million and $.06 per diluted share versus $3.5 million and $.05 per diluted
share for the second quarter of 2001. Weighted average diluted shares for the
respective periods were 68,087,145 and 67,899,474
- 11 -
HOOPER HOLMES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operation - Six months ended June 30, 2002 compared to
Six months ended June 30, 2001
Revenues for the six months ended June 30, 2002 increased 6.6% to $132.5 million
from $124.4 million for the six months ended June 30, 2001. The number of
paramedical examinations performed increased to approximately 1,559,000 from
1,509,000. These increases are due to the overall improvement in the life
insurance industry and an increase in the average revenue per examination of
approximately 3.2 %. Management believes the percentage increase in the average
revenue per examination is due to higher prices per examination based on selling
value added services such as Portamedic Select and Portamedic F.A.S.T.
On June 20, 2002, the Company, and subsequently its three principal competitors
have been notified by the California Department of Health Services that they are
in violation of the California Business and Professions Code, with respect to
the drawing of blood by phlebotomists on a mobile basis. The Company disagrees
with the Department's interpretation of the law, has retained legal counsel and
is working with the Department to develop a reasonable interpretation of the law
and a plan that will allow the Company to continue using phlebotomists to draw
blood. There is no assurance that the Company will be able to continue utilizing
the services of phlebotomists in California. However, the Company is exploring
alternative collection methods, as well as expanding its network of licensed
nurses and physicians, who are unaffected by the Department's interpretation of
the law. It is expected this will minimize the impact to the Company and its
insurance company customers should the Department ultimately prevail. The
Company continues to service its customers in the State of California without
interruption.
The Company's cost of operations for the six months ended June 30, 2002 totaled
$92.9 million compared to $88.6 million for the six months ended June 30, 2001.
Cost of operations as a percentage of revenues, decreased to 70.1% for the six
months ended June 30, 2002 from 71.2% for the six months ended June 30, 2001.
The reduction, as a percentage of revenues, is due to the Company's ability to
leverage its field expenses, despite the 6.6% increase in revenues, and is
offset by increased blood kit charges.
Selling, general and administrative expenses (SG&A) totaled $22.5 million for
the six months ended June 30, 2002 compared to $ 23.3 million for the six months
ended June 30, 2001, and as a percentage of revenues totaled 17.0% compared to
18.7%, respectively. The decrease is attributable to the adoption of FASB.
Statement No. 142 " Goodwill and other Intangible Assets", which the Company
adopted January 1, 2002. SFAS. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized. Amortization of intangible
assets was $ 1.4 million for the six months ended June 30, 2002 compared to
amortization of goodwill and intangible assets of $ 3.4 million for the six
months ended June 30, 2001. The favorable effect of SFAS 142 for the six months
ended June 30, 2002, was offset by increased SG&A cost primarily in the areas of
general insurance and employee programs insurance, which increased over the six
months ended June 30, 2001. These insurance costs, given current renewal trends
in the insurance industry, are expected to increase in 2002, as the Company
renews its insurance policies.
- 12 -
During the second quarter of 2002, the Company recorded a 25% write down to the
carrying value of its investment in and advances to e-Nable Corporation, which
resulted in a pre-tax charge of $ 1.6 million. The adjustment was estimated
based on an assessment of the fair value of the investment and was mainly the
result of the difficulty e-Nable has had in securing additional capital in the
capital markets. If demand for the e-Nable products does not materialize or if
e-Nable's financing efforts are not successful, the Company will continue to
review the value of the investment to determine if the carrying value of the
e-Nable investment should be further reduced.
The Company's operating income increased to $15.4 million from $12.5 million and
as a percentage of revenues, increased to 11.6% from 10.0% for the six months
ended June 30, 2002 compared to the six months ended June 30, 2001.
Interest income decreased to $.3 million for the six months ended June 30, 2002,
compared to $1.8 million for the six months ended June 30, 2001 due to lower
interest rates.
The effective tax rates were 40% and 42% for the six months ended June 30, 2002
and 2001, respectively. The reduction in the effective tax rate is due to the
adoption of Statement 141 and 142 and the resultant elimination of certain
non-deductible goodwill amortization.
Net income and earnings per diluted share for the six months ended June 30, 2002
were $9.7 million and $.14 per diluted share versus $8.2 million and $.12 per
diluted share for the six months ended June 30, 2001. Average diluted shares for
the respective periods were 67,905,998 and 68,077,624.
- 13 -
Liquidity and Financial Resources
The Company's primary sources of cash are internally generated funds, cash
equivalents, and marketable securities, as well as the Company's bank credit
facility.
On January 31, 2001, the Company entered into a marketing and equity investment
agreement with e-Nable Corporation (e-Nable), at a total original cost of $ 5.0
million. e-Nable Corporation provides Internet-based business processing
solutions that allow integration of data sources, underwriting intelligence,
distribution channels and insurance products. In August 2001, the Company
executed a convertible promissory note agreement with e-Nable, to provide
additional financing for up to $1.75 million of which $ 1.3 million was funded
and outstanding as of June 30, 2002. The Company has no future commitment to
contribute additional funds to e-Nable other than the additional financing
referred to above. Under the cost method of accounting, investments are carried
at cost and are adjusted only for other-than-temporary declines in fair value,
distributions of earnings and additional investments.
During the second quarter of 2002, the Company recorded a 25% write down to the
carrying value of its investment in and advances to e-Nable Corporation, which
resulted in a pre-tax charge of $ 1.6 million. The adjustment was estimated
based on an assessment of the fair value of the investment and was mainly the
result of the difficulty e-Nable has had in securing additional capital in the
capital markets. If demand for the e-Nable products does not materialize or if
e-Nable's financing efforts are not successful, the Company will continue to
review the value of the investment to determine if the carrying value of the
e-Nable investment should be further reduced.
Net cash provided by operating activities for the six months ended June 30, 2002
was $6.4 million compared to $10.2 million for the six months ended June 30,
2001. The significant sources were net income of $ 9.7 million, $2.5 million of
depreciation and amortization, and was offset by a $ 4.3 million increase in
accounts receivable and a $ .8 million decrease in accounts payable and accrued
expenses.
Days Sales Outstanding (DSO) for the six months ended June 30, 2002 was 42.0
days, compared to 46.0 days for the three months ended March 31, 2002, and 36.5
days at December 31, 2001.
As of June 30, 2002, the Company has outstanding borrowings against the term
loan in the amount of $ 3 million, and has no borrowings against the $ 35
million revolving loan.
The Company's current ratio at June 30, 2002 stood at 7.0:1 as compared to 5.6:1
at December 31, 2001. Inflation has not, nor is it expected to have a material
impact on the Company's financial results in 2002 and there have been no
material commitments for capital expenditures.
On May 30, 2000, the Board of Directors authorized the repurchase in any
calendar year of up to 2.5 million shares of the Company's common stock for an
aggregate purchase price not to exceed $ 25 million. For the six months ended
June 30, 2002, the Company purchased 149,300 shares at a total cost of $ 1.2
million.
- 14 -
Dividends paid in February and May 2002 were $.01 per share or an aggregate of
$.02 per share for the six months ended June 30, 2002 versus $.015 for the
comparable period last year. At its board meeting on July 30, 2002, the Company
declared a quarterly dividend of $.01 per share.
Management believes that the combination of current cash and cash equivalents,
and borrowings under the Company's credit facility along with the anticipated
cash flows from operations, will provide sufficient capital resources to satisfy
our short term and foreseeable long term needs.
Critical Accounting Policies
There were no changes to the Company's critical accounting policies during the
six months ended June 30, 2002.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires companies to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and/or normal
use of the assets. Companies also record a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003 and the Company does not anticipate that the statement
will have a material impact on the Company's financial statements.
On July 2002, the Financials Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards ("SFAS") No.146,"Accounting for Costs
Associated with Exit or Disposal Activities" which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Such costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146,
replaces the previous accounting guidance provided by the Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002 and the Company does not
anticipate that the statement will have a material impact on the Company's
financial statements.
Forward Looking Statements
Certain written and oral statements made by our Company or with the approval of
an authorized executive officer of our Company may constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995, including statements made in this report and other filings with the
Securities and Exchange Commission. These statements generally are not
historical in nature and can be identified by words such as "believe," "expect,"
"intend," "estimate," "anticipate," "project," "will," "may," "should," "could"
and similar expressions. These statements involve risks and uncertainties that
could cause actual results to differ materially from our Company's historical
experience and our present expectations or projections. These statements are not
guarantees of future performance or results.
- 15 -
The following are some of the factors that could cause our Company's actual
results to differ materially from those described in forward-looking statements:
Trends and other developments affecting the life insurance industry--We
currently derive nearly all of our revenues from life insurance companies. The
demand for our services is largely dependent on the demand for life insurance
policies, policy amounts, the type of health information services requested,
general economic conditions, and other factors beyond our control. Any decreases
in demand for health information services by life insurance companies could
substantially harm our business.
Loss of customers--Our relationships with most insurance company customers are
not covered by formal written agreements, and we have exclusive relationships
with only a small number of customers. Our ability to retain these customers
will depend on our continued ability to serve their needs and to distinguish us
from our competitors. The loss of one or more customers could materially impact
our business.
Changes in the health information services business environment--These include
changes in the types of products demanded by insurance companies, competitive
product and pricing pressures, including technological advancements by
competitors, and our ability to gain or maintain market share notwithstanding
the actions of our competitors. Factors such as these could adversely impact our
earnings and growth.
Continued growth of alternative distribution channels--Our continued growth will
depend in part on increased use of the Internet and other alternative
distribution channels by our customers to sell their life insurance products.
Rapid growth in the use of these distribution channels may not continue.
Reduction or replacement of these channels could limit any growth in the number
of applications for life insurance policies, which could substantially harm our
business.
Need to enhance and expand our technology and infrastructure--We need to
continually adapt to the technological needs of our insurance company customers
by enhancing and expanding our technology and network infrastructure to
accommodate our customers' changing needs. Our failure to do so could
substantially harm our business.
Loss of key management--Our continued success is materially dependent upon our
key management team, including James M. McNamee, our Chairman, President and
Chief Executive Officer, none of whom has an employment agreement. If we lose
one or more of our executive officers, an inability to successfully recruit and
retain additional highly skilled and experienced management, or to successfully
train and promote existing personnel to serve in a managerial capacity, could
substantially harm our business.
Acquisitions and other strategic investments--Our growth strategy has included
acquiring other businesses and making strategic investments. There is no
guarantee that these activities will be profitable, or that we will continue
growing through these types of activities or otherwise.
Changes in laws and regulations, including changes in accounting standards,
taxation requirements and environmental laws.
The effectiveness of our sales, advertising and marketing programs.
Our ability to achieve earnings forecasts, which are primarily based on
projected numbers of examinations to be performed.
Economic and political conditions in the United States.
- 16 -
The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in our Securities and Exchange Commission filings.
Other factors not identified could also cause actual results to materially
differ from those described in forward-looking statements. Caution should be
taken not to place undue reliance on any forward-looking statements made in this
report or otherwise since such statements speak only as of the date when made.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
- 17 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. The Company does not invest in portfolio
equity securities or commodities or use financial derivatives for trading
purposes. The Company's debt security portfolio represents funds held
temporarily pending use in our business and operations. The Company mitigates
this risk by investing in only high credit quality securities that it believes
to be low risk and by positioning its portfolio to respond to a significant
reduction in a credit rating of any investment issuer or guarantor. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity.
The table below presents the principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio as of June 30,
2002.
2007 & Estimated
2002 2003 2004 2005 2006 thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(in thousands)
Fixed Rate Investments $ 4,153 $ 8,389 $ 10,993 $ 5,708 $ 1,680 $ 3,821 $ 34,743 $35,723
Average Interest Rates 5.65% 4.94% 5.02% 5.90% 5.76% 6.27% 5.39%
- 18 -
PART II - Other Information
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders on May 21, 2002, the
shareholders elected Benjamin A. Currier and Elaine L. Rigolosi to serve as
directors until the 2005 Annual Meeting, ratified the selection of KPMG LLP to
serve as the Company's independent auditors for 2002 and approved the 2002 Stock
Option Plan.
The chart below names each director nominated for election by the shareholders
at the 2002 Annual Meeting, the number of votes cast for, against or withheld
and the number of broker nonvotes with respect to each such person:
Votes Cast Broker
Nominee For Against Withheld Nonvotes
- ------- ------------------------------------ --------
Benjamin Currier 55,764,535 - 2,800,283 0
Elaine L. Rigolosi 55,770,641 - 2,794,177 0
The name of each director whose term of office as a director continued after the
annual meeting is as follows:
Quentin J. Kennedy
John E. Nolan
James M. McNamee
Kenneth R. Rossano
G. Earle Wight
With respect to the ratification of KPMG LLP as independent auditors, the number
of votes cast was 56,212,930 For, 2,279,680 Against, 72,206 Abstained and 0
Broker Nonvotes.
With respect to the approval of the 2002 Stock Option Plan, the number of votes
cast was 52,138,388 For, 6,166,584 Against, 259,843 Abstained and 0 Broker
Nonvotes.
- 19 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Hooper Holmes, Inc.
Dated: August 14, 2002
BY: /s/ James M. McNamee
-------------------------------
James M. McNamee
Chairman, President and
Chief Executive Officer
BY: /s/ Fred Lash
-------------------------------
Fred Lash
Senior Vice President
Chief Financial Officer &
Treasurer