Attached files
file | filename |
---|---|
EX-24 - POWER OF ATTORNEY - HOOPER HOLMES INC | exhibit24.htm |
EX-23 - EXHIBIT 23 CONSENT OF AUDITOR KPMG - HOOPER HOLMES INC | exhibit23.htm |
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION - HOOPER HOLMES INC | exhibit31-2.htm |
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - HOOPER HOLMES INC | exhibit31-1.htm |
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION - SECTION 1350 - HOOPER HOLMES INC | exhibit32-1.htm |
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION - SECTION 1350 - HOOPER HOLMES INC | exhibit32-2.htm |
EX-10.10 - EXHIBIT 10.10 MICHAEL SHEA'S EMPLOYMENT AGREEMENT - HOOPER HOLMES INC | exhibit10-10.htm |
EX-21 - EXHIBIT 21 SUBSIDIARIES OF HOOPER HOLMES, INC. - HOOPER HOLMES INC | exhibit21.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2009
Commission
file number: 001-09972
HOOPER
HOLMES, INC.
(Exact
name of Registrant as specified in its charter)
New
York
|
22-1659359
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
170
Mt. Airy Road
|
|
Basking
Ridge, NJ
|
07920
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (908) 766-5000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
Common
Stock ($.04 par value per share)
|
NYSE
Amex Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
|
*
|
No
|
x
|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of Section 15(d) of the Act.
Yes
|
*
|
No
|
x
|
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 and (2) has been subject to such filing requirements for the
past 90 days.
Yes
|
x
|
No
|
*
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if and, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T 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
|
*
|
No
|
*
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer
|
*
|
Accelerated
Filer
|
*
|
Non-Accelerated
Filer
|
*
|
Smaller
Reporting Company
|
x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
Yes
|
*
|
No
|
x
|
The
aggregate market value of the shares of common stock held by non-affiliates of
the Registrant (62,191,197 shares), based on the closing price of these shares
on June 30, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter) on the NYSE Amex Stock Exchange, was
$27,364,127.
The
number of shares outstanding of the Registrant’s common stock as of February 26,
2010 was 68,704,587.
Documents Incorporated by
Reference
Items 10, 11, 12, 13 and 14 of Part III
incorporate by reference information from the Registrant’s proxy statement to be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Registrant’s Annual Meeting of Shareholders to
be held on May 24, 2010.
Table
of Contents
|
PART
I
|
||
Cautionary
Statement Regarding Forward-Looking Statements
|
||
Item
1
|
Business
|
2
|
Item
1A
|
Risk
Factors
|
11
|
Item
1B
|
Unresolved
Staff Comments
|
15
|
Item
2
|
Properties
|
15
|
Item
3
|
Legal
Proceedings
|
15
|
Item
4
|
Reserved
|
16
|
PART
II
|
||
Item
5
|
Market
for Registrant’s Common Equity, Related Stockholder
Matters
|
16
|
and
Issuer Purchases of Equity Securities
|
||
Item
6
|
Selected
Financial Data
|
19
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Item
7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
40
|
Item
8
|
Financial
Statements and Supplementary Data
|
40
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
67
|
Item
9A
|
Controls
and Procedures
|
67
|
Item
9B
|
Other
Information
|
68
|
PART
III
|
||
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
68
|
Item
11
|
Executive
Compensation
|
68
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
68
|
Item
13
|
Certain
Relationships and Related Transactions
|
68
|
Item
14
|
Principal
Accountant Fees and Services
|
68
|
PART
IV
|
||
Item
15
|
Exhibits
and Financial Statement Schedules
|
69
|
Schedule
II – Valuation and Qualifying Accounts
|
||
Signatures
|
FORM
10K
PART
1
In this
report, the terms “Hooper Holmes,” “Company,” “we,” “us” and “our” refer to
Hooper Holmes, Inc. and its subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
annual report contains forward-looking statements within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, including, but not limited to, statements about our plans, strategies
and prospects under the headings “Business,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this annual report. When used in this Report, the words
“expects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “could,”
“will,” “may” and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and
include statements as to our operating results, revenues, sources of revenues,
cost of revenues, gross margins, net and operating losses, our new IT system,
our new imaging platform, our expansion of managed scheduling, and the expansion
of certain service line offerings. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties
include, but are not limited to risks related to customer concerns about our
financial health, our liquidity, future claims arising from the sale of our
business, declines in our business, our competitive disadvantage, our ability to
successfully implement cost reduction initiatives, as well as risks discussed in
Item 1A- Risk Factors, below. Investors should consider these factors
before deciding to make or maintain an investment in our
securities. The forward-looking statements included in this annual
report are based on information available to us as of the date of this annual
report. We expressly disclaim any intent or obligation to update any
forward-looking statements to reflect subsequent events or
circumstances.
1
ITEM
1
|
Business
|
Overview
We are a publicly-traded company whose
shares of common stock are listed on the NYSE Amex Stock
Exchange. Our corporate headquarters are located in Basking Ridge,
New Jersey.
Our
Company history spans over 100 years. Over the last 40 years, our
business focus has been on providing health risk assessment services, described
more fully below under the caption “Description of Services.” We
currently engage in several service lines that are managed as one
division: the Health Information Division. In July 2009, we combined
our service lines formerly referred to as Underwriting Solutions and Infolink,
and now refer to these operations as Hooper Holmes Services.
Our Health Information Division
(HID) consists of the following service lines:
·
|
Portamedic – performs
paramedical and medical examinations of individuals, primarily on behalf
of insurance companies in connection with the offering or rating of
insurance coverage (mainly life insurance), along with medical
examinations of health plan participants in order to provide medical
information on plan members to the plan
sponsors;
|
·
|
Heritage Labs – performs
tests of blood, urine and/or oral fluid specimens, primarily generated in
connection with the paramedical exams and wellness screenings performed by
our Portamedic and Health & Wellness services lines, and assembles and
sells specimen collection kits;
|
·
|
Health & Wellness –
collects health information via onsite biometric screenings,
self-collection laboratory test kits and health risk assessments for
health management companies, including wellness companies, disease
management organizations and health plans;
and
|
·
|
Hooper Holmes Services
(formerly Underwriting Solutions and Infolink) – provides telephone
interview of insurance candidates, retrieval of medical records and
inspections, risk management solutions and underwriting services for
simplified issue products and products requiring full
underwriting.
|
The table
below provides a breakdown of our revenues by service line for each of the three
most recently completed fiscal years. Historical financial
information presented in this annual report reflects our former Claims
Evaluation division (“CED”), sold in June 2008, and our United Kingdom based
subsidiary, Medicals Direct Group (“MDG”), sold in October 2007, as discontinued
operations. Accordingly, except where specific discussion of MDG
and/or CED is made, all financial information presented in this annual report
excludes CED and MDG for all periods presented.
(in
thousands)
|
For
the Years Ended December 31,
|
|||||||||||||||||||||||
2009
|
%
of Total
|
2008
|
%
of Total
|
2007
|
%
of Total
|
|||||||||||||||||||
Portamedic
|
$ | 134,373 | 73.7 | % | $ | 140,720 | 71.0 | % | $ | 148,035 | 71.0 | % | ||||||||||||
Heritage
Labs
|
14,955 | 8.2 | % | 15,738 | 7.9 | % | 17,445 | 8.4 | % | |||||||||||||||
Health
& Wellness
|
10,961 | 6.0 | % | 7,587 | 3.8 | % | 5,007 | 2.4 | % | |||||||||||||||
Hooper
Holmes Services
|
24,698 | 13.5 | % | 37,075 | 18.7 | % | 41,526 | 19.9 | % | |||||||||||||||
Subtotal
|
184,987 | - | 201,120 | - | 212,013 | - | ||||||||||||||||||
Intercompany
eliminations (a)
|
(2,586 | ) | -1.4 | % | (2,887 | ) | -1.5 | % | (3,381 | ) | -1.6 | % | ||||||||||||
Total
|
$ | 182,401 | 100.0 | % | $ | 198,233 | 100.0 | % | $ | 208,632 | 100.0 | % |
|
(a) represents
intercompany sales from Heritage Labs to
Portamedic
|
2
|
Description
of Services
|
Portamedic
Life
insurance underwriting decisions are based on statistical probabilities of
mortality (death) and morbidity (illness or disease), such that insurance
companies generally require quantitative data reflecting an insurance
applicant’s general health. We assist insurance companies, their
affiliated agents, independent agents and brokers, in gathering this
data.
We
perform paramedical and medical examinations of applicants for insurance,
primarily life insurance, throughout the United States under the Portamedic trade name, the
results of which are used by our clients in processing applications for
insurance. We provide our paramedical examination services through a
network of paramedical examiners, consisting largely of phlebotomists,
registered nurses, licensed practitioner nurses, emergency medical technicians
(EMTs), and other medically trained professionals. A paramedical exam
typically consists of asking questions about an applicant’s medical history,
taking measurements of the applicant’s height and weight, blood pressure and
pulse. Blood and urine specimens are also collected, to be tested by
a laboratory – in many cases, our Heritage Labs laboratory.
When our
customers require a medical examination beyond the capacity of a paramedical
examiner, we contract with physicians who are licensed and in good standing and
practice in the relevant specialty area. Insurance companies have
different guidelines for determining when a more complete medical examination is
required and the scope of such examination. The likelihood that an
insurance company will require a more complete examination of an applicant is
primarily influenced by the applicant’s age and the amount of insurance coverage
he or she is seeking. In general, insurance companies insist upon
more stringent underwriting standards as the age of the applicant and amount of
coverage increase.
In the
fourth quarter of 2009, we expanded our service offering of providing medical
exam assessments to senior individuals who are enrolled in Medicare Advantage
healthcare plans. We provide these services utilizing our network of
licensed and trained physicians, nurse practitioners and physician
assistants. The purpose of these medical assessments is to provide
health insurance payors with health information on their plan members to assist
in validating pricing/reimbursement information, and to provide information used
in quality improvement and disease management initiatives.
Heritage
Labs
Heritage
Labs performs tests of blood, urine and/or oral fluid specimens, the results of
which are used primarily in connection with the life insurance underwriting
process and, to a lesser extent, in the health insurance underwriting
process. Most blood and urine samples are collected by paramedical
examiners during the course of a paramedical exam; oral fluid samples are
generally collected by insurance agents.
Approximately
75-80% of the total volumes of specimens that Heritage Labs tests in its lab are
originated through the paramedical exams coordinated by our Portamedic
business. This percentage has been fairly constant over the past
several years. As a result, Heritage Labs’ business is affected by
the market trends and conditions influencing our Portamedic
business. The other specimens Heritage Labs tests are generated by
third-party health information service providers.
Heritage
Labs performs a defined group of standard tests (referred to as “panels”) on the
specimens tested, as well as a secondary level of additional reflex tests that
can be used to supplement the basic panels. Heritage Labs provides
testing services that consist of certain specimen profiles designed to provide
its customers with specific information of relevance to the assessment of a
person’s health profile, such as:
·
|
the
presence of antibodies to the human immunodeficiency virus
(HIV);
|
·
|
cholesterol
and related lipids;
|
·
|
liver
or kidney disorders;
|
3
·
|
the
presence of antibodies to
hepatitis;
|
·
|
prostate
specific antigens;
|
·
|
immune
disorders;
|
·
|
tobacco/nicotine
use; and
|
·
|
the
use of certain medications, cocaine and other
drugs.
|
In
addition to performing lab testing services, Heritage Labs assembles blood/urine
kits, urine-only kits and oral fluid kits. The kits are primarily
sold to paramedical examination companies, including our Portamedic business,
which then bill their insurance company customers for the kits they
use. Heritage Labs also assembles kits for a number of other
companies.
Heritage
Labs markets a line of self-collected finger stick test kits under the trade
name “Appraise.” The kits are used for the testing of, among other
things, glycosylated (glycated) hemoglobin (hemoglobin A1c), which has been
implicated in diabetes and damage to, or disease of, the kidneys and
non-inflammatory damage to the retina of the eye. Disease management
companies use these kits to help monitor the diabetics in their
populations.
Health
& Wellness
We formed our Health & Wellness
service line in 2007 in an effort to leverage our existing assets and services
in a market that, unlike our core Portamedic paramedical examination service
line, is experiencing growth: the health and care management
market. See the discussion under the caption “Market Conditions and
Strategic Initiatives” below.
Our Health & Wellness service line
collects health information via onsite biometric screenings, self collection
laboratory tests kits and health risk assessments for health and care management
companies including wellness companies, disease management organizations and
health plans. The information collected is used by our
customers to measure the populations they manage, to identify risks in those
populations, to target interventional programs, and to measure the results of
their health and care management programs.
Our
Health & Wellness services include:
·
|
scheduling
of individual and group screenings;
|
·
|
provision
and fulfillment of needed supplies (e.g., examination kits, blood pressure
cuffs, stadiometers, scales, centrifuges, etc.) at screening
events;
|
·
|
end-to-end
event management;
|
·
|
biometric
screenings (e.g., height, weight, body mass index, the taking of a
person’s hip, waist and neck measurements, as well as his or her pulse and
blood pressure) and blood draws via venipuncture or fingerstick – all
performed by certain of our paramedical
examiners;
|
·
|
lab
testing of blood specimens – utilizing our Heritage Labs laboratory;
and
|
·
|
data
processing and transmission.
|
In 2009,
we expanded the services we offer at our biometric screening events to include
influenza immunization and health counseling. We provided influenza
immunizations at select biometric screening events held in late 2009 and early
2010. Our health counseling services are offered in conjunction with biometric
screening events and are intended to assist our customers in engaging
participants in the on-going health management programs they offer.
4
Hooper
Holmes Services (formerly Underwriting Solutions and Infolink)
In July
2009, we combined our product and service offerings formerly delivered by our
Underwriting Solutions and Infolink businesses into a new service line, Hooper
Holmes Services. We combined these services in order to eliminate
duplicate operations, to reduce our expenses to a level commensurate with
current revenues, and better position us to expand our services to new and
existing customers. Hooper Holmes Services’ principal places of
operation are in Lenexa, KS, and Omaha, NE.
The
services we provide through Hooper Holmes Services fall into the following four
categories: Health Information Services, Health Risk Analytics, Consumer
Services and Business Entity Services.
Health Information Services -
provides data and information to insurance companies as underwriters
assess general insurability and appropriate rate class.
·
|
Medical
Record Retrieval: We obtain medical records of an applicant for life
insurance. Medical records provide an insurance company with information
that will help determine whether the applicant is insurable and, if so,
the appropriate rate class.
|
·
|
Inspection
Report: We conduct personal health interviews over the telephone during
which we gather information about an insurance applicant’s health, as well
as financial and employment
history.
|
·
|
Health
Risk Assessment / Physicians Information Line (“PIL”): We conduct in-depth
interviews with a proposed insured’s physician about a single disease
state or multiple impairments. Insurance carriers also use PILs to assess
a proposed insured’s cognitive
state.
|
·
|
Record
and Database Check and Employment Verification: We collect a variety of
information available from public records and private database sources,
such as motor vehicle reports, real estate owned and criminal history. In
addition, we contact current and past employers to verify dates and
periods of employment.
|
Health Risk Analytics -
provides risk management consultative support and underwriting services
to insurance carriers and reinsurance companies active in the life, annuity and
health insurance markets.
·
|
Full
underwriting: We assess health and lifestyle data associated with a
prospective insured and then make a determination about insurability and
appropriate rate class consistent with the insurance carrier’s product
pricing, risk tolerances and reinsurance
treaties.
|
·
|
Simplified
underwriting: We review information about a proposed insured’s general
health to determine insurability for products having predetermined benefit
limits. This service provides for limited medical and non-medical data
collection when compared to fully underwritten
applications.
|
·
|
Medical
Record Summarization: We review medical records of an insurance applicant.
Our underwriters provide an analysis of the records and provide an
indication of general insurability and indicative rate
class.
|
·
|
Impaired
risk underwriting services: We gather information, review medical records
and review lab test results on proposed insureds attempting to purchase
life insurance or long-term care insurance who have known health or
lifestyle conditions that may make them uninsurable. We assess the degree
of impairment, project life expectancy and make recommendations about
insurability and the appropriate rate
class.
|
Consumer Services – via a
telephonic interview with an insurance applicant, we complete all or a portion
of the insurance application, verify information provided to us by the
applicant, assess an applicant’s general cognitive state and assist with the
insurance purchase process.
Business Entity Services –
helps an insurance company assess the quality of decisions made by the carrier’s
underwriting group, determine adherence to the carrier’s underwriting policies,
evaluate benefit claims, both pre and post-payment, and ensure that underwriting
files are complete and accurate.
5
Market
Conditions and Strategic Initiatives
Our operating results for the past
several years (discussed more fully in the Management’s Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 of this annual
report) reflect, in part, the challenging market conditions we have experienced
in our businesses.
Portamedic
Our Portamedic service line accounted
for 74% of our total revenues in 2009. The market for life insurance related
services offered by Portamedic has steadily decreased in total size over the
past decade. We believe this is the result of the reported shift in consumers’
preferences away from individual life insurance towards other wealth
accumulation and investment products, such as annuities and mutual funds, along
with the weak U.S. economy and its negative impact on the market for life
insurance products. We have historically relied on the MIB Life
Index, the life insurance industry’s timeliest measure of application activity
across the United States and Canada, to gauge the degree of the
decline. Despite the rate of decline we have experienced, we believe
the market offers opportunities to us.
To
address these market conditions and increase our market share, we have taken (or
are in the process of taking) a number of steps to better differentiate our
services. We have taken the following steps to increase our top-line
revenue:
·
|
In
the third quarter of 2009, we introduced a new appointment scheduling
option called Instant Scheduling. It allows insurance agents, while
completing the policy application with the applicant, to immediately
schedule the examination utilizing our centralized scheduling
center. The new process significantly reduces the cycle time of
policy application to policy issuance, which benefits the applicant,
agent/broker and insurance carrier.
|
·
|
In
2010, we expect to deploy a new electronic system for capturing
paramedical exam information which will utilize wireless electronic
devices, linked to secure corporate servers. This new “e-Exam”
service will provide our customers with real-time quality assurance at the
time of exam. The cycle time required for insurance carriers to
process applications is also expected to be
reduced.
|
·
|
We
introduced our National Broker & General Agency service program which
includes specialized training of our field sales representatives to market
to this growing distribution channel. To serve these customers,
we have implemented new case management services which link our ordering
and imaging systems to many agency management
tools.
|
·
|
In
January 2009, we instituted a pricing increase for Portamedic examinations
of approximately 6% for non-contract customers. As a result of
this pricing increase, and increases received from other Portamedic
customers under contract, average revenue per exam increased approximately
3% for the year ended December 31, 2009 in comparison to the corresponding
prior year period. Due to current economic conditions and the
impact on our customers, we believe pricing increases in 2010 will be
below the increases achieved in
2009.
|
·
|
In
early 2009, we engaged Leerink Swann, a healthcare strategic advisor, to
assess our short and long-term strategy, including assistance in creating
new sources of revenue in adjacent markets (such as healthcare) by
utilizing existing core capabilities in our operations, including
Portamedic. Leerink Swann’s analysis also identified areas of opportunity
to reduce costs and errors, and increase efficiency and
speed.
|
·
|
In
the fourth quarter of 2009, we expanded our service offering of providing
medical exam assessments to senior individuals who are enrolled in
Medicare Advantage healthcare plans. We provide these services
utilizing our network of licensed and trained physicians, nurse
practitioners and physician assistants. The purpose of these
medical assessments is to provide health insurance payors with health
information on their plan members to assist in validating
pricing/reimbursement information, and to provide information used in
quality improvement and disease management
initiatives.
|
6
·
|
All
of our Portamedic branch offices are now utilizing managed
scheduling. As a result of implementing managed scheduling, the
time required to schedule an examination has been reduced significantly
relative to past procedures where examiners scheduled their own
appointments with applicants. Our implementation of managed
scheduling was completed during the third quarter of
2009.
|
·
|
In
an effort to improve the speed, accuracy and consistency of services
provided to our Portamedic customers, we decided in December 2008 to begin
the development of a new customer service order tracking IT
system. In utilizing our current IT system, we license the
software and, as such, have difficulties in quickly implementing
improvements and enhancements to the software. Our new IT
system is expected to eliminate these difficulties and is expected to
operate at a significantly lower cost and cash outlay in the future
relative to our existing system. Our new customer service
system is expected to cost approximately $1.4 million and is scheduled for
completion in mid-2010.
|
·
|
We
continue to take steps to strengthen our local sales force including
hiring additional sales representatives, streamlining our sales tracking
systems, improving sales training, and focusing sales incentives on
increases in paramedical exams completed (i.e. unit
goals).
|
While we
intend for these measures to increase our market share and revenues, there can
be no assurance we will achieve those results. Although the number of
paramedical examinations Portamedic performs continues to decline, we believe
that we are a market leader in the industry. However, in 2010 market
conditions are expected to remain difficult for our Portamedic services,
particularly in light of the weak U.S. economy and its negative impact on the
market for life insurance, along with the related impact on our
customers.
Heritage
Labs
Approximately
75-80% of the total volume of specimens that Heritage Labs tests originate
through the paramedical exams coordinated by our Portamedic
services. As a result, Heritage Labs services are also adversely
affected by the market trends and conditions which are influencing our
Portamedic service line.
In 2008,
Heritage Labs hired a new medical director to help improve the value added
services provided to customers and to aid in gaining new
business. The main focus of the medical director has been to use
sophisticated data modeling to gain a better understanding of the true mortality
consequences of the laboratory tests that we provide to the insurance
industry. Our objective has been to assist our clients in their
ability to develop new insurance products and establish more accurate premium
ratings or pricing techniques using the lab mortality data that we have
developed. We have also begun to develop risk scores to help our
insurance clients better understand the mortality implications between and among
interactions of multiple tests related to specific disease states. We believe
that the mortality data we are providing is unique and more complex than the
data being provided by our competitors. We believe we will be able to
leverage the value of the data we supply to gain new business in
2010.
In
January 2009, Heritage Labs moved its lab facilities to a new, larger location
which is expected to increase productivity and enable new service/product
offerings, including offerings with a focus outside of the paramedical exam
marketplace.
On
December 30, 2009, we hired a new Chief Operating Officer to oversee the
operations of our Heritage Labs and Health & Wellness service
lines. This individual has over 15 years of financial and operations
experience in manufacturing and distribution businesses. We believe this is an
opportunity for Heritage Labs and Health & Wellness to streamline and
improve manufacturing and distribution processes and operations in 2010, while
reducing operating costs.
In 2010,
Heritage Labs intends to market its services more aggressively in a combination
package service offering with our other services, Portamedic and Hooper Holmes
Services. Our three service lines provide a complete suite of
services for insurance underwriting purposes and we plan to take advantage of
the value that the combined services present in value offerings.
7
Health
& Wellness
Our
Health & Wellness service line supports health and care management companies
including health plans, disease management organizations, and wellness
companies. While the health and care management industry continues to
grow, our Health & Wellness service line works to help companies transition
from traditional disease management to total population health management which
is the fastest growing portion of the market. While disease
management attempts to lower the cost of care associated with participants with
a specific disease state, wellness and total population health management
attempts to reverse the trend of rising healthcare costs through prevention and
early intervention. Our Health & Wellness service line helps our
customers move into total population health management by providing the
laboratory and biometric data necessary to identify risks and participant
engagement opportunities via biometric screenings.
As
discussed above, we hired a new Chief Operating Officer to oversee the
operations of our Heritage Labs and Health & Wellness service
lines.
Hooper
Holmes Services
Hooper
Holmes Services has been adversely affected by the decline in life insurance
application activity brought about by the weak U.S. economy and the resulting
trend of insurance carriers to discontinue outsourcing relationships, including
risk analytic services such as underwriting. The level of new insurance
applications remains low when compared to prior healthier market
conditions.
In
mid-2009, we combined our Underwriting Solutions and Infolink operations (now
referred to as Hooper Holmes Services) in order to eliminate duplicate
operations, to reduce expenses and better position us to expand our services to
new and existing customers. We significantly reduced our costs to a level more
appropriate for our reduced revenues, including a reduction of staff by
approximately 50 employees and we closed a remote underwriting
office.
In 2009,
we implemented a number of initiatives designed to increase Hooper Holmes
Services market profile, to improve business development activity and to enhance
operational efficiency. In order to enhance our efforts to attract new
customers, in April 2009, we hired a new Senior Vice President of Business
Development for Hooper Holmes Services.
Sales
and Marketing
Portamedic
Our Portamedic service line generally
requires a two-step sales process for our life insurance
business. First, our corporate sale representatives negotiate with
the national office of a life insurance company to get on its list of approved
outside risk assessment service providers. Second, our field sales
personnel must sell to the insurance company’s local agents and to the community
of independent brokers and agents that sell the insurer’s
products. Success at the local level requires establishing,
maintaining and nurturing relationships with the agents and
brokers. We have taken steps to coordinate localized marketing
campaigns, develop on-line sales training programs for new sales personnel, and
otherwise provide better support for local field sales personnel. We
also utilize a pay-for-performance program for our sales personnel, with the
incentive compensation potentially payable under the program being tied solely
to the development of local business.
|
Heritage
Labs
|
With the
addition of a our new Chief Operating Officer to oversee lab operations, the
president of Heritage Labs, who has a 30 year history in the sale and marketing
of lab testing services to the insurance industry, will now be able to focus
more of his time on insurance sales, business development and top line
growth. The Heritage sales staff reports directly to the president
who is managing day to day sales and strategy. One of our main
strategies for 2010 will be to gain new business by leveraging the value of our
new mortality data and risk scores to the insurance industry. We will
also seek to develop new risk scores to facilitate the underwriting of
laboratory results.
8
Health
& Wellness
Our Health & Wellness service line
markets its services to health and care management organizations, wellness
companies and health plans. We offer an end-to-end biometric
screening solution that we believe offers our customers the ability
to:
·
|
engage
more individuals via our national network of
examiners;
|
·
|
collect
more health risk information earlier in the health and care management
process; and
|
·
|
implement
integrated screening solutions via venipucture and fingerstick blood draws
and self-collection test kits.
|
We believe our unique set of services
allows our customers to uncover risks, stratify populations, target
interventional programs, and measure improvement in health.
In
January 2009, we hired a full time sales professional to continue the growth of
this business. Additionally, in 2009 we continued to invest in our
operational infrastructure allowing our marketing executive management to
further focus on our sales initiatives.
With the addition of our new Chief
Operating Officer to oversee operations, the president of Health & Wellness,
will now be able to focus more of his time on sales, business development and
top line growth.
Hooper
Holmes Services
Hooper Holmes Services markets its
services and products in the following three ways:
·
|
Corporate Sales Team -
The team includes individuals with experience in the insurance industry,
including knowing a carrier’s key decision makers. They arrange meetings
with key decision makers of insurance companies and insurance distribution
entities. Hooper Holmes Services representatives provide assistance in the
form of delivering presentations, modeling positive financial impact of
outsourcing and providing technical
support.
|
·
|
Brokers Elite Platform
- Aimed at insurance distribution organizations, Brokers Elite offers a
range of products, through an integrated order platform. We feel that this
single-source system reduces the insurance application to
policy issue cycle.
|
·
|
Request for Proposal -
Hooper Holmes Services receives throughout the year Requests for Proposal
(RFPs) from a number of insurance companies and distribution
organizations. We respond to RFPs for services and products within our
service lines matching core
competencies.
|
We expect to expand our presence in the
marketplace and anticipate increasing business development resources across the
country. In addition, we plan to increase market awareness through joint
initiatives with leading centers of influence.
Information
Technology
Information technology systems are used
extensively in virtually all aspects of our business. We have made
substantial investments in our IT systems, believing that IT capability is or
can be a competitive differentiator.
In 2009, with the assistance of an
independent audit firm, we completed our first SAS 70 Type II Audit, a
top-to-bottom review of our Information Technology controls and
security. We received an unqualified opinion, which affirms that we
have adequate information security and controls.
In an effort to improve the speed,
accuracy and consistency of services provided to our Portamedic customers, in
December 2008 we began development of a new customer service order tracking IT
system. In mid 2009, we deployed one component of the new system for
use by our Hooper Holmes Services service line. We are continuing the
development of this new customer order tracking system and expect full
deployment to begin in 2010.
9
Our Health & Wellness service line
utilizes an IT system, which is separate from our Portamedic
system.
Our IT systems may be vulnerable to
damage from a variety of causes, including telecommunications or network
failures, human acts and natural disasters. Moreover, despite the
security measures we have taken, our systems may be subject to physical or
electronic break-in attempts, computer viruses and similar disruptive
problems. System failures could adversely affect our reputation and
result in the loss of customers.
Competition
Portamedic
We believe that our Portamedic service
line is the largest of the four national firms, as measured by market share,
whose businesses encompass arranging paramedical examinations, providing
specimen analysis, conducting interviews of insurance applicants and collecting
medical records for life insurers. In addition, a significant number
of regional and local firms also compete in this industry. Most of
our customers use two or more risk assessment service providers. As
discussed under market conditions and strategic initiatives, above, pricing is a
primary basis of competition for the business of certain of these insurance
carriers.
Heritage
Labs
There are two other major laboratories
providing testing services to the life and health industries. We estimate that
Heritage Labs is the smallest of the three, measured by market share. With the
smallest market share, we believe there is room to grow and capture additional
market share. Most large insurance companies tend to use more than
one lab, while many small or medium-sized companies may use only a single
lab.
Health
& Wellness
Our Health & Wellness service line
cites several competitive differentiators in its sales and marketing efforts,
including:
·
|
its
complete ownership of every phase of the wellness screening process,
including an internal lab testing capability through Heritage
Labs;
|
·
|
its
ability to screen both individuals and groups of all
sizes;
|
·
|
its
ability to conduct screenings via venipuncture, fingerstick or
self-collection blood draws;
|
·
|
its
ability to conduct screenings in every jurisdiction in the United
States;
|
·
|
its
fulfillment capability, in the form of Heritage Labs being an FDA-approved
Class I and II medical device and specimen collection kit assembler;
and
|
·
|
its
wellness examiner certification process through “Hooper Holmes
University,” an online training
program.
|
Our
Health & Wellness service line needs to continually refine and enhance its
value proposition to maintain its advantage and capitalize on the evolving
nature of the wellness market.
10
Hooper
Holmes Services
Hooper Holmes Services competes with a
number of companies that offer one or more services and products similar to
ours. They range from small single state providers to companies with a national
presence. When competing for market share, we believe we are the only provider
that offers full underwriting, simplified underwriting, and impaired risk
services in addition to, medical record retrieval, inspections, and telephone
application and interview services.
Hooper Holmes Services maintains a
qualified workforce made up of approximately 50 underwriters and two
physicians. We also employ nurses, health care professionals and
individuals with experience in the life and health insurance industry. We
believe that we have a competitive advantage in our targeted market due to the
experienced underwriting staff which we employ and the current scarcity of
qualified insurance underwriters.
Governmental
Regulation
The service lines within our Health
Information Division, in particular, our paramedical examination, health &
wellness and lab services, are subject to federal and state
regulation. The paramedical examiners we utilize are subject to
certain licensing and certification requirements and regulations with respect to
the drawing of blood and needle disposal. We are subject to federal
and state regulations relating to the transportation, handling and disposal of
the various specimens obtained in the course of a paramedical examination,
medical examination or wellness screening. The FDA governs certain
aspects of Heritage Labs’ business, including the assembly of specimen
collection kits. In addition, many of the services we provide may be
subject to certain provisions of the Health Information Portability and
Accountability Act of 1996 (“HIPAA”) and other federal and state laws relating
to the privacy of health and other personal information.
Employees
We employ approximately 1,870 persons
in our Company, including approximately 95 personnel in our corporate
headquarters in Basking Ridge, New Jersey.
General
Information
Hooper Holmes, Inc. is a New York
corporation. Our principal executive offices are located at 170 Mt.
Airy Road, Basking Ridge, New Jersey 07920. Our telephone number is
(908) 766-5000. Our website address is www.hooperholmes.com. We
have included our website address as an inactive textual reference
only. The information on our website is not incorporated by reference
into this annual report.
We file annual, quarterly and current
reports, proxy statements and other information with the SEC. You may
read and copy any document that we file with the SEC at the SEC’s Public
Reference Room located at 100 F Street, NE, Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-732-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding companies that file electronically
with the SEC. The SEC’s website is www.sec.gov. We
also make available, free of charge, through our website, our annual reports on
Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K,
our proxy statements, the Form 3, 4 and 5 filings of our directors and executive
officers, and all amendments to these reports and filings, as soon as reasonably
practicable after such material is electronically filed with the
SEC.
ITEM
1A
|
Risk
Factors
|
You should carefully consider all the
information included in this annual report, particularly the following risk
factors, before deciding to invest in our shares of common stock. The
risk factors set forth below are not the only risks we
face. Additional risks not presently known to or understood by us may
also negatively affect our business, results of operations and/or financial
condition.
11
Continued
weakness in the economy in general, or the financial health of the life
insurance industry in particular, could have a material adverse effect on our
results of operations.
We derive
a significant percentage of our revenues from customers in the life insurance
industry. If the condition of the U.S. economy continues to weaken,
demand for life insurance products may decline more steeply, resulting in less
business for our Company. If some of our life insurance company
customers fail or curtail operations as a result of economic conditions in the
life insurance industry, such failures or curtailments of operations would
result in less business for our Company. Either event would
negatively affect our cash flows from operations.
Customer
concerns about our financial health may result in the loss of customers or a
portion of their business, or cause prospective customers not to engage
us.
Customer concerns about our financial
health, stemming from past operating results and the associated drop in our
stock price, may result in the loss of customers or a portion of their
business. Concerns about our financial health may also prompt
prospective customers not to engage us or make it more challenging for us to
compete for their business.
Limited
or negative cash flow from operations in 2010 may limit our ability to make the
desired level of investment in our businesses.
While we do not believe we are facing
any immediate or near-term liquidity crisis, we experienced a revenue decline in
2009 and this decline could continue in 2010 due to the downturn in the economy
and its negative impact on our customers. We generated approximately
$8.7 million of cash from continuing operations in 2009 and we lowered our cost
of operations, and selling, general and administrative (SG&A) expenses as
well. However, if we continue to experience the rates of decline in
our consolidated revenues that we have experienced for the past several years,
it could become difficult to generate cash from operations and invest in our
businesses at optimal levels.
Our
liquidity may be adversely affected by the terms of our Loan and Security
Agreement.
If we experience negative cash flows
from operations, we may need to borrow in the future under our Loan and Security
Agreement. We have an available borrowing base of $14.4 million under
this facility as of December 31, 2009. The Loan and Security
Agreement contains a financial covenant that requires us to maintain a fixed
charge coverage ratio (as defined in the Loan and Security Agreement), on a
trailing 12-month basis, of no less than 1.1 to 1.0 as of January 31, 2010 and
as of the end of each of our fiscal quarters thereafter. The fixed charge
coverage ratio allows for the exclusion of capital expenditures in excess of one
dollar from the denominator of the calculation provided we maintain pre-defined
minimum cash balances at TD Bank on average for the 90 days ended as of the
measurement date. As of January 31, 2010, our average cash balance at
TD Bank for the 90 days then ended, exceeded the pre-defined cash balance
requirements, thereby allowing all capital expenditures in excess of one dollar
to be excluded from the denominator of the fixed charge coverage ratio
calculation. As of January 31, 2010, our fixed charge coverage ratio measured on
a trailing 12-month period and excluding capital expenditures in excess of one
dollar was 10.8 to 1.0 and, as such, we satisfied this financial
covenant. However, there is no assurance that we will satisfy this
financial covenant as of the end of each fiscal quarter thereafter.
Future
claims arising from the sale of one business unit (Discontinued Operations)
could negatively impact our results of operations.
We sold our Claims Evaluation business
in 2008. In regard to this sale, we retained certain potential
liabilities pertaining to periods prior to the sale of this unit. For
example, we have recorded a liability of $0.3 million as of December 31, 2008
for a potential liability on a long-term lease for the CED
business. If additional claims are identified related to this
discontinued operation in the future, this may result in additional cost and
cash payments by us which could negatively impact our results of operations and
financial condition.
The
lack of coverage of our stock by the financial analyst community may reduce the
volume of trading in shares of our common stock and could negatively affect our
stock price.
As our stock price has dropped, the
financial analysts who followed our stock dropped their coverage. The
lack of analyst coverage may lead to a reduced volume of trading in shares of
our common stock. A concern about the liquidity of the market for our
shares could negatively affect our stock price.
12
We
continue to experience declines in Portamedic unit volumes.
We have experienced period-over-period
declines in Portamedic unit volumes for the past several years. The decline in
unit volumes has often exceeded our budgeted forecasts. We have taken
a number of steps to stop the decline, such as strengthening our field sales
personnel, streamlining our sales tracking systems, improving sales training,
focusing sales incentives on increases in paramedical exams completed (i.e.,
unit goals), and seeking to identify customers for our services outside the life
insurance industry. However, we cannot be sure that these initiatives
will prove sufficient to stop or offset the decline in Portamedic unit
volumes. In fact, our continuing focus on profitable revenue may lead
us to terminate certain accounts when our contractual obligations expire,
resulting in an acceleration of the rate of decline in Portamedic unit
volumes.
In
a market where price has increasingly become the sole or principal basis of
competition, our Portamedic branch office network may put us in a position of
being at a competitive disadvantage.
Through much of its history, our
Portamedic business has benefited from our branch office network, which we
believe to be the most extensive in our industry. Our branch office
personnel are critical to building and nurturing the relationships with the
insurance agents and brokers in the surrounding geographic area, from whom we
receive a significant volume of our paramedical exam orders. The
importance of these relationships was reinforced for us in 2007 when we closed a
limited number of our branch offices and subsequently experienced a decline in
unit volumes from the insurance agents and brokers in the areas surrounding
these branch offices.
Prior to
2007, we experienced downward pricing pressure from our life insurance carrier
customers. We attribute this pressure to their efforts to address cost items in
a more rigorous manner in an attempt to maintain their profitability and level
of return to their investors and other stakeholders. From 2007 to 2009, we had
some success in increasing our price levels to some extent, largely as a result
of making improvements in our levels of service. The price increases
contributed to an increase in our average revenue per paramedical exam and
improved operating margins. Nonetheless, pricing represents the
primary basis of competition for the business of certain insurance
companies. With our Portamedic branch office network, a higher
proportion of our costs are fixed costs compared with our competitors who do not
operate such a network.
Our
Health & Wellness service line would be adversely affected if health and
wellness interventional programs are determined not to have a sufficient return
on investment.
Based on published information from
industry analysts, no standard methodology exists yet for measuring whether
disease management and/or wellness programs produce cost savings and, if so, how
much. If a methodology is established and health insurance companies,
employers and other payers then determine that health and wellness
interventional programs do not provide the anticipated return on investment,
this may adversely affect the health management industry. This, in
turn, could adversely affect our Health & Wellness service
line.
Each
of our service lines derives a significant percentage of its revenues from a
limited number of customers, such that a loss of some or all of the business of
one or more customers over a short period of time could have a material adverse
effect on our results of operations.
Each of
our service lines, including our core Portamedic service line, derives a
significant percentage of its revenues from a limited number of
customers. Losing some or all of the business of one or more of these
customers can result in a significant reduction in the revenues of the
applicable service line. If this were to occur, we face significant
challenges in the short term in replacing the lost revenues. Further,
the loss of business from key customers can negatively affect our cash flows
from operations.
A number
of circumstances could prompt our loss of one or more key customers or a
substantial portion of its or their business. For example, many
organizations in the insurance industry have consolidated; if one of our
customers were to be acquired by or merged into another company for whom we do
not provide services, we could lose the acquired company’s
business. Additionally, we could lose one or more significant
customers due to competitive pricing pressures or other reasons.
13
The
reductions in our cost structure and capital expenditures that we plan may not
succeed in offsetting the decline in revenues we are experiencing.
To offset
the declines in revenues we have experienced, and could experience in 2010, we
have taken actions to decrease our cost structure and reduce the level of
capital expenditures. If we are unable to implement these actions as
quickly or completely as we plan, our cash flows from operations would be
negatively affected.
If
we cannot maintain and upgrade our information technology platform so that we
can meet critical customer requirements, the competitiveness of our businesses
will suffer.
In each
of our businesses, the speed with which we make information available to our
customers is critical. As a result, we are dependent on our
information technology platforms and our ability to store, retrieve, process,
manage and enable timely customer access to the health-related and other data we
gather on behalf of our customers. Disruption of the operation of our
IT systems for any extended period of time, loss of stored data, programming
errors or other system failures could cause customers to turn elsewhere to
address their service needs.
In
addition, we must continue to enhance our IT systems – potentially at
substantial cost – to keep pace with our competitors’ service and product
enhancements. In December 2008, the Company decided to begin
developing a new Portamedic customer service order tracking
system. In utilizing our current IT system, we license the system
software and, as such, have difficulties in getting improvements or enhancements
to the software and also find that it requires significant cash
outlay. We have identified and acquired new technology resources to
develop and support a new order tracking system which is scheduled for
completion in mid-2010. If we are unable to successfully complete and
deploy this technology, the competitiveness of our business could
suffer.
Allegations
of improper actions by our paramedical examiners or our physician practitioners
could result in claims against us and/or our incurring expenses to indemnify our
clients.
Allegations
of improper actions by our paramedical examiners or our physician practitioners
could result in claims against us, require us to indemnify our clients for any
harm they may suffer, or damage our relationships with important
clients. For example, in the first quarter of 2006 a life insurance
company client informed us that, after investigation, it had determined that it
issued certain life insurance policies that were procured by fraudulent means
employed by insurance applicants, the client’s agents, the Company’s
sub-contracted examiners and others. We have since reached an
agreement under which we paid $0.5 million to the client to resolve the
matter.
Allegations
of our failure to provide accurate health-related risk assessment analyses of
that data may result in claims against us.
Our
clients rely on the accuracy of the medical data we gather on their behalf –
whether derived from a Portamedic paramedical exam, a Hooper Holmes Services
tele-interview, a Health & Wellness screening, a Heritage Labs specimen
test, or our Hooper Holmes Services underwriting resources – in connection with
their insurance underwriting, interventional programs, patient treatment and
other decisions. As a result, we face exposure to claims that may
arise or result from the decisions of our customers based on allegedly
inaccurate data and/or faulty analysis of such data. We maintain
professional liability insurance and such other coverage as we believe
appropriate, but such insurance may prove insufficient. Regardless of
insurance, any such claims could damage our relationships with important
clients.
Our
operations and reputation may be harmed if we do not adequately secure
information.
Federal
and state laws regulate the disclosure of specimen test results and other
nonpublic medical-related and other personal information. If we do
not protect the confidentiality of such results in accordance with applicable
laws, we could face significant liability, and/or damage to our relationship
with clients.
Our
classification of most of our paramedical examiners outside of the States of
California, Montana and Oregon as independent contractors, rather than
employees, exposes us to possible litigation and legal liability.
In the past, some state agencies have
claimed that we improperly classified our examiners as independent contractors
for purposes of state unemployment and/or workers compensation tax laws and that
we were therefore liable for taxes in arrears, or for penalties for failure to
comply with such state agencies’ interpretations of the laws. In some
states, our classification of examiners has been upheld and in others it has
not. However, there are no assurances that we will not be subject to
similar claims in other states in the future.
14
Allegations
of our failure to register certain securities could result in claims against
us.
The issuance in 2007 of an aggregate of
81,508 shares (at an aggregate purchase price of approximately $0.2 million)
pursuant to the 2004 Employee Stock Purchase Plan occurred prior to the filing
with the SEC of a registration statement in respect of those
shares. As a result, the Company may have potential liability, to the
purchasers of those shares, for rescission of the sales.
Our
operations could be adversely affected by the effects of a natural disaster or
an act of terrorism.
Our
operations – in particular, that of Heritage Labs’ laboratory, would be
adversely affected in the event of a natural disaster, such as a tornado or
hurricane, or an act of terrorism. While Heritage Labs has a back-up
lab facility available (also located in Kansas), and a disaster
recovery plan, damage to its primary laboratory or to its available back-up lab
facility could nonetheless disrupt its ability to provide its testing services,
which could have a material adverse effect on its operations and
business.
ITEM
1B
|
Unresolved
Staff Comments
|
Not
applicable.
ITEM
2
|
Properties
|
Our
corporate headquarters consists of a five building complex located at 170 Mt.
Airy Road, Basking Ridge, New Jersey approximately 45 miles southwest of New
York City. Of approximately 53,000 total square feet of office space, we
maintain our operations in approximately 45,000 square feet and the balance is
leased or available for lease to several tenants. We have pledged our
corporate headquarters as collateral under our asset-based lending facility
provided by TD Bank, N.A.
We lease
our regional operations centers, and our approximately 100 Portamedic branch
offices, with the term of such leases typically being three years.
We also
lease 9,200 square feet in Allentown, PA for a business continuity and customer
service operations center.
We
believe that, in general, our facilities are suitable and adequate for our
current and anticipated future levels of operations and are adequately
maintained. We believe that if we were unable to renew a lease on any
of our facilities, we could find alternative space at competitive market rates
and relocate our operations to such new location without material disruption to
our business.
ITEM
3
|
Legal
Proceedings
|
On February 28, 2008, a physician, John
McGee, M.D., filed suit in the United States District Court for the Eastern
District of New York in which he alleged, among other things, that an insurance
company and numerous other named and unnamed defendants including Hooper
Evaluations, Inc. (which was part of the CED the Company sold in June 2008),
violated various laws, including the Racketeer Influenced Corrupt Organization
Act (“RICO”), in connection with the arranging of independent medical
examinations. The substance of the claim appears to be that the
plaintiff physician was denied compensation for medical services allegedly
rendered to persons claiming to have been injured in automobile accidents, after
independent medical examinations arranged by the defendant insurance company
indicated no basis for those services. It is not yet possible to
estimate the size of the alleged claim against the defendants as a whole, or the
CED in particular. The Company believes the plaintiff’s claims are
without merit and intends to defend itself vigorously in this
matter. The Company, along with the other defendants, have
moved to dismiss the case, and these motions are pending. The motions are based
on grounds similar to those asserted in the motion to dismiss filed in the
Sundahl matter, described below. On July 31, 2009, plaintiffs filed an amended
complaint which modifies the claims for relief, primarily against a defendant
insurance company. On February 11, 2010, based on the fact that the amended
complaint appears to allege claims only against the insurance company, the court
dismissed the case as against all other defendants including Hooper Evaluations,
Inc., without prejudice to plaintiffs seeking to further amend the
complaint. The Company has retained liability for this litigation
following the sale of substantially all of the assets of the CED.
15
On April 3, 2008, Gregory Sundahl and
Jesse Sundahl, individually and on behalf of all others similarly situated,
filed suit in the United States District Court for the Eastern District of New
York in which they alleged, among other things, that an insurance company and
numerous other named and unnamed defendants including Hooper Evaluations, Inc.
(which was part of the CED the Company sold in June 2008), violated various
laws, including RICO, in connection with the arranging of independent medical
examinations. This suit was filed by the same lawyer that filed the
McGee case described above, and contains similar allegations, but on behalf of
the patients who were allegedly injured in automobile accidents whose medical
services were not paid for based on the results of independent medical
examinations. It is not yet possible to estimate the size of the
alleged claim against the defendants as a whole, or CED in
particular. The Company believes the plaintiff’s claims are without
merit and intends to defend itself vigorously in this matter. The
Company, along with the other defendants, moved to dismiss the case, and this
motion was granted on March 31, 2009. The alleged claims under
federal law have been dismissed with prejudice; the alleged claims under state
law were dismissed without prejudice to plaintiffs re-filing them in state
court. On April 22, 2009, plaintiffs moved for reconsideration of the
dismissal order; the Company’s opposition to that motion was filed May 4,
2009. Plaintiffs also filed, on May 8, 2009, a notice of appeal
from the dismissal order. The Company has retained liability for this
litigation following the sale of substantially all of the assets of the
CED.
On July 22, 2009, an individual named
Nicolo Genovese filed suit in the Supreme Court of the State of New York, County
of Suffolk in which he alleged, among other things, that an insurance company
and numerous other corporate and individual defendants, including Hooper
Evaluations, Inc. (which was part of the CED the Company sold in June 2008) and
Hooper Holmes, Inc. violated various state laws in connection with the arranging
of independent medical exams. With respect to Hooper Evaluations,
Inc. and certain other named defendants who were part of the CED, the Company
has retained liability for this litigation following the sale of substantially
all of the assets of the CED. It is not yet possible to estimate the
size of the alleged claim against the defendants as a whole, or the Company or
the former CED entities in particular. On October 26, 2009, a motion
to dismiss the complaint was filed on behalf of the Company and the former CED
entities. The Company believes the plaintiff’s claims are without
merit and intends to defend itself vigorously in this matter. The
Company has also initiated steps to invoke insurance coverage that may apply to
some or all of the potential liability and/or costs of suit.
We are a party to (or an indemnitor of)
a number of other legal claims and actions arising in the ordinary course of our
business. We maintain various liability insurance coverages (e.g.,
general liability and professional liability) for such claims. In the
opinion of management, we have substantial legal defenses and/or insurance
coverage with respect to these pending legal matters. Accordingly,
none of these actions is expected to have a material adverse effect on our
liquidity, or our consolidated financial position.
ITEM
4
|
Submission
Of Matters To A Vote Of Security
Holders
|
Reserved
PART
II
ITEM
5 Market For The Registrant’s Common Equity, Related Stockholder Matters And
Issuer Purchases Of Equity Securities
Market
Information
Our
common stock is traded on the NYSE Amex Stock Exchange under the symbol
“HH.”
16
Common
Stock Price Range
The
following table shows, for the periods indicated, the high and low sales prices
per share of our common stock based on published financial sources
(dollars):
2009
|
2008
|
|||
Quarter
|
High
|
Low
|
High
|
Low
|
First
|
0.49
|
0.15
|
1.76
|
0.55
|
Second
|
0.63
|
0.30
|
1.10
|
0.63
|
Third
|
1.16
|
0.35
|
1.69
|
0.93
|
Fourth
|
1.10
|
0.66
|
1.30
|
0.17
|
The
following graph shows a comparison of cumulative total returns for an investment
in our common stock, versus both the S&P 500 Composite Index and the Russell
2000 Index. It covers the period commencing December 31, 2004 and ending
December 31, 2009. The graph assumes that the value for the investment in our
common stock and in each index was $100 on December 31, 2004 and that all
dividends were reinvested. This graph is not deemed to be “soliciting material”
or to be “filed” with the SEC or subject to the SEC’s proxy rules or to the
liabilities of Section 18 of the Securities Exchange Act of 1934, and the graph
shall not be deemed to be incorporated by reference into any prior or subsequent
filing by us under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934. The Company does not believe that an
appropriate, published industry or line of business index is
available.
For
the years ended December 31,
|
||||||||||||||||||||||||
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
Hooper
Holmes, Inc.
|
$ | 100 | $ | 44.09 | $ | 57.23 | $ | 29.74 | $ | 4.32 | $ | 17.98 | ||||||||||||
S&P
500 Composite Index
|
$ | 100 | $ | 103.00 | $ | 117.03 | $ | 121.16 | $ | 74.53 | $ | 92.01 | ||||||||||||
Russell
2000 Index
|
$ | 100 | $ | 103.32 | $ | 120.89 | $ | 117.57 | $ | 76.65 | $ | 95.98 |
Holders
According
to the records of our transfer agent, Registrar and Transfer Company, Cranford,
NJ, as of February 15, 2010, there were 1,040 holders of record of our common
stock.
17
Dividends
No
dividends were paid in 2009, 2008 or 2007.
In 2006,
our Board of Directors suspended the payment of cash dividends on the Company’s
common stock. Furthermore, we were precluded from declaring or making
any dividend payments or other distributions of assets with respect to any class
of our equity securities under the terms of our Revolving Credit Facility with
CitiCapital Commercial Corporation which terminated on March 9, 2009, and
continue to be precluded from declaring or making any dividend payments under
our new Loan and Security Agreement with TD Bank, N.A., which was effective as
of March 9, 2009 (See Note 7 to our consolidated financial
statements).
Recent
Sales of Unregistered Securities
On May
30, 2007, the Company’s shareholders approved the Hooper Holmes, Inc. 2007
Non-Employee Director Restricted Stock Plan (the “2007 Plan”).
On June
1, 2007, we issued an aggregate of 45,000 shares of our common stock to the
eight non-employee directors who served on the Board as of June 1, 2007. On June
1, 2008, we issued 40,000 shares to the seven non-employee directors as of June
1, 2008. These share issuances were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”)
as “transactions not involving a public offering.” No underwriter
participated in these transactions, nor was any commission paid.
In the
third quarter of 2007, the Company became aware that it did not file with the
SEC a registration statement on Form S-8 to register the shares of its common
stock issuable under either the Hooper Holmes, Inc. 2002 Stock Option Plan (the
"2002 Stock Option Plan") or the Stock Purchase Plan (2004) of Hooper Holmes,
Inc. (the "2004 Employee Stock Purchase Plan") at the time such plans were
approved by the Company’s shareholders in May 2002 and May 2003,
respectively. In 2007, the Company filed with the SEC a registration
statement on Form S-8 (the "Registration Statement") covering shares that
remained issuable under these plans. In May 2007, pursuant to the
2002 Stock Option Plan, we issued 45,000 shares of common stock upon the
exercise of options with an exercise price of $3.46 per share for a total
consideration of approximately $0.2 million. We believe that the
acquisition of the shares upon exercise of these options was exempt from
registration under Section 4(2) of the Securities Act. No underwriter
participated in these transactions, nor was any commission
paid.
In March 2007, we issued
an aggregate of 81,508 shares pursuant to the 2004 Employee Stock Purchase Plan
at a per share purchase price of $2.70. The aggregate purchase price
of these shares was approximately $0.2 million. The issuances
of shares upon exercise of purchase rights granted under the 2004 Employee Stock
Purchase Plan, which occurred prior to the filing of the Registration Statement,
may not have been exempt from registration under the Securities Act and
applicable state securities laws and regulations. As a result, the
Company may have potential liability to those employees (and, in some cases, now
former employees) to whom the Company issued its shares upon the exercise of
purchase rights granted under the plans. The Company may also have
potential liability with respect to shares issued under the 2002 Stock Option
Plan if the acquisition of shares under the plan is not exempt from registration
under Section 4(2) of the Securities Act.
Purchase
of Equity Securities by the Issuer and Affiliated Purchaser
We did
not repurchase any shares of our common stock during the fourth quarter of our
fiscal year ended December 31, 2009.
18
ITEM
6
|
Selected
Financial Data
|
The
following table of selected financial data should be read in conjunction with
our consolidated financial statements and related notes, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
other financial information appearing elsewhere in this annual report. The
statement of operations data set forth below for each of the years in the three
year periods ended December 31, 2009, and the balance sheet data as of December
31, 2009 and 2008, have been derived from, and are qualified by reference to,
our consolidated financial statements appearing elsewhere in this annual report.
The statement of operations data for the years ended December 31, 2006 and 2005,
and the balance sheet data as of December 31, 2007, 2006 and 2005, are derived
from the Company’s consolidated financial statements that are not included in
this annual report.
(in
thousands except for share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||
Statement
of operations data:
|
|||||||||||||||||||||||||
Revenues
|
$ | 182,401 | $ | 198,233 | $ | 208,632 | $ | 223,907 | $ | 239,657 | |||||||||||||||
Operating
loss from continuing operations
|
(1,013 | ) |
(a)
|
(1,428 | ) |
(c)
|
(10,390 | ) |
(e)
|
(49,970 | ) |
(g)
|
(80,606 | ) |
(i)
|
||||||||||
Interest
expense
|
17 | 3 | 181 | 138 | 230 | ||||||||||||||||||||
Income
(loss) from continuing operations
|
37 |
(b)
|
(1,559 | ) | (10,506 | ) | (79,043 | ) | (41,089 | ) | |||||||||||||||
(Loss)
income from discontinued operations
|
(41 | ) | (326 | ) |
(d)
|
3,199 |
(f)
|
(7,048 | ) |
(h)
|
(55,712 | ) |
(j)
|
||||||||||||
Net
loss
|
(4 | ) | (1,885 | ) | (7,307 | ) | (86,091 | ) | (96,801 | ) | |||||||||||||||
Basic
and diluted earnings (loss) per share:
|
|||||||||||||||||||||||||
Continuing
operations
|
$ | - | $ | (0.02 | ) | $ | (0.15 | ) | $ | (1.18 | ) | (0.63 | ) | ||||||||||||
Discontinued
operations
|
- | - | 0. 05 | (0.11 | ) | (0.85 | ) | ||||||||||||||||||
Net
loss
|
$ | - | $ | (0.03 | ) | $ | (0.11 | ) | $ | (1.29 | ) | (1.48 | ) | ||||||||||||
Cash
dividends per share
|
$ | - | $ | - | $ | - | $ | - | $ | 0.06 | |||||||||||||||
Weighted
average shares:
|
|||||||||||||||||||||||||
Basic
|
68,692,176 | 68,657,975 | 68,476,194 | 66,804,605 | 65,513,451 | ||||||||||||||||||||
Diluted
|
69,392,243 | 68,657,975 | 68,476,194 | 66,804,605 | 65,513,451 | ||||||||||||||||||||
Balance
sheet data (as of December 31):
|
|||||||||||||||||||||||||
Working
capital(k)
|
$ | 30,102 | $ | 24,135 | $ | 24,752 | $ | 31,831 | $ | 50,513 | |||||||||||||||
Total
assets
|
$ | 56,702 | 59,669 | 67,149 | 86,209 | 163,218 | |||||||||||||||||||
Current
maturities of long-term debt
|
- | - | - | - | 1,000 | ||||||||||||||||||||
Total
long-term debt
|
- | - | - | - | 1,000 | ||||||||||||||||||||
Stockholders’ equity
|
$ | 41,426 | $ | 40,768 | $ | 41,909 | $ | 47,969 | $ | 128,727 |
(a)
|
Includes
restructuring and other charges totaling $1.2
million.
|
(b)
|
Includes
a $1.5 million federal tax benefit resulting from carrying back net
operating losses from 2008 of $4.3
million.
|
(c)
|
Includes
restructuring and other charges totaling $1.6
million.
|
(d)
|
Includes
a $0.9 million net gain on the sale of the
CED.
|
(e)
|
Includes
restructuring and other charges totaling $4.7
million.
|
(f)
|
Includes
goodwill and intangible asset impairment charges of $5.7 million and $0.6
million, respectively, and a $9.2 million net gain on the sale of
MDG.
|
(g)
|
Includes
goodwill and intangible asset impairment charges of $29.9 million and $1.8
million, respectively, along with restructuring and other charges totaling
$10.3 million.
|
(h)
|
Includes
a goodwill impairment charge of $6.3 million and restructuring and other
charges totaling $0.2 million.
|
(i)
|
Includes
goodwill and intangible asset impairment charges of $76.1 million and $0.7
million, respectively, along with restructuring and other charges totaling
$6.3 million.
|
( j)
|
Includes
goodwill and impairment charges of $39.5 million and $17.3 million,
respectively, along with restructuring and other charges totaling $0.3
million.
|
(k)
|
Working
capital includes the net assets and liabilities of discontinued operations
for the years 2007-2005, including assets and liabilities of $6.3 million
and $1.7 million in 2007, $26.8 million and $10.3 million in 2006, and
$30.3 million and $8.7 million in 2005,
respectively.
|
19
|
ITEM
7 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion and analysis contains forward-looking
statements. See page 4 of this annual report on Form 10-K for
information regarding our use of forward-looking statements in this annual
report. This discussion and analysis should be read in conjunction
with our audited consolidated financial statements and related notes included in
Item 8 of this annual report.
Overview
As
discussed in greater detail in Item 1 (“Business”), we currently engage in
several service lines that are managed as one division: the Health Information
Division. In July 2009, we combined our service lines formerly referred to as
Underwriting Solutions and Infolink, and now refer to these operations as Hooper
Holmes Services.
Our Health Information Division
(HID) consists of the following service lines:
·
|
Portamedic – performs
paramedical and medical examinations of individuals, primarily on behalf
of insurance companies in connection with the offering or rating of
insurance coverage (mainly life insurance), along with medical
examinations of health plan participants in order to provide medical
information on plan members to the plan
sponsors;
|
·
|
Heritage Labs – performs
tests of blood, urine and/or oral fluid specimens, primarily generated in
connection with the paramedical exams and wellness screenings performed by
our Portamedic and Health & Wellness services, and assembles and sells
specimen collection kits;
|
·
|
Health & Wellness –
collects health information via onsite biometric screenings,
self-collection laboratory test kits and health risk assessments for
health management companies, including wellness companies, disease
management organizations and health plans;
and
|
·
|
Hooper Holmes Services
(formerly Underwriting Solutions and Infolink) – provides telephone
interviews of insurance candidates, retrieval of medical records and
inspections, risk management solutions and underwriting services for
simplified issue products and products requiring full
underwriting.
|
Our core
Portamedic paramedical examination business accounted for approximately 74%, 71%
and 71% of our total consolidated revenues in 2009, 2008 and 2007,
respectively.
Basis
of Presentation of Management’s Discussion and Analysis
On June 30, 2008, we sold substantially
all of the assets and liabilities of our Claims Evaluation division (CED)
operating segment for $5.6 million and received cash payments totaling $5.1
million and a $0.5 million note receivable due in six equal monthly installments
beginning July 31, 2008. We recognized a net gain on the sale of the
CED of approximately $0.9 million for the year ended December 31,
2008.
On October 9, 2007, we completed the
sale of our Medicals Direct Group, or MDG for $15.3 million and received a cash
payment of $12.8 million, net of closing adjustments of $1.2
million. In addition, we incurred $1.0 million of expenses related to
the sale. For the year ended December 31, 2007, we recognized a net
gain on the sale of approximately $9.2 million.
Our
decision to sell the CED and MDG was based on several factors, including their
limited ability to significantly contribute to our long-term specific
goals. See Note 4 to our consolidated financial statements included
in this annual report for further discussion of our sale of the CED and
MDG. Except where specific discussion of the CED and MDG is made, our
discussion of our results of operations and financial condition excludes the CED
and MDG for all periods presented.
20
2009
Highlights and Business Outlook for 2010
2009
Consolidated Financial Performance
For the year ended December 31, 2009,
consolidated revenues totaled $182.4 million, representing a decline of
approximately 8.0% from the prior year. Our revenues continued to
decline in 2009 primarily resulting from the downturn in the economy and its
negative impact on the customers we serve (i.e. life insurance
industry). While the general economy may start to improve in 2010, we
are unsure if the demand for our customers’ life insurance products will
experience a rebound in 2010. As a result, we plan to continue
to take actions to decrease our cost structure and plan to continue to closely
monitor capital expenditures in 2010.
Although revenues declined in 2009, our
gross margin improved to 26.9%, an improvement of 170 basis points over the
comparable prior year period, resulting primarily from increased pricing,
productivity gains and cost reductions. In addition, we reduced our
selling, general and administrative expenses to $48.9 million, representing a
reduction of $0.9 million, or approximately 1.8% from the prior
year. As detailed in the Portamedic highlights, included in S,G&A
expense is increased depreciation expense of approximately $2.7 million for the
year ended December 31, 2009, related to the reduction of the estimated useful
life of our current customer service order tracking information technology
(“IT”) systems. We generated income from continuing operations of $0.04 million
for the year ended December 31, 2009, which included restructuring and other
charges of approximately $1.2 million and a $1.5 million tax benefit from
carrying back prior year net operating losses that were fully
reserved. This represents a reduction from the prior year loss from
continuing operations of $1.6 million, which included restructuring and other
charges of approximately $1.6 million.
Portamedic
For the year ended December 31, 2009,
Portamedic revenues decreased approximately 4.5% in comparison to the prior
year. We continue to believe that achieving acceptable profitability
levels will require top-line revenue growth, including the reversal of past
revenue declines. Although we have approvals from over 90% of the insurance
carriers in the marketplace, the number of paramedical examinations we complete
on life insurance applicants continues to decline. The rate of
decline in completed examinations for the full year 2009 was 8.3% compared to
2008, with a 10.0% decline in 2008 compared to 2007, representing a slight
improvement during a difficult economic period in 2009. In order to
reverse our decline in completed examinations, we must achieve greater success
in turning carrier approvals into unit sales at the local agent, corporate and
brokerage levels. We continue to take steps to strengthen our local
sales force: we are hiring more sales representatives, streamlining our sales
tracking systems, improving sales training, and focusing sales incentives on
increases in paramedical exams completed (i.e. unit goals).
The market for our Portamedic services
has steadily declined. For example, according to the MIB Life Index,
in 2009 there were approximately nine million applications for life insurance
completed in the United States, compared to approximately 17 million
applications in 1985. Notwithstanding the rate of decline in
applications submitted, we believe that the market continues to offer attractive
opportunities to a company that can sell its services effectively and
distinguish itself from its competitors.
We have
taken (or are in the process of taking) the following steps to increase our
market share and improve top-line revenue:
·
|
In
the third quarter of 2009, we introduced a new appointment scheduling
option called Instant Scheduling. It allows insurance agents, while
completing the policy application with the applicant, to immediately
schedule the examination utilizing our centralized scheduling
center. The new process significantly reduces the cycle time of
policy application to policy issuance, which benefits the applicant,
agent/broker and insurance carrier.
|
·
|
In
2010, we expect to deploy a new electronic system for capturing
paramedical exam information which will utilize wireless electronic
devices, linked to secure corporate servers. This new “e-Exam”
service will provide our customers with real-time quality assurance at the
time of exam. The cycle time required for insurance carriers to
process applications is also expected to be
reduced.
|
21
·
|
We
introduced our National Broker & General Agency service program which
includes specialized training of our field sales representatives to market
to this specific distribution channel. To serve these
customers, we have implemented new case management services which link our
ordering and imaging systems to many agency management
tools.
|
·
|
In
the fourth quarter of 2009, we expanded our service offering of providing
medical exam assessments to senior individuals who are enrolled in
Medicare Advantage healthcare plans. We provide these services
utilizing our network of licensed and trained physicians, nurse
practitioners and physician assistants. The purpose of these
medical assessments is to provide health insurance payors with health
information on its plan members to assist in validating
pricing/reimbursement information, and to provide information used in
quality improvement and disease management
initiatives.
|
·
|
All
of our Portamedic branch offices are now utilizing managed
scheduling. As a result of implementing managed scheduling, the
time required to schedule an examination has been reduced significantly
relative to past procedures where examiners scheduled their own
appointments with applicants. Our implementation of managed
scheduling was completed during the third quarter of
2009.
|
·
|
In
an effort to improve the speed, accuracy and consistency of services
provided to our Portamedic customers, we decided in December 2008 to begin
the development of a new customer service order tracking IT
system. In utilizing our current IT system, we license the
software and, as such, have difficulties in quickly implementing
improvements and enhancements to the software. Our new IT
system is expected to eliminate these difficulties and is expected to
operate at a significantly lower cost and cash outlay in the future
relative to our existing system. Our new customer service
system is expected to cost approximately $1.4 million and is scheduled for
completion in mid-2010. As a result of the development of this
new system, we have reduced the estimated useful life of our current IT
system to terminate in mid-2010. This reduction in useful
life increased depreciation expense (non-cash charge) in 2009
by approximately $2.7 million. We believe that our investment
in this new customer service system will enhance the quality of service to
our customers, while improving productivity and decreasing future cash
outlay.
|
·
|
In
September 2008, we appointed a new President of Portamedic with more than
25 years experience as a senior executive in the insurance
industry.
|
·
|
We
continue to take steps to strengthen our local sales force including
hiring additional sales representatives, streamlining our sales tracking
systems, improving sales training, and focusing sales incentives on
increases in paramedical exams completed (i.e. unit
goals).
|
Although the number of paramedical
examinations Portamedic performs continues to decline, we believe that we are a
market leader in the industry. We also believe that the steps we are
taking to improve our selling ability and the quality of our services will
enable us to reduce the decline experienced in the last several
years. However, in 2010 market conditions are expected to remain
difficult for our Portamedic service line, particularly in light of the weak
U.S. economy and its negative impact on the market for life insurance, along
with the related impact on our customers.
Heritage
Labs
Heritage Labs services consist
principally of performing tests of blood, urine and/or oral fluid specimens; and
the assembly and sale of kits used in the collection and transportation of such
specimens to its lab facility. In 2009, approximately 57% of Heritage
Labs revenue came from lab testing and 43% came from the sale of specimen
kits.
Most of Heritage Labs revenue
originates from paramedical exam companies (including Portamedic), and therefore
Heritage Labs is affected by the same negative market trends affecting
Portamedic, namely the decline in the number of life insurance
applications. In response, Heritage Labs has taken the following
steps to expand its market share and increase revenues:
·
|
On
December 30, 2009, we hired a new Chief Operating Officer to oversee the
operations of our Heritage Labs and Health & Wellness service
lines. This individual has over 15 years of financial and
operations experience in manufacturing and distribution businesses. We
believe this is an opportunity for Heritage Labs and Health & Wellness
to streamline and improve distribution processes and operations, while
reducing operating costs.
|
22
·
|
In
January 2009, Heritage Labs moved its lab facilities to a new, larger
location which is expected to increase productivity and enable new
service/product offerings, including offerings focusing outside the
paramedical exam marketplace.
|
·
|
In
2008, Heritage Labs hired a new medical director to help improve the value
added services provided to customers and to aid in gaining new
business. The main focus of the medical director has been to
use sophisticated data modeling to gain a better understanding of the true
mortality consequences of the laboratory tests that we provide to the
insurance industry. Our objective has been to assist our
clients in their ability to develop new insurance products and establish
more accurate premium rating or pricing techniques using the lab mortality
data that we have developed. We have also begun to develop risk
scores to help our insurance clients better understand the mortality
implications between and among interactions of multiple tests related to
specific disease states. We believe that the mortality data we are
providing is unique and more complex than the data being provided by our
competitors. We believe we will be able to leverage the value
of the data we supply to gain new business in
2010.
|
·
|
Heritage
Labs continues to expand its kit assembly products and
services. Heritage Labs is an FDA-registered Class I and Class
II medical device assembler. Of the three laboratories
providing testing services to the insurance industry, only Heritage Labs
is licensed to assemble kits.
|
·
|
Heritage
Labs is marketing a line of self-collected finger stick test kits directly
to customers, under the trade name “Appraise.” These kits test
hemoglobin A1c. The hemoglobin A1c test is particularly
important for diabetics, who must regularly monitor their hemoglobin A1c
levels. Heritage Labs uses two blood testing methods for
hemoglobin A1c, one for testing whole blood specimens and the other for
testing dried blood spots. The test kits are currently
available in retail locations including Wal-Mart, Rite Aid, Walgreens and
other locations nationwide.
|
While we intend for these measures to
increase our market share and revenues, there can be no assurance we will
achieve those results. Heritage Labs revenues for the year ended December 31,
2009 of $15.0 million decreased 5.0% in comparison to the prior year
period. We believe that, through increased test kit sales and
Portamedic revenue improvements, we may achieve future growth at Heritage
Labs. In fact, fourth quarter 2009 revenue for Heritage Labs achieved
a 3% increase over the comparable prior year period.
Health
& Wellness
Our Health and Wellness service line,
established in 2007, recorded revenues of approximately $11.0 million for the
year ended December 31, 2009, an increase of $3.4 million, or approximately
44.5%, from the prior year. In 2009, we completed approximately
222,000 health screenings compared to 160,000 screenings in 2008. We
provided our services to 49 health management companies in 2009, up from 28
companies in 2008. We have conducted screening events in every state
in the U.S. as well as the District of Columbia and Puerto Rico. To
date, we have certified approximately 2,700 of the examiners in our network to
be “wellness certified” examiners representing an increase of 33% from
2008.
Health and Wellness services include
event scheduling, provision and fulfillment of all supplies (e.g., examination
kits, blood pressure cuffs, stadiometers, scales, centrifuges, lab coats,
bandages, etc.) at screening events, event management, biometric screenings
(height, weight, body mass index, hip, waist, neck, pulse, blood pressure),
blood draws via venipuncture or finger stick, lab testing, participant and
aggregate reporting, data processing and data transmission. Heritage
Labs does all of the testing on the samples we collect at health and wellness
screenings. Our key market advantages are our ability to screen both
individuals and groups in every jurisdiction in the U.S. using a variety of
screening methods.
In 2009, we expanded the services we
offer at our biometric screening events to include influenza immunization and
health counseling. We provided influenza immunizations at select
biometric screening events held in late 2009 and early 2010. Our health
counseling services are offered in conjunction with biometric screening events
and are intended to assist our customers in engaging participants in the
on-going health management programs they offer.
23
We believe that we are well-positioned
to capture a significant share of the health and care management
market. However, the success of Health and Wellness will depend in
part upon the proven success of health and care management and health and
wellness initiatives. If the return on investment in these
initiatives is not sufficiently high, our Health and Wellness business may not
reach its full potential. Notwithstanding, we believe we are well
positioned to capitalize on this opportunity given our Company’s unique set of
assets, including our own laboratory (Heritage Labs), systems and personnel and
access to our network of paramedical examiners.
Hooper
Holmes Services
In July 2009, we combined our product
and service offerings formerly delivered by our Underwriting Solutions and
Infolink businesses into a new service line, Hooper Holmes
Services. We combined these services in order to eliminate duplicate
operations, to reduce our expenses to a level commensurate with current
revenues, and better position the businesses to expand services to new and
existing customers.
For the year ended December 31, 2009,
Hooper Holmes Services revenues decreased 33.4% in comparison to the prior
year. A significant contributing factor to this decrease was reduced
underwriting service revenues from several of our largest insurance company
customers. These customers experienced a substantial slowdown in
their business (reduced insurance applications) which resulted in a significant
amount of underwriting services previously outsourced to us being greatly
reduced or taken back in-house by customers.
Also significantly contributing to the
decrease in Hooper Holmes Services revenue is a decline in our 2009 attending
physician statement (APS) retrieval revenue as compared to 2008 This
decline is attributable to the overall decrease in life insurance application
activity.
Throughout
2009, we implemented cost reduction actions to bring expenses in-line with our
reduced revenues. These actions included a significant reduction of
staff, along with several office closures.
Key
Financial and Other Metrics Monitored by Management
In our
periodic reports filed with the SEC, we provide certain financial information
and metrics about our businesses, and information that our management uses in
evaluating our performance and financial condition. Our
objective in providing this information is to help our shareholders and
investors generally understand our overall performance and assess the
profitability of our businesses and our prospects for future net cash
flows.
In 2009,
we primarily focused on tracking our actual results relative to our forecasts
and budgets, and measuring the degree of success of our efforts to align our
costs with lower revenue levels. We monitored the following metrics
in 2009:
|
·
|
the
number of paramedical examinations performed by
Portamedic;
|
|
·
|
the
average revenue per paramedical
examination;
|
|
·
|
time
service performance, from examination order to
completion;
|
|
·
|
the
MIB Life Index data, which represents an indicator of the level of life
insurance application activity;
|
|
·
|
the
number of health screenings completed by our Health & Wellness
business;
|
|
·
|
the
number of tele-interviewing/underwriting reports we
generate;
|
|
·
|
the
number of specimens tested by Heritage
Labs;
|
|
·
|
the
average revenue per specimen
tested;
|
|
·
|
budget
to actual performance at the branch level as well as in the aggregate;
and
|
|
·
|
customer
and product line profitability.
|
24
Certain
of the above-cited metrics are discussed in the comparative discussion and
analysis of our results of operations that follows.
Results
of Operations
Comparative
Discussion and Analysis of Results of Operations in 2009, 2008 and
2007
The table
below sets forth our revenue by service line, for the periods
indicated. Revenue for Infolink and Underwriting Solutions have been
combined for the years ended December 31, 2008 and 2007, and presented under the
heading “Hooper Holmes Services” to conform to the 2009
presentation.
(in
thousands)
|
For
the Years Ended December 31,
|
|||||||||||||||||||
2009
|
%
Change
|
2008
|
%
Change
|
2007
|
||||||||||||||||
Portamedic
|
$ | 134,373 | -4.5 | % | $ | 140,720 | -4.9 | % | $ | 148,035 | ||||||||||
Heritage
Labs
|
14,955 | -5.0 | % | 15,738 | -9.8 | % | 17,445 | |||||||||||||
Health
& Wellness
|
10,961 | 44.5 | % | 7,587 | 51.5 | % | 5,007 | |||||||||||||
Hooper
Holmes Services
|
24,698 | -33.4 | % | 37,075 | -10.7 | % | 41,526 | |||||||||||||
Subtotal
|
184,987 | - | 201,120 | - | 212,013 | |||||||||||||||
Intercompany
eliminations (a)
|
(2,586 | ) | - | (2,887 | ) | - | (3,381 | ) | ||||||||||||
Total
|
$ | 182,401 | -8.0 | % | $ | 198,233 | -5.0 | % | $ | 208,632 |
(a) represents
intercompany sales from Heritage Labs to Portamedic
Revenues
Consolidated revenues for the year
ended December 31, 2009 were $182.4 million, a decline of $15.8 million or 8.0%
from the prior year. Revenues for the year ended December 31, 2008 were $198.2
million, a decline of $10.4 million or 5.0% below 2007 results. As explained in
greater detail below, similar market forces influenced the revenues and
operating results of our services throughout the three year period ended
December 31, 2009.
Portamedic
The decline in Portamedic revenues for
the years ended December 31, 2009, 2008 and 2007 reflects the net impact
of:
·
|
fewer
paramedical examinations per day performed (1,520,000 in 2009, or 6,008
per day, vs. 1,664,000 in 2008, or 6,550 per day, vs. 1,842,000 in 2007,
or 7,280 per day);
|
·
|
higher
average revenue per paramedical examination ($89.44 in 2009 vs. $86.98 in
2008 vs. $83.27 in 2007).
|
We attribute the reduction in the
number of paramedical examinations and related services performed in 2009 and
2008 to the continued decline in life insurance application activity in the
United States (as reported by the MIB Life Index), along with the weak U.S.
economy and its negative impact on the market for life insurance
products. In addition, our revenue declined due to the
consolidation/closing of certain Portamedic offices in 2007 and early
2008. A significant amount of Portamedic volume is derived from
local agents and brokers, which has been negatively impacted by the elimination
of certain offices.
25
Heritage Labs
Heritage Labs revenues in 2009 were
$15.0 million, a decrease of $0.8 million, or 5.0%, compared to
2008. Heritage Labs tested fewer specimens in 2009 compared to the
prior year (561,000 in 2009 vs. 612,000 in 2008). Heritage Labs average revenue
per specimen tested decreased in 2009 ($15.10 in 2009 vs. $16.45 in
2008). Revenues from lab kit assembly (approximately 43% of total
Heritage revenue in 2009) increased by 14% in comparison to 2008.
The decline in Heritage Labs revenue
for the year ended December 31, 2009 as compared to the prior year was primarily
due to reduced demand for lab testing services resulting from fewer insurance
applications processed by Heritage Labs customers and the loss of a significant
customer in April 2008 who transferred its lab testing services to a different
company’s lab. This customer generated approximately $1.9 million in revenues
for Heritage Labs in 2008. Decreased revenues due to the loss
of this customer have been partially offset by revenue earned from new customers
in the lab testing and kit manufacturing businesses. The decreased
average revenue per specimen experienced in the year ended December 31, 2009 is
primarily due to a reduction in the amount we charged our customers resulting
from a reduction in overnight delivery costs incurred by us and passed on to our
customers. To a lesser extent, product mix also contributed to the
decrease in average revenue per specimen for the year ended December 31, 2009 as
compared to the corresponding prior year.
The reduced demand for Heritage Labs
services from insurance companies is partially attributable to the reduction in
the number of paramedical examinations completed by
Portamedic. Approximately 75-80% of total specimens tested by
Heritage Labs originate from a Portamedic paramedical exam or a Health and
Wellness screening.
Heritage
Labs revenues in 2008 were $15.7 million, a decrease of $1.7 million, or 9.8%,
compared to 2007. Heritage Labs tested fewer specimens in 2008
compared to the prior year (612,000 in 2008 vs. 751,000 in 2007). Heritage Labs
average revenue per specimen tested increased in 2008 ($16.45 in 2008 vs. $16.27
in 2007). The reduced demand for Heritage Labs services from insurance companies
is partially attributable to a reduction in the number of paramedical
examinations completed by our Portamedic business. In addition,
revenues were reduced in 2008 by approximately $2.7 million in comparison to the
prior year due to the loss of a significant customer in April
2008. The increased average revenue per specimen experienced in 2008
is primarily due to a change of business mix, with a greater emphasis on more
complex testing.
Health and Wellness
Health and Wellness revenues in 2009
were $11.0 million, an increase of $3.4 million, or 44.5%, compared to
2008. Health and Wellness, established in 2007, completed
approximately 222,000 health screenings in 2009, compared to approximately
160,000 screenings completed in 2008. We provided our services to 49
health management companies in 2009, up from 28 companies in 2008. We
have conducted screening events in every state in the U.S. as well as The
District of Columbia and Puerto Rico. To date, we have certified
approximately 2,700 of the examiners in our network to be “wellness certified”
examiners. Our revenue increase in 2009 compared to 2008 is primarily
due to our sales and marketing efforts in 2009, as we continue to grow and
develop this new business.
Health and Wellness revenues in 2008
were $7.6 million, an increase of $2.6 million, or 51.5%, compared to
2007. Health and Wellness completed approximately 160,000 health
screenings in 2008, compared to approximately 100,000 screenings completed in
2007. We provided our services to 28 health management companies in
2008, up from 15 companies in 2007. The increase in 2008 compared to
2007 was primarily due to the addition of new customers.
Hooper Holmes Services
Hooper Holmes Services revenue
decreased 33.4% to $24.7 million for 2009 versus the prior year.
Our
Health Information Services, which includes attending physician statement
(“APS”) retrieval and physicians information line (“PIL”), is the largest
revenue component within Hooper Holmes Services. Revenues from Health
Information Services decreased 6.1% to $14.4 million for the year 2009 versus
the prior year. The decrease in revenues is primarily due to a reduction in the
number of APS units of approximately 27% as compared to 2008, attributable to
the overall decline in life insurance activity, and a decrease of approximately
10% as compared to 2008, in the average price per unit of an APS. The
decrease in the average price per unit is attributable to a reduction in fees
charged to customers for medical records retrieval.
26
Consumer
Services includes our tele-underwriting/interviewing services. Revenue from
Consumer Services for the year 2009 decreased 8.5% as compared to the prior
year. The decrease in revenue is primarily due to a decline of 14.2%
in the number of tele-underwriting/interviewing units completed, partially
offset by an increase of 6.9% in the average price per unit as compared to the
prior year.
Health
Risk Analytics includes our risk management and underwriting services. Revenues
declined 60% in 2009 to $3.8 million compared to the prior year. The
decrease is primarily due to the overall decline in life insurance application
activity, which resulted in a significant amount of underwriting services
previously outsourced to us being greatly reduced or taken back in-house by
customers.
Hooper
Holmes Services revenues decreased 10.7% to $37.1 million for 2008 versus
2007.
Revenues
from Health Information Services decreased 14.6% to $20.5 million for the year
2008 versus 2007. The decrease in revenues is primarily due to a reduction in
the number of APS units of approximately 18.2% attributable to the overall
decline in life insurance activity, offset slightly by an increase of
approximately 0.8% in the average price per unit of an APS.
Revenue
from Consumer Services for the year 2008 increased 1.4% as compared to
2007. This increase is due to an increase of 5.4% in the average
price per unit, partially offset by a decline of 3.3% in Consumer Services units
completed as compared to the prior year.
Revenues
from Health Risk Analytics declined 9.5% in 2008 to $9.5 million compared to
2007. The decrease is primarily due to reduced revenue from one major
client of approximately $2.7 million. In 2006, this client decided
that in order to mitigate its risk in utilizing us as its sole outsourced
underwriter, the client expanded its underwriter supplier
network. This loss of revenue was partially offset by increased
revenues from new and existing customers.
Cost of Operations
Our total
cost of operations amounted to $133.3 million in 2009 compared to $148.3 million
in 2008 and $160.4 million in 2007. The following table shows the
cost of operations as a percentage of revenues broken down by certain lines of
business.
For
the Years Ended December 31,
|
||||||||||||||||||||||||
As
a % of
|
As
a % of
|
As
a % of
|
||||||||||||||||||||||
(in
thousands)
|
2009
|
Revenues
|
2008
|
Revenues
|
2007
|
Revenues
|
||||||||||||||||||
Portamedic/H&W
|
$ | 105,486 | 72.6 | % | $ | 113,033 | 76.2 | % | $ | 120,417 | 78.7 | % | ||||||||||||
Heritage
Labs
|
9,529 | 63.7 | % | 10,091 | 64.1 | % | 10,207 | 58.5 | % | |||||||||||||||
Hooper
Holmes Services
|
20,895 | 84.6 | % | 28,114 | 75.8 | % | 33,235 | 80.0 | % | |||||||||||||||
Subtotal
|
135,910 | - | 151,238 | - | 163,859 | - | ||||||||||||||||||
Intercompany
eliminations (a)
|
(2,580 | ) | - | (2,953 | ) | - | (3,449 | ) | - | |||||||||||||||
Total
|
$ | 133,330 | 73.1 | % | $ | 148,285 | 74.8 | % | $ | 160,410 | 76.9 | % |
(a)
represents intercompany cost of operations pertaining to sales from Heritage
Labs to Portamedic
The
decrease in the consolidated cost of operations for the year ended December 31,
2009 compared to 2008 was primarily attributable to lower cost of operations in
our Portamedic and Heritage Labs businesses attributable to reduced revenue
levels and cost reduction initiatives implemented as revenues
declined. This decrease was offset by increased cost of sales as a
percentage of revenues for Hooper Holmes Services. In July 2009, we
combined the Underwriting Solutions and Infolink service lines into a new
service line, Hooper Holmes Services. This combination resulted in a
lower overall cost structure, which was not fully implemented until the fourth
quarter of 2009.
The
decrease in consolidated cost of operations for the year ended December 31, 2008
compared to 2007 was primarily attributable to reduced revenues in all service
lines except Health and Wellness, reduced branch operating expenses resulting
from branch staff reductions and the consolidation of Portamedic branch offices
in 2008, and staff reductions in our Hooper Holmes Services service
line.
27
Selling, General and Administrative
Expenses
(in
thousands)
|
For
the years ended December 31,
|
Decrease
|
||||||||||||||||||
2009
|
2008
|
2007
|
2009
vs. 2008
|
2008
vs. 2007
|
||||||||||||||||
Total
|
$ | 48,900 | $ | 49,774 | $ | 53,944 | $ | (874 | ) | $ | (4,170 | ) |
For the
past three years, we have continually focused on reducing SG&A expenses in
response to our declining revenues. As reflected in the table above,
consolidated selling, general and administrative (“SG&A”) expenses in 2009
were $0.9 million less than 2008, and in 2008 were $4.2 million less than
2007.
The
reduction in 2009 SG&A expenses compared to 2008 is primarily due
to:
·
|
reduced
employee benefit costs such as health insurance, 401(k) employer match and
workers compensation plan costs totaling $1.0
million;
|
·
|
reduced
legal and general insurance costs totaling $0.7
million;
|
·
|
reduced
amortization expense resulting from certain intangible assets now fully
amortized totaling $0.6 million;
|
·
|
reduced
incentive compensation expense totaling $0.3
million;
|
·
|
reduced
Portamedic regional and administrative salaries and related expense
totaling $1.0 million; and
|
·
|
reduced
audit, stock compensation, Board of Director fees and general business
taxes totaling $0.6 million.
|
|
The
decreases listed above were partially offset by the
following:
|
·
|
increased
depreciation expense (non-cash) resulting from a reduction in the
estimated useful life of our current IT systems scheduled to be replaced
in mid 2010, totaling $2.7 million;
and
|
·
|
increased
consulting costs associated with retaining the services of a strategic
advisor in 2009 totaling $0.5
million.
|
The
reduction in 2008 SG&A expenses compared to 2007 is primarily due
to:
|
·
|
reduced
health insurance costs resulting from a change in the health care benefits
for all employees, a reduction in headcount and fewer employees
participating in our health benefit plan totaling $3.6
million;
|
|
·
|
reduced
Regional and Area managerial salaries and related expenses and reduced
employee payroll tax costs resulting from branch office consolidations in
2007 and early 2008 totaling $0.4
million;
|
|
·
|
reduced
audit and business tax fees totaling $0.5 million;
and
|
|
·
|
reduced
incentive compensation and unused vacation accrual totaling $0.9
million.
|
|
The
decreases listed above were partially offset by the
following:
|
|
·
|
increased
costs associated with the growth in our Health and Wellness business
totaling $1.2 million;
|
|
·
|
increased
depreciation expense totaling $0.5 million resulting from asset
acquisitions in 2008 and a reduction in the useful lives of certain
capitalized software; and
|
|
·
|
increased
field examiner recruiting costs related to our efforts to attract more
examiners and executive recruiting costs totaling $0.3
million.
|
28
|
Impairment
of Long-Lived Assets and Goodwill
|
Intangible
Assets
In
accordance with current accounting standards, long-lived assets, including
amortizable intangible assets, are to be tested for impairment when impairment
indicators are present.
As a result of the decline in revenues
during 2009 and 2008, principally due to the downturn in the economy and its
negative impact on the life insurance industry in which we serve, we performed
an impairment analysis of our intangible assets. Based on our
analysis, we concluded that the undiscounted cash flows expected to be generated
by our intangible assets (primarily customer relationships), exceeded their
carrying values. As a result, no impairment was recorded on our
intangible assets during 2009 and 2008.
In the
third quarter of 2007, the following events and circumstances triggered an
impairment evaluation of our intangible assets and goodwill:
|
·
|
declining
revenues and operating profits during the second and third quarters of
2007 compared to 2006 and the expectation that this decline would continue
into the fourth quarter;
|
|
·
|
2007
quarterly and year-to-date revenues and operating income were
significantly below budget and the expectation of below budget revenues
and operating income continuing for the remainder of
2007;
|
|
·
|
continued
contraction of the principal markets served by the CED;
and
|
|
·
|
reduced
revenues from three of the CED’s largest customers who expanded their
vendor base resulting in fewer cases referred to the
CED.
|
The
evaluation resulted in an impairment of our intangible
assets. Accordingly, in the third quarter of 2007 we recorded an
impairment charge totaling $0.6 million in the CED. The impairment
charge consisted of an impairment of tradenames and customer
relationships. Consistent with our accounting treatment of the CED as
a discontinued operation, this charge is recorded in income (loss) from
discontinued operations in the consolidated statement of operations for the year
ended December 31, 2007.
Goodwill
We considered all of the impairment
indicators previously discussed, as well as the impairment recorded on our
intangible assets and concluded that we needed to test the CED reporting unit
goodwill during the third quarter of 2007. The analysis indicated a
goodwill impairment for the CED reporting unit. Accordingly, we
recorded a $5.7 million goodwill impairment charge during the third quarter of
2007, which is recorded in income (loss) from discontinued operations in the
accompanying statement of operations.
Restructuring and Other
Charges
For the
year ended December 31, 2009, we recorded restructuring and other charges of
approximately $1.2 million. The charges are attributable
to:
·
|
restructuring
charges for employee severance and office closures totaling $0.8 million;
and
|
·
|
legal
and other costs related to the 2009 Board of Director election proxy
contest totaling $0.4 million.
|
For the
year ended December 31, 2008, we recorded restructuring and other charges of
approximately $1.6 million. The charges are attributable
to:
·
|
charges
related to the early termination of an agreement with the outside
consultant utilized in our 2006 strategic review totaling $0.9
million;
|
·
|
severance
charges related to the resignation of the former CEO of $0.4 million;
and
|
·
|
restructuring
charges for employee severance and office closures totaling $0.3
million.
|
29
For the
year ended December 31, 2007, we recorded restructuring and other charges of
approximately $4.7 million. The charges are attributable
to:
·
|
restructuring
charges for employee severance and branch office closures totaling $2.9
million;
|
·
|
the
cancellation of a software development project approximating $0.8 million;
and
|
·
|
legal
settlements with an insurance company client and a software supplier
totaling $1.0 million.
|
Operating Loss from Continuing
Operations
Our
consolidated operating loss from continuing operations for the year ended
December 31, 2009 totaled $1.0 million, compared to $1.4 million in the prior
year. These improved results are primarily due to a decrease of $0.4
million in restructuring and other charges ($1.2 million in 2009 vs. $1.6
million in 2008) and a decrease in SG&A of $0.9 million ($48.9 million in
2009 vs. $49.8 million in 2008).
Our
consolidated operating loss from continuing operations for the year ended
December 31, 2008 totaled $1.4 million, compared to $10.4 million in the prior
year. The decrease results from lower restructuring and other charges
of $3.1 million ($1.6 million vs. $4.7 million), improved gross profit of $1.7
million and a $4.2 million reduction in SG&A.
Income
Taxes
We
have significant deferred tax assets attributable to tax deductible intangibles,
capital loss carryforwards, and federal and state net operating loss
carryforwards, which may reduce taxable income in future
periods. Based on the continued decline in revenues, the cumulative
tax and operating losses, the lack of taxes in the carryback period, and the
uncertainty surrounding the extent or timing of future taxable income, we do not
believe we will realize the tax benefits of these deferred tax
assets. Accordingly, we continue to record a full valuation allowance
on our net deferred tax assets of $50.9 million and $53.2 million as of December
31, 2009 and 2008, respectively. The net decrease in the valuation
allowance of approximately $2.3 million was primarily attributable to the
expiration of a capital loss, the utilization of prior year net operating
losses, offset by the current year net operating loss.
Prior to the passage of the “Worker,
Homeownership and Business Assistance Act of 2009” (the 2009 Act), signed into
law in the fourth quarter of 2009, corporations were allowed to carryback net
operating losses two years and forward 20 years to offset taxable
income. Under this new legislation, corporations can elect to
carryback net operating losses incurred in either 2008 or 2009 to a profitable
fifth year preceding the loss year. The net operating loss carried
back is limited to 50% of the available taxable income for that
year. We were able to carryback approximately $4.3 million of federal
net operating losses incurred in 2008 to tax year 2003 and in the fourth quarter
of 2009, we filed an amended tax return to recover approximately $1.5 million of
federal income tax previously paid. In February 2010, we received
$1.5 million of cash related to the carryback claim, which included $0.02
million of interest.
The federal tax benefit recorded in the
year ended December 31, 2009 reflects the utilization of fully reserved net
operating losses that were carried back to 2003 under the 2009 Act referred to
above, offset by certain state tax liabilities. The income tax
expense recorded in the year ended December 31, 2008 reflects certain state tax
liabilities. The tax benefit recorded in the year ended December 31,
2007 reflects a state tax benefit.
As of January 1, 2009 and 2008, no
amounts were recorded for unrecognized tax benefits or for the payment of
interest or penalties. Furthermore, no such amounts were accrued
during the years ended December 31, 2009 and 2008.
In July 2008, we received notification
from the Internal Revenue Service (the “IRS”) that it had completed its audits
of our tax returns for the years 2001 through 2006 with no
adjustments. State income tax returns for the year 2003 and forward
are subject to examination.
As of December 31, 2009, we had U.S.
federal and state net operating loss carryforwards of approximately $80.2
million and $99.9 million, respectively. The net operating loss
carryforwards, if unutilized, will expire in the years 2011 through
2029.
The effective tax rate for the years
ended December 31, 2009, 2008 and 2007 was (103%), 1% and (1%),
respectively.
30
Discontinued Operations
On June 30, 2008, we sold substantially
all of the assets and liabilities of our CED operating segment for $5.6 million
and received cash payments totaling $5.1 million and a $0.5 million note
receivable due in six equal monthly installments beginning July 31,
2008. The note receivable was fully collected by March
2009. In connection with the sale of the CED, we were released as the
primary obligor for certain lease obligations acquired but remain secondarily
liable in the event the buyer defaults. The guarantee is provided for
the term of the lease, which expires in July 2015. During the year
ended December 31, 2008, we recorded a reserve of $0.3 million representing the
fair value of the guarantee obligation. As of December 31, 2009, the
maximum potential amount of future payments under the guarantee is $0.6
million. We recognized a net gain on the sale of the CED of
approximately $0.9 million for the year ended December 31, 2008, inclusive of
the above mentioned reserve of $0.3 million, which was reported in discontinued
operations.
On October 9, 2007, we completed the
sale of MDG, for $15.3 million and received a cash payment of $12.8 million, net
of closing adjustments of $1.2 million. In addition, we incurred $1.0
million of expenses related to the sale. Additional payments to be
received included $0.5 million within nine months of the closing and $0.7
million within 24 months of the closing. We recognized a net gain on
the sale of approximately $9.2 million, inclusive of $1.4 million of MDG foreign
currency translation gains, which was reported in discontinued operations in our
consolidated statement of operations for the year ended December 31,
2007.
In connection with the sale of MDG, we
agreed to indemnify the purchaser for certain pre-closing tax
liabilities. In 2008, information became available to us relating to
certain pre-closing tax obligations of MDG. Based on this
information, we recorded a reserve of $1.4 million in loss on sale of
subsidiaries. In the first quarter of 2009, we recorded an additional
liability of $0.04 million resulting in a total liability for these pre-closing
tax matters of $1.5 million as of March 31, 2009.
On May 7, 2009, we reached a settlement
agreement with Medicals Direct Holding Limited (“MD”) (successor-in-interest to
the purchaser of MDG) whereby we agreed with MD to fully release and discharge
each other from any and all claims known or unknown under the MDG Stock Purchase
Agreement and the Tax Deed executed on October 9, 2007. On May 8, 2009 we paid
MD the sum of $0.3 million, and further released MD from the additional purchase
price payments due us, totaling $1.2 million. The $0.3 million
payment is presented within cash used by operating activities of discontinued
operations in our consolidated statement of cash flows for the year ended
December 31, 2009.
Net
Loss
Earnings
for the year ended December 31, 2009 were essentially break even, compared to a
net loss of $1.9 million, or ($0.03) per share, in the prior year. In
2007, we reported a net loss of $7.3 million, or ($0.11) per share.
Liquidity and Financial
Resources
As of and for the years ended December
31, 2009 and 2008, our primary sources of liquidity are our holdings of cash and
cash equivalents and our revolving line of credit. At December 31, 2009 and
2008, our working capital was $30.1 million and $24.1 million,
respectively. Our current ratio as of December 31, 2009 was 3.2 to 1
compared to 2.3 to 1 at December 31, 2008. Significant sources and
uses affecting our cash flows for the year ended December 31, 2009
include:
·
|
a
decrease in accounts receivable of $4.9 million;
and
|
·
|
a
receipt of a $0.6 million lease incentive
payment.
|
These
sources of cash were partially offset by the following:
·
|
restructuring
payments related to employee severance and branch office closure costs
totaling $0.9 million;
|
·
|
consulting
payments related to the services of a strategic advisor totaling $0.5
million; and
|
·
|
capital
expenditures of $3.1 million.
|
31
For the
year ended December 31, 2009 we generated income from continuing operations of
$0.04 million, and a loss from continuing operations of $1.6 million and $10.5
million for the years ended December 31, 2008 and 2007,
respectively. Theses results include operating losses, and
restructuring and other charges. We have managed our liquidity during
this period through a series of cost reduction initiatives, sales of assets and
borrowings under our revolving credit facility.
At
December 31, 2009, we had approximately $16.5 million in cash and cash
equivalents and no outstanding debt. Our net cash provided by (used
in) operating activities of continuing operations for the years ended December
31, 2009, 2008 and 2007 were $8.7 million, $0.1 million and ($6.0) million,
respectively.
Revolving Credit
Facility
As of December 31, 2008 and for the
majority of the first quarter of 2009, we had a three year Revolving Credit
Facility (the “Credit Facility”) with CitiCapital Commercial Corporation
(“CitiCapital”). The Credit Facility was due to expire on October 10,
2009. On March 9, 2009, we entered into a three year Loan and
Security Agreement (the “Loan and Security Agreement”) with TD Bank, N.A. (“TD
Bank”) which expires on March 8, 2012. In connection with entering
into the Loan and Security Agreement with TD Bank, we terminated our Credit
Facility with CitiCapital.
Loan and Security
Agreement
The Loan
and Security Agreement provides us with a revolving line of credit, the proceeds
of which are to be used for general working capital purposes. Under
the terms of the Loan and Security Agreement, TD Bank has agreed to make
revolving credit loans to us in an aggregate principal amount at any one time
outstanding which, when combined with the aggregate undrawn amount of all
unexpired letters of credit, does not exceed 85% of “Eligible Receivables” (as
that term is defined in the Loan and Security Agreement), provided that in no
event can the aggregate amount of the revolving credit loans and letters of
credit outstanding at any time exceed $15 million. The maximum
aggregate face amount of letters of credit that may be outstanding at any time
may not exceed $1.5 million pursuant to the terms of the Loan and Security
Agreement.
Borrowings of revolving credit loans
shall take the form of LIBOR rate advances with the applicable interest rate
being the greater of 1% per annum or the LIBOR rate, plus 3.5%.
In
connection with the Loan and Security Agreement, we paid closing fees of $0.2
million to the lender. We are also obligated to pay, on a monthly
basis in arrears, an unused line fee (usage fee) equal to 1% per annum on the
difference between $15 million and the average outstanding principal balance of
cash advances under the revolving credit line plus the average daily aggregate
undrawn portion of all outstanding letters of credit for the preceding
month. In addition, we are required to pay an annual loan fee of $0.1
million. During 2009, we incurred unused fees of $0.1
million.
As security for our full and timely
payment and other obligations under the Loan and Security Agreement, we have
granted TD Bank a security interest in all of our existing and after-acquired
property and of our subsidiary guarantors, including our receivables (which are
subject to a lockbox account arrangement), inventory and
equipment. As further security, we have granted TD Bank a mortgage
lien encumbering our corporate headquarters. In addition, the
obligations are secured under the terms of security agreements and guarantees
provided by all of our subsidiaries. The aforementioned security
interest and mortgage lien are referred to herein as the
“Collateral”.
TD Bank, in its sole discretion based
upon its reasonable credit judgment, may (A) establish and change reserves
required against Eligible Receivables, (B) change the advance rate against
Eligible Receivables or the fair market value of our corporate headquarters, and
(C) impose additional restrictions on the standards of eligibility for Eligible
Receivables, any of which could reduce the aggregate amount of indebtedness that
may be incurred under the Loan and Security Agreement.
32
The Loan and Security Agreement
contains covenants that, among other things, restrict our ability, and that of
our subsidiaries, to:
·
|
pay
any dividends or distributions on, or purchase, redeem or retire any
shares of any class of our capital stock or other equity
interests;
|
·
|
incur
additional indebtedness;
|
·
|
sell
or otherwise dispose of any of our assets, other than in the ordinary
course of business;
|
·
|
create
liens on our assets;
|
·
|
enter
into any sale and leaseback transactions;
and
|
·
|
enter
into transactions with any of our affiliates on other than an arm’s-length
or no less favorable basis.
|
The Loan
and Security Agreement contains a financial covenant, which requires us to
maintain a fixed charge coverage ratio (as defined in the Loan and Security
Agreement), measured on a trailing 12-month basis, of no less than 1.1 to 1.0 as
of January 31, 2010, and as of the end of each of our fiscal quarters
thereafter. The fixed charge coverage ratio allows for the exclusion
of capital expenditures in excess of one dollar from the denominator of the
calculation provided we maintain pre-defined minimum cash balances at TD Bank on
average for the 90 days ended as of the measurement date. As of
December 31, 2009 and January 31, 2010, our average cash balance at TD Bank for
the 90 days then ended, exceeded the pre-defined cash balance requirements,
thereby allowing all capital expenditures in excess of one dollar to be excluded
from the denominator of the fixed charge coverage ratio
calculation. As of December 31, 2009, our fixed charge coverage ratio
measured on a trailing 12-month period and excluding capital expenditures in
excess of one dollar was 10.3 to 1. If December 31, 2009 were the
measurement date, we would satisfy the financial covenant. As of
January 31, 2010, our fixed charge coverage ratio measured on a trailing
12-month period and excluding capital expenditures in excess of one dollar was
10.8 to 1.0 and, as such, we satisfied the financial
covenant. However, there is no assurance that we will satisfy this
financial covenant as of the end of each fiscal quarter thereafter.
On April
22, 2009, we obtained from TD Bank and issued a letter of credit under the Loan
and Security Agreement in the amount of $0.5 million to the landlord of our
Heritage Labs facility as security for performance of our obligations under the
lease. The letter of credit will automatically extend for additional
periods of one year, unless notice is given to terminate the letter of credit 60
days prior to its expiration date. In no event shall the letter of
credit be renewed beyond December 31, 2011. Also, in December 2009,
we opened a $0.1 million TD VISA credit card account to be used by Hooper Holmes
Services medical records retrieval service line. The letter of credit and the
credit card reduced our borrowing capacity under our revolving line of
credit. As of December 31, 2009, our borrowing capacity under the
revolving line of credit totaled $14.4 million.
The failure of us or any subsidiary
guarantor to comply with any of the covenants or the breach of any of our
representations and warranties contained in the Loan and Security Agreement
constitutes an event of default under that agreement. In addition,
the Loan and Security Agreement provides that “Events of Default” include the
occurrence or failure of any event or condition that, in TD Bank’s sole
judgment, could have a material adverse effect (i) on our business, operations,
assets, management, liabilities or condition of, (ii) on the value of or the
perfection or priority of TD Bank’s lien upon the Collateral, or (iii) on the
ability of us and our subsidiary guarantors to perform under the Loan and
Security Agreement.
The revolving credit loans are payable
in full, together with all accrued and unpaid interest, on the earlier of March
8, 2012 or the date of termination of the loan commitments, termination being
one of the actions TD Bank may take upon the occurrence of an event of
default. We may prepay any revolving credit loan, in whole or in part
without penalty. We may also terminate the Loan and Security
Agreement, provided that on the date of such termination all of our obligations
thereunder are paid in full. We will be required to pay an early
termination fee equal to $0.3 million if the termination occurs prior to the
first anniversary of the date of the parties’ execution of the Loan and Security
Agreement, $0.2 million if termination occurs after the first anniversary but
prior to the second anniversary, and $0.1 million if termination occurs after
the second anniversary, but prior to the Loan and Security Agreement expiration
date.
33
For the
year ended December 31, 2009, our consolidated revenues totaled $182.4 million,
representing a decline of approximately 8% from the prior year. In
response to the declining revenues, we have taken certain actions to reduce our
costs including headcount reductions, wage and hiring freezes, and a reduction
in capital expenditures and general operating expenses.
Based on
our anticipated level of future revenues, the cost reduction initiatives
implemented to date, along with our existing cash and cash equivalents, we
believe we have sufficient funds to meet our cash needs through December 31,
2010.
The
current challenging economic climate may lead to further reductions in
revenues. If revenues continue to decline, operating losses may
continue, and we will be required to take additional actions to further reduce
costs, capital spending and restructure operations. This would also
reduce our cash reserves and potentially require us to borrow under the Loan and
Security Agreement with TD Bank. However, there is no guarantee that
our cost reduction actions will generate the cost savings necessary to offset
declining revenues and operating profits. If we are unsuccessful in
implementing cost reductions initiatives and/or if revenues continue to decline,
we might fail the financial covenant contained in the Loan and Security
Agreement and therefore be prohibited from borrowings under the Loan and
Security Agreement. These and other factors would adversely affect
our liquidity and our ability to generate profits in the future.
Cash
Flows from Operating Activities
For the years ended December 31, 2009,
2008 and 2007, net cash provided by (used in) operating activities of continuing
operations was $8.7 million, $0.1 million and ($6.0) million,
respectively.
The net cash provided by operating
activities of continuing operations for 2009 of $8.7 million includes income of
$0.04 million from continuing operations, non-cash charges of $7.2 million of
depreciation and amortization, and $0.7 million of share-based compensation
expense. Changes in working capital items included:
|
·
|
a
decrease in accounts receivable of $4.9 million, primarily due to
increased Portamedic cash collections. Our consolidated days
sales outstanding (DSO), measured on a rolling 90-day basis was 41 days at
December 31, 2009, compared to 48 days at December 31,
2008. Historically, our accounts receivable balances and our
DSO are at their lowest point in December as many of our customers utilize
the remainder of their operating budgets before their year-end budget
close-out. As a result, our DSO historically declines at
year-end compared to other months during the year. In addition, our
average DSO for 2009 was 47.6 days compared to 53.7 days in
2008. We believe our increased collection efforts in 2009,
along with our continued focus on electronic customer billing, are the
primary drivers of our improvement in our 2009 DSO relative to our
historic experience. As a result of these improvements, our allowance for
doubtful accounts, which includes a reserve for revenue reductions,
declined approximately $1.8 million since December 31, 2008, of which
$0.5 million was reversed to revenue during the year ended December 31,
2009.
|
·
|
an
increase in other assets and income tax receivable of $2.8 million;
and
|
|
·
|
a
decrease in accounts payable, accrued expenses and other long-term
liabilities of $1.6 million.
|
The net cash provided by operating
activities of continuing operations for 2008 of $0.1 million reflects a loss of
$1.6 million from continuing operations, and includes non-cash charges of $4.7
million of depreciation and amortization, $0.7 million of share-based
compensation expense and a $0.4 million write-off of software. Changes in
working capital items included:
|
·
|
a
decrease in accounts receivable of $1.0 million, primarily due to
increased Portamedic cash collections from increased collection efforts
primarily in the fourth quarter of 2008. Our consolidated DSO,
measured on a rolling 90-day basis was 48 days at December 31, 2008,
compared to 46 days at December 31, 2007 (increase in DSO is due to lower
revenue in the fourth quarter of 2008 compared to the same period of the
prior year);
|
34
|
·
|
the
receipt of $0.5 million in federal and state income tax refunds in 2008;
and
|
|
·
|
a
decrease in accounts payable, accrued expenses and other long-term
liabilities of $5.9 million primarily related to payments to an outside
consultant related to our 2006 strategic review of $2.3 million, an
unclaimed property payment of $1.4 million and restructuring payments for
severance and branch office closure costs of $1.7
million.
|
The net cash used in operating
activities of continuing operations for 2007 of $6.0 million reflects a loss of
$10.5 million from continuing operations, and includes non-cash charges of $4.2
million of depreciation and amortization, $1.2 million of share-based
compensation expense and a $0.8 million write-off of software. Changes in
working capital items included:
|
·
|
a
decrease in accounts receivable of $0.3 million, primarily due to
increased Portamedic cash collections resulting from increased collection
efforts primarily in the fourth quarter of 2008. Our DSO,
measured on a rolling 90-day basis was 46 days at December 31, 2007,
compared to 45 days at December 31, 2006 (increase in DSO was due to lower
revenue in the fourth quarter of 2007 compared to the same period of the
prior year);
|
|
.
|
|
·
|
the
receipt of $2.5 million in federal and state income tax refunds in 2007;
and
|
|
·
|
a
decrease in accounts payable, accrued expenses and other long-term
liabilities of $5.1 million.
|
Cash
Flows used in Investing Activities
For the year ended December 31, 2009,
we used $3.1 million in net cash for investing activities of continuing
operations for capital expenditures primarily relating to leasehold improvements
associated with the relocation of Heritage Labs in the first quarter of 2009 and
the purchase of IT hardware and software.
For the
year ended December 31, 2008, we used $5.6 million in net cash for investing
activities of continuing operations for capital expenditures, primarily relating
to upgrading our branch operating system software, the development of a new
Health & Wellness billing system, and the purchase of IT
hardware. Net cash provided by investing activities of discontinued
operations during 2008 was $5.5 million, due primarily to the net cash received
from the sale of CED in June 2008.
For the
year ended December 31, 2007, we used $4.2 million in net cash for investing
activities of continuing operations for capital expenditures. Net
cash provided by investing activities of discontinued operations during 2007 was
$11.8 million, due to the net cash received from the sale of MDG in October
2007.
Cash Flows used in Financing
Activities
For the year ended December 31, 2009,
net cash used in financing activities of continuing operations of $0.4 million
represents debt issuance costs associated with entering into our new Loan and
Security Agreement with TD Bank and the payment of capital lease
obligations.
For the year ended December 31, 2008,
net cash used in financing activities of continuing operations of $0.1 million
represents the payment of capital lease obligations.
For the
year ended December 31, 2007, cash provided by financing activities of
continuing operations was $1.5 million consisting of proceeds received from the
exercise of stock options and purchases under the employee stock purchase
plan. Partially offsetting these sources of cash provided by
financing activities was the payment of capital lease obligations of $0.1
million.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our consolidated financial condition, results
of operations, liquidity, capital expenditures or capital resources that are
material to investors.
35
Share
Repurchases
We did
not purchase any shares of our common stock during 2009, 2008 or
2007. We were precluded from purchasing any shares of our common
stock under the terms of the 2006 Revolving Credit Facility and continue to be
precluded under our Loan and Security Agreement with TD Bank.
Dividends
No
dividends were paid in 2009, 2008 or 2007. We were precluded from
declaring or making any dividend payments or other distributions of assets with
respect to any class of our equity securities under the terms of the 2006
Revolving Credit Facility and continue to be precluded under our Loan and
Security Agreement with TD Bank.
Contractual
Obligations
The
following table sets forth our schedule of contractual obligations at December
31, 2009, including future minimum lease payments under non-cancelable operating
and capital leases, employment contract payments and our software license
fees.
(In
thousands)
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
|||||||||||||||
Operating
Lease Obligations
|
$ | 20,614 | $ | 4,850 | $ | 6,913 | $ | 3,880 | $ | 4,971 | ||||||||||
Capital
Lease Obligations
|
311 | 146 | 153 | 12 | - | |||||||||||||||
Employment
Contracts
|
1,407 | 903 | 504 | - | - | |||||||||||||||
Software
License Fees
|
400 | 400 | - | - | - | |||||||||||||||
Total
|
$ | 22,732 | $ | 6,299 | $ | 7,570 | $ | 3,892 | $ | 4,971 |
Inflation
Inflation
has not had, nor is it expected to have, a material impact on our consolidated
financial results.
Critical
Accounting Policies
A
critical accounting policy is one that is important to the portrayal of a
company’s operating results and/or financial condition and requires management’s
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently
uncertain. Our consolidated financial statements and accompanying
notes are prepared in accordance with US generally accepted accounting
principles (US GAAP). Preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
We base these determinations upon the best information available to us during
the period in which we are accounting for our results. Our estimates
and assumptions could change materially as conditions within and beyond our
control change or as further information becomes available. Further,
these estimates and assumptions are affected by management’s application of
accounting policies. Changes in our estimates are recorded in the
period the change occurs.
We have
identified the accounting policies discussed below as critical to us. The
discussion below is not intended to be a comprehensive list of our accounting
policies. Our significant accounting policies are more fully described in Note 1
to the consolidated financial statements included elsewhere in this report on
Form 10-K.
Revenue
Recognition
Revenue
is recognized for paramedical and medical examinations when the examination of
the insurance policy applicant is completed. Revenues generated from medical
record collection, laboratory testing, fingerstick test kits, and other services
are recognized when the related service is completed. In all cases,
there must be evidence of an agreement with the customer, the sales price must
be fixed or determinable, delivery of services must occur and the ability to
collect must be reasonably assured.
36
Allowance for
Doubtful Accounts
We
maintain allowances for doubtful accounts for (i) estimated losses resulting
from the inability of our customers to make required payments, and (ii) amounts
that customers may deduct from their remittances to us for billed items not in
compliance with customer specifications. Management regularly
assesses the financial condition of our customers, the markets in which these
customers participate as well as historical trends relating to customer
deductions and adjusts the allowance for doubtful accounts based on this
review. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, our ability to
collect on accounts receivable could be negatively impacted, in which case
additional allowances may be required.
We must
make significant management judgments and estimates in determining allowances
for doubtful accounts in any accounting period. One significant
uncertainty inherent in our analysis is whether our past experience will be
indicative of future periods. Adverse changes in general economic
conditions could affect our allowance estimates, collection of accounts
receivable, cash flows and results of operations.
Impairment
of Long-lived Assets, including Intangible Assets and Assets to be
Disposed
Long-lived
assets with determinable useful lives are reviewed for impairment whenever
events or changes in circumstances indicate that their carrying value may not be
recoverable. Impairment is a condition that exists when the carrying amount of a
long-lived asset exceeds its fair value.
The
following are examples of events or changes in circumstances that may indicate
an asset’s carrying value may not be recoverable:
|
·
|
a
significant decrease in the market price of a long-lived
asset;
|
|
·
|
a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical
condition;
|
|
·
|
a
significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset, including an adverse
action or assessment by a
regulator;
|
|
·
|
a
current period operating cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of the long lived
asset; and
|
|
·
|
a
current expectation that, more likely than not, a long-lived asset will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
|
|
The
process to identify if there is impairment includes the following
steps:
|
|
·
|
a
comparison of the undiscounted net cash flows from the business group to
the carrying value of the long-lived assets;
and
|
|
·
|
if
the carrying value exceeds the undiscounted net cash flows, an impairment
is identified. The amount of the impairment is based on the excess of the
carrying value of the long-lived assets to its fair value. We
estimate the fair value of the long-lived assets based on discounted cash
flow models.
|
As discussed in the Results of
Operations, due to the decline in revenues during 2009 and 2008, principally due
to the downturn in the economy and its negative impact on the life insurance
industry in which we serve, we performed an impairment analysis of our
intangible assets. Based on the analysis, we concluded that the
undiscounted cash flows expected to be generated by our intangible assets
(primarily customer relationships), exceeded their carrying
values. As a result, no impairment was recorded on our intangible
assets during 2009 and 2008.
37
In 2007,
there were several events and circumstances that constituted impairment
indicators. Accordingly, we initiated an impairment analysis of our
long-lived assets in the third quarter of 2007 and determined that the carrying
values of certain long-lived assets exceeded their projected undiscounted net
cash flows. The fair values were determined based on discounted cash
flows under the relief from royalty method and indicated that an impairment of
certain of our intangible assets existed. Accordingly, during the
third quarter of 2007 we recorded an impairment charge totaling $0.6
million. The impairment charge consisted of an impairment of the CED
intangible assets (e.g., customer relationships and trade names) and, consistent
with our accounting treatment of the CED as a discontinued operation, this
charge is recorded in Income (loss) from discontinued operations in our
consolidated statement of operations for the year ended December 31,
2007.
|
Assets
to be disposed of are reported at the lower of their carrying amount or
fair value less the costs to sell.
|
Accounting
for Income Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions which we
operate. This process involves estimating our actual current tax
expense together with assessing temporary differences resulting from different
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet.
We assess the realization of our
deferred tax assets to determine whether an income tax valuation allowance is
required. Based on the continued decline in revenues, the cumulative
tax and operating losses, the lack of taxes in the carryback period, and the
uncertainty surrounding the extent or timing of future taxable income, we do not
believe that we will realize the tax benefits of our deferred tax
assets. Accordingly, we continue to record a full valuation allowance
on our net deferred tax assets. During the year ended December 31, 2009, we
recorded a $1.5 million federal tax benefit due to the utilization of fully
reserved net operating losses that were carried back to 2003 under the
Homeownership and Business Assistance Act of 2009, signed into law in the fourth
quarter of 2009.
Share-Based
Compensation
Authoritative
accounting literature addresses the accounting for transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. This literature establishes accounting principles
which require companies to recognize compensation cost in an amount equal to the
fair value of the share-based payments, such as stock options or non-vested
stock granted to employees. Compensation cost for stock options and non-vested
stock is recognized over the vesting period based on the estimated fair value on
the date of the grant. The accounting principles also require that we
estimate a forfeiture rate for all share based awards. We monitor
share option exercise and employee termination patterns to estimate forfeiture
rates within the valuation model. The estimated fair values of
options are based on assumptions, including estimated lives, volatility,
dividend yield, and risk-free interest rates. These estimates also
consider the probability that the options will be exercised prior to the end of
their contractual lives and the probability of termination or retirement of the
holder, which are based on reasonable facts but are subject to change based on a
variety of external factors.
Recently Issued Accounting
Standards
Fair Value Measurements - In
September 2006, new authoritative accounting literature established a single
definition of fair value, set out a framework for measuring fair value, and
requires additional disclosures about fair-value measurement. This
accounting principle was effective January 1, 2008, except for certain
provisions which became effective January 1, 2009. The impact of the adoption of
this accounting principle was not material to our consolidated
financial statements.
38
Business Combinations - In
December 2007, new authoritative accounting literature significantly changed the
way companies account for business combinations and generally will require more
assets acquired and liabilities assumed to be measured at their acquisition-date
fair value. Under this accounting principle, legal fees and other
transaction-related costs are expensed as incurred and are no longer included in
goodwill as a cost of acquiring the business. This new accounting
principle also requires, among other things, acquirers to estimate the
acquisition date fair value of any contingent consideration and to recognize any
subsequent changes in the fair value of contingent consideration in
earnings. In addition, restructuring costs the acquirer expected, but
was not obligated to incur, will be recognized separately from the business
acquisition. This new accounting principle applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The adoption of this accounting principle did not impact us
during 2009 as we made no acquisitions during this period.
Noncontrolling Interest in a
Subsidiary - In December 2007, new authoritative accounting literature
established accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This new
accounting principle requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure on the face of the consolidated
statement of operations the amounts of consolidated net income attributable to
the parent and to the noncontrolling interest. In addition, this
accounting principle established a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not result in
deconsolidation and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. This new accounting
principle is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. In January 2010,
additional literature was issued to clarify certain implementation
issues. The adoption of this accounting principle and, subsequent
clarification, did not impact our consolidated financial
statements.
Share-Based Payment Transactions in
Computing Earnings Per Share - In June 2008, new authoritative accounting
literature addressed whether awards granted in share-based payment transactions
are participating securities prior to vesting and therefore, need to be included
in the earnings allocation in computing earnings per share using the two-class
method. Unvested share-based payment awards that have non-forfeitable
rights to dividend or dividend equivalents are treated as a separate class of
securities in calculating earnings per share. This accounting
principle was effective beginning January 1, 2009, and did not impact the
Company’s consolidated financial statements.
Subsequent Events - In May
2009, and as amended in February 2010, new authoritative accounting literature
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. This accounting principle was effective
for us as of June 30, 2009, and did not have a material impact on our
consolidated financial statements.
Accounting Standards Codification -
In June 2009, new authoritative accounting literature established the
Accounting Standards Codification (the “Codification”) as the exclusive source
of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the Financial Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. The Codification was effective for our 2009 third
fiscal quarter, and did not have a material impact on our consolidated financial
statements.
Multiple Element Arrangements
– In September 2009, new authoritative accounting literature became effective
requiring that revenue be allocated to each unit of accounting in many multiple
deliverable arrangements based on the relative selling price of each
deliverable. The literature also changed the level of evidence of
standalone selling price required to separate deliverables by allowing a “best
estimate” of the standalone selling price of deliverables when more objective
evidence of selling price is not available. This accounting principle
is effective for us as of June 15, 2010. Early adoption is
permitted. We do not expect the adoption of this accounting principle
to have a material impact on our consolidated financial statements.
39
ITEM
7A
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
We are
exposed to interest rate risk primarily through our borrowing activities, which
are described in Note 7 to the consolidated financial statements included in
this annual report. Our credit facility is based on variable rates
and is therefore subject to interest rate fluctuations. Accordingly,
our interest expense will vary as a result of interest rate changes and the
level of any outstanding borrowings. As of December 31, 2009, there
were no borrowings outstanding.
Based on
our market risk sensitive instruments outstanding at December 31, 2009, we have
determined that there was no material market risk exposure to our consolidated
financial position, results of operations or cash flows as of such
date.
ITEM
8
|
Financial
Statements and Supplementary Data
|
Financial
Highlights (Unaudited)
Years
ended December 31,
|
||||||||||||
(in
thousands, except share data, per share data and ratios)
|
2009
|
2008
|
2007
|
|||||||||
Revenues
|
$ | 182,401 | $ | 198,233 | $ | 208,632 | ||||||
Operating
loss from continuing operations
|
(1,013 | ) | (1,428 | ) | (10,390 | ) | ||||||
Net
loss
|
(4 | ) | (1,885 | ) | (7,307 | ) | ||||||
Basic
and diluted earnings (loss) per share:
|
||||||||||||
Loss
from continuing operations
|
$ | - | $ | (0.02 | ) | $ | (0.15 | ) | ||||
Income
from discontinued operations
|
- | - | $ | 0.05 | ||||||||
Net
loss per share
|
$ | - | $ | (0.03 | ) | $ | (0.11 | ) | ||||
Weighted
average number of shares:
|
||||||||||||
Basic
|
68,692,176 | 68,657,975 | 68,476,194 | |||||||||
Diluted
|
69,392,243 | 68,657,975 | 68,476,194 | |||||||||
Return
on stockholders’ equity
|
- | (4.6 | %) | (17.4 | %) | |||||||
Net
cash provided by (used in) operating activities of continuing
operations
|
$ | 8,669 | $ | 113 | $ | (5,983 | ) | |||||
Working
capital
|
$ | 30,102 | $ | 24,135 | $ | 24,752 | ||||||
Book
value per weighted average share outstanding
|
$ | 0.60 | $ | 0.59 | $ | 0.61 | ||||||
Closing
stock price per common share
|
$ | 1.04 | $ | 0.25 | $ | 1.72 | ||||||
Current
ratio
|
3.2:1
|
2.3:1
|
2.0:1
|
|||||||||
Quick
ratio
|
3.0:1
|
2.2:1
|
1.9:1
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Consolidated
Financial Statements:
|
|
Report
of Independent Registered Public Accounting Firm
|
41
|
Consolidated
Balance Sheets – December 31, 2009 and 2008
|
42
|
Consolidated
Statements of Operations – Years ended December 31, 2009, 2008 and
2007
|
43
|
Consolidated
Statements of Stockholders’ Equity – Years ended December 31, 2009, 2008
and 2007
|
44
|
Consolidated
Statements of Cash Flows – Years ended December 31, 2009, 2008 and
2007
|
45
|
Notes
to Consolidated Financial Statements
|
46-65
|
Quarterly
Financial Data (Unaudited)
|
66
|
40
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Hooper
Holmes, Inc.:
We have
audited the accompanying consolidated balance sheets of Hooper Holmes, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2009. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedule, “Schedule II – Valuation and
Qualifying Accounts.” These consolidated financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hooper Holmes, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG
LLP
Short
Hills, New Jersey
March 12,
2010
41
Consolidated
Balance Sheets
(In
thousands, except share and per share data)
December
31,
2009
|
December
31,
2008
|
|||||||
ASSETS
(Note 7)
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 16,495 | $ | 11,547 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $1,237 and $3,036 at
December 31, 2009 and 2008, respectively
|
20,365 | 25,270 | ||||||
Inventories
|
2,750 | 2,865 | ||||||
Income
tax receivable
|
1,479 | 31 | ||||||
Other
current assets
|
2,816 | 2,421 | ||||||
Total
current assets
|
43,905 | 42,134 | ||||||
Property,
plant and equipment, net
|
11,555 | 15,741 | ||||||
Intangible
assets, net
|
932 | 1,429 | ||||||
Other
assets
|
310 | 365 | ||||||
Total
assets
|
$ | 56,702 | $ | 59,669 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 5,167 | $ | 6,701 | ||||
Accrued
expenses
|
8,636 | 11,298 | ||||||
Total
current liabilities
|
13,803 | 17,999 | ||||||
Other
long-term liabilities
|
1,473 | 902 | ||||||
Commitments
and Contingencies (Note 8)
|
||||||||
Stockholders’
Equity:
|
||||||||
Common
stock, par value $.04 per share; authorized 240,000,000 shares; Issued:
68,713,982 shares and 68,683,982 shares at December 31, 2009 and 2008,
respectively. Outstanding: 68,704,587 shares and 68,674,587 shares at
December 31, 2009 and 2008, respectively.
|
2,748 | 2,747 | ||||||
Additional
paid-in capital
|
147,507 | 146,846 | ||||||
Accumulated
deficit
|
(108,758 | ) | (108,754 | ) | ||||
41,497 | 40,839 | |||||||
Less:
Treasury stock, at cost 9,395 shares as of December 31, 2009 and
2008
|
(71 | ) | (71 | ) | ||||
Total
stockholders' equity
|
41,426 | 40,768 | ||||||
Total
liabilities and stockholders' equity
|
$ | 56,702 | $ | 59,669 | ||||
See
accompanying notes to consolidated financial statements.
|
42
Consolidated Statements of
Operations
(In
thousands, except share and per share data)
Years
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues
|
$ | 182,401 | $ | 198,233 | $ | 208,632 | ||||||
Cost
of operations
|
133,330 | 148,285 | 160,410 | |||||||||
Gross
profit
|
49,071 | 49,948 | 48,222 | |||||||||
Selling,
general and administrative expenses
|
48,900 | 49,774 | 53,944 | |||||||||
Restructuring
and other charges
|
1,184 | 1,602 | 4,668 | |||||||||
Operating
loss from continuing operations
|
(1,013 | ) | (1,428 | ) | (10,390 | ) | ||||||
Other
income (expense):
|
||||||||||||
Interest
expense
|
(17 | ) | (3 | ) | (181 | ) | ||||||
Interest
income
|
92 | 269 | 116 | |||||||||
Other
expense, net
|
(441 | ) | (383 | ) | (123 | ) | ||||||
(366 | ) | (117 | ) | (188 | ) | |||||||
Loss
from continuing operations before income taxes
|
(1,379 | ) | (1,545 | ) | (10,578 | ) | ||||||
Income
tax (benefit) provision
|
(1,416 | ) | 14 | (72 | ) | |||||||
Income
(loss) from continuing operations
|
37 | (1,559 | ) | (10,506 | ) | |||||||
Discontinued
operations:
|
||||||||||||
Income
(loss) from discontinued operations, net of income taxes
|
- | 212 | (5,960 | ) | ||||||||
(Loss)
gain on sale of subsidiaries
|
(41 | ) | (538 | ) | 9,159 | |||||||
(41 | ) | (326 | ) | 3,199 | ||||||||
Net
loss
|
$ | (4 | ) | $ | (1,885 | ) | $ | (7,307 | ) | |||
Basic
and diluted (loss) earnings per share:
|
||||||||||||
Continuing
operations
|
||||||||||||
Basic
|
$ | - | $ | (0.02 | ) | $ | (0.15 | ) | ||||
Diluted
|
- | (0.02 | ) | (0.15 | ) | |||||||
Discontinued
operations
|
||||||||||||
Basic
|
$ | - | $ | - | $ | 0.05 | ||||||
Diluted
|
- | - | 0.05 | |||||||||
Net
(loss)
|
||||||||||||
Basic
|
$ | - | $ | (0.03 | ) | $ | (0.11 | ) | ||||
Diluted
|
- | (0.03 | ) | (0.11 | ) | |||||||
Weighted
average number of shares:
|
||||||||||||
Basic
|
68,692,176 | 68,657,975 | 68,476,194 | |||||||||
Diluted
|
69,392,243 | 68,657,975 | 68,476,194 |
See
accompanying notes to consolidated financial statements.
43
Consolidated
Statements of Stockholders’ Equity
(In
thousands, except share data)
Accumulated
|
Treasury Stock
|
|||||||||||||||||||||||||||||||
Common Stock
|
Additional
|
Other
Com-
|
Number
|
|||||||||||||||||||||||||||||
Number
Of
Shares
|
Amount
|
Paid-in
Capital
|
prehensive
Income
(Loss)
|
Accumulated
Deficit
|
of
Shares
|
Amount
|
Total
|
|||||||||||||||||||||||||
Balance,
December 31, 2006
|
67,933,274 | $ | 2,717 | $ | 143,332 | $ | 1,553 | $ | (99,562 | ) | (9,395 | ) | $ | (71 | ) | $ | 47,969 | |||||||||||||||
Net
loss
|
(7,307 | ) | (7,307 | ) | ||||||||||||||||||||||||||||
Foreign
currency translation
|
(187 | ) | (187 | ) | ||||||||||||||||||||||||||||
Exercise
of stock options
|
584,200 | 24 | 1,381 | 1,405 | ||||||||||||||||||||||||||||
Issuance
of stock awards
|
45,000 | 2 | 161 | 163 | ||||||||||||||||||||||||||||
Issuance
of shares for employee stock purchase plan
|
81,508 | 3 | 217 | 220 | ||||||||||||||||||||||||||||
Sale
of foreign subsidiary
|
(1,366 | ) | (1,366 | ) | ||||||||||||||||||||||||||||
Share-based
compensation
|
1,012 | 1,012 | ||||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
68,643,982 | 2,746 | 146,103 | - | (106,869 | ) | (9,395 | ) | (71 | ) | 41,909 | |||||||||||||||||||||
Net
loss
|
(1,885 | ) | (1,885 | ) | ||||||||||||||||||||||||||||
Issuance
of stock awards
|
40,000 | 1 | 35 | 36 | ||||||||||||||||||||||||||||
Share-based
compensation
|
708 | 708 | ||||||||||||||||||||||||||||||
Balance,
December 31, 2008
|
68,683,982 | 2,747 | 146,846 | - | (108,754 | ) | (9,395 | ) | (71 | ) | 40,768 | |||||||||||||||||||||
Net
loss
|
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||
Issuance
of stock awards
|
30,000 | 1 | 17 | 18 | ||||||||||||||||||||||||||||
Share-based
compensation
|
644 | 644 | ||||||||||||||||||||||||||||||
Balance,
December 31, 2009
|
68,713,982 | $ | 2,748 | $ | 147,507 | - | $ | (108,758 | ) | (9,395 | ) | $ | (71 | ) | $ | 41,426 |
See
accompanying notes to consolidated financial statements.
44
Consolidated
Statements of Cash Flows
(In
thousands)
Years
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (4 | ) | $ | (1,885 | ) | $ | (7,307 | ) | |||
(Loss)
income from discontinued operations, net of income taxes
|
(41 | ) | (326 | ) | 3,199 | |||||||
Income
(loss) from continuing operations
|
37 | (1,559 | ) | (10,506 | ) | |||||||
Adjustments
to reconcile income (loss) from continuing operations to net
cash
|
||||||||||||
provided
by (used in) operating activities of continuing
operations:
|
||||||||||||
Depreciation
|
6,660 | 3,799 | 3,062 | |||||||||
Amortization
|
497 | 932 | 1,163 | |||||||||
Provision
for bad debt expense
|
20 | 143 | 178 | |||||||||
Share-based
compensation expense
|
662 | 744 | 1,175 | |||||||||
Write-off
of software
|
- | 367 | 776 | |||||||||
Loss
on disposal of fixed assets
|
180 | 137 | 343 | |||||||||
Change
in assets and liabilities, net of effect
|
||||||||||||
from
dispositions of businesses:
|
||||||||||||
Accounts
receivable
|
4,885 | 974 | 292 | |||||||||
Inventories
|
115 | (317 | ) | 10 | ||||||||
Other
assets
|
(1,324 | ) | 362 | 153 | ||||||||
Income
tax receivable
|
(1,448 | ) | 487 | 2,450 | ||||||||
Accounts
payable, accrued expenses and other long-term liabilities
|
(1,615 | ) | (5,956 | ) | (5,079 | ) | ||||||
NNet
cash provided by (used in) operating activities of continuing
operations
|
8,669 | 113 | (5,983 | ) | ||||||||
Net
cash (used in) provided by operating activities of discontinued
operations
|
(300 | ) | 396 | 1,005 | ||||||||
Net
cash provided by (used in) operating activities
|
8,369 | 509 | (4,978 | ) | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(3,138 | ) | (5,587 | ) | (4,161 | ) | ||||||
NNet
cash used in investing activities of continuing operations
|
(3,138 | ) | (5,587 | ) | (4,161 | ) | ||||||
NNet
cash provided by investing activities of discontinued
operations
|
83 | 5,483 | 11,766 | |||||||||
Net
cash (used in) provided by investing activities
|
(3,055 | ) | (104 | ) | 7,605 | |||||||
Cash
flows from financing activities:
|
||||||||||||
Borrowings
under revolving credit facility
|
- | - | 11,000 | |||||||||
Payments
under revolving credit facility
|
- | - | (11,000 | ) | ||||||||
Reduction
in capital lease obligation
|
(130 | ) | (125 | ) | (110 | ) | ||||||
Debt
financing fees
|
(236 | ) | - | - | ||||||||
Proceeds
related to the exercise of stock options
|
- | - | 1,405 | |||||||||
Proceeds
from employee stock purchase plan
|
- | - | 220 | |||||||||
Net
cash (used in) provided by financing activities of continuing
operations
|
(366 | ) | (125 | ) | 1,515 | |||||||
Net
cash used in financing activities of discontinued
operations
|
- | - | - | |||||||||
Net
cash (used in) provided by financing activities
|
(366 | ) | (125 | ) | 1,515 | |||||||
Net
increase in cash and cash equivalents
|
4,948 | 280 | 4,142 | |||||||||
Cash
and cash equivalents at beginning of year
|
11,547 | 11,267 | 7,125 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 16,495 | $ | 11,547 | $ | 11,267 | ||||||
Supplemental
disclosure of non-cash investing activities:
|
||||||||||||
Fixed
assets vouchered but not paid
|
$ | 224 | $ | 627 | $ | 652 | ||||||
Note
receivable on sale of subsidiary
|
$ | - | $ | 83 | $ | 1,181 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$ | 1 | $ | 3 | $ | 162 | ||||||
Income
taxes
|
$ | 101 | $ | 16 | $ | 184 |
See
accompanying notes to consolidated financial statements
45
HOOPER
HOLMES, INC.
Notes
to Consolidated Financial Statements
(in
thousands, except share and per share data, unless otherwise noted)
Note
1 — Summary of Significant Accounting Policies
(a)
Description of the Business
Hooper Holmes, Inc. and its
subsidiaries (“Hooper Holmes” or “the Company”) provide outsourced health risk
assessment services to the life insurance and health industries. The
Company operates in one reportable operating segment and provides paramedical
and medical examinations, personal health interviews and record collection, and
laboratory testing, which help life insurance companies evaluate the risks
associated with underwriting policies. The Company also conducts
wellness screenings for wellness companies, disease management organizations and
health plans.
The
Company is one of the leading providers of outsourced risk assessment services
to the life and health insurance industry. The core activity of these services
consists of arranging for paramedical examinations on behalf of insurance
carriers, primarily in connection with such carriers’ processing and evaluation
of the risks associated with underwriting insurance policies - mainly life
insurance policies. As a provider of health risk assessment services to the
insurance industry, the Company’s business is subject to seasonality, with third
quarter sales typically dropping below the other quarters due to the decline in
activity typically experienced by the insurance industry during the summer
months.
(b)
Basis of Presentation
On June 30, 2008, the Company sold
substantially all of the assets and liabilities of its Claims Evaluation
Division (“CED”). The CED met the definition of a “component of an
entity” and therefore has been accounted for as discontinued
operations. Accordingly, the CED operating results and cash flows are
segregated and reported as discontinued operations in the accompanying
consolidated statements of operations and cash flows for all periods
presented.
On October 9, 2007, the Company
completed the sale of its U.K. subsidiary, Medicals Direct Group (“MDG”). MDG
met the definition of a “component of an entity” and therefore has been
accounted for as discontinued operations. Accordingly, the operating results and
cash flows of MDG have been segregated and are reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows for the years ended December 31, 2008 and 2007.
All corresponding footnotes reflect the
discontinued operations presentation. See Note 4 for additional information on
the sale of the CED and MDG.
We have evaluated subsequent events for
disclosure through the date of issuance of the accompanying consolidated
financial statements.
(c)
Principles of Consolidation
The consolidated financial statements
include the accounts of Hooper Holmes, Inc. and its wholly owned
subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
(d)
Liquidity
For
the year ended December 31, 2009, the Company’s net income from continuing
operations was $0.04 million. For the years ended December 31, 2008 and 2007 the
Company incurred losses from continuing operations of $1.6 million and $10.5
million, respectively. These results include losses from operations, and
restructuring and other charges. The Company has managed its
liquidity during this period through a series of cost reduction initiatives,
sales of assets and borrowings under its revolving line of credit.
46
At December 31, 2009, the Company had
approximately $16.5 million in cash and cash equivalents and no outstanding
debt. The Company’s net cash provided by (used in) operating
activities of continuing operations for the years ended December 31, 2009, 2008
and 2007 were $8.7 million, $0.1 million and $(6.0) million,
respectively.
As
discussed in Note 7, on March 9, 2009 the Company entered into a three year Loan
and Security Agreement (“Loan and Security Agreement”) with TD Bank, N.A. (“TD
Bank”), which provides the Company with a revolving line of credit limited to
the lesser of $15 million, or 85% of eligible accounts receivable, as defined.
As of December 31, 2009, the Company’s borrowing capacity under the revolving
line of credit totals $14.4 million.
The Loan
and Security Agreement contains a financial covenant, which requires the Company
to maintain a fixed charge coverage ratio (as defined in the Loan and Security
Agreement), measured on a trailing 12-month basis, of no less than 1.1 to 1.0 as
of January 31, 2010, and as of the end of each of the Company’s fiscal quarters
thereafter. The fixed charge coverage ratio allows for the exclusion
of capital expenditures in excess of one dollar from the denominator of the
calculation, provided the Company maintains pre-defined minimum cash balances at
TD Bank on average for the 90 days ended as of the measurement
date. As of December 31, 2009, the Company’s average cash balances at
TD Bank for the 90 days ended December 31, 2009 exceeded the pre-defined cash
balance requirement under the fixed charge coverage ratio, thereby allowing all
capital expenditures in excess of one dollar to be excluded from the denominator
of the fixed charge coverage ratio calculation. As of December 31,
2009, the Company’s fixed charge coverage ratio measured on a trailing 12-month
period and excluding capital expenditures in excess of one dollar was 10.3 to
1.0. If December 31, 2009 were the measurement date, the Company
would satisfy this financial covenant. However, there is no assurance
that the Company will satisfy this financial covenant in the
future.
For the
year ended December 31, 2009, the Company’s consolidated revenues totaled $182.4
million, representing a decline of approximately 8% from the prior year. In
response to the declining revenues, the Company took certain actions in 2009 to
reduce its costs including headcount reductions,
wage and hiring freezes, office closures and consolidations, and a reduction in
capital expenditures and general operating expenses. These actions
are expected to further reduce expenses in future years.
The
current challenging economic climate may lead to further reductions in
revenues. If revenues continue to decline compared to the prior year,
operating losses will continue, and the Company will be required to take
additional actions to further reduce costs, capital spending and restructure
operations. This would also reduce the Company’s cash reserves and
potentially require the Company to borrow under the Loan and Security Agreement
with TD Bank. Furthermore, there is no guarantee that the Company’s current and
future cost reduction actions will generate the cost savings necessary to offset
declining revenues and operating profits. If the Company is
unsuccessful in implementing additional cost reduction initiatives and/or if
revenues continue to decline at levels similar to or worse than that experienced
in 2009, the Company may fail to satisfy the financial covenant contained in the
Loan and Security Agreement and therefore would be prohibited from borrowing
under the Loan and Security Agreement. These and other factors would
adversely affect the Company’s liquidity and its ability to generate profits in
the future.
Based on
the Company’s anticipated level of future revenues, the cost reduction
initiatives implemented to date, along with the Company’s existing cash and cash
equivalents, the Company believes it has sufficient funds to meet its cash needs
through December 31, 2010.
(e)
Cash and Cash Equivalents
The Company considers highly liquid
investments with original maturities at the date of purchase of less than 90
days to be cash equivalents.
(f)
Accounts Receivable
Trade accounts receivable are recorded
at the invoiced amount and do not bear interest. The Company maintains
allowances for doubtful accounts for (i) estimated losses resulting from the
inability of our customers to make required payments and (ii) amounts that
customers may deduct from their remittances to the Company for billed items not
in compliance with customer specifications. Allowances for uncollectible
accounts are estimated based on the Company’s periodic review of accounts
receivable historical losses, current receivables aging and existing industry
and economic data. Account balances are charged off to the allowance after all
means of collections have been exhausted and potential for recovery is
considered remote. Customer pricing adjustments are recorded against
revenue; where as adjustments for bad debts are recorded within selling, general
and administrative expenses. Accounts receivable are net of an
allowance for doubtful accounts and pricing adjustments totaling $1.2 million
and $3.0 million as of December 31, 2009 and 2008, respectively. The
Company does not have any off-balance sheet credit exposure related to its
customers.
47
(g)
Inventories
Inventories, which consist of finished
goods and component inventory, are stated at the lower of average cost or market
using the first-in first-out (FIFO) inventory method. Included in inventories
at December 31, 2009 and 2008 are $1.7 million and $1.8 million of finished
goods and $1.1 million and $1.1 million of components,
respectively.
(h)
Property, Plant and Equipment
Property, plant and equipment are
stated at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the assets’ estimated useful lives. Leasehold
improvements are amortized over the shorter of the estimated useful life of the
improvement or the remaining lease term. The cost of maintenance and
repairs is charged to operations as incurred. Significant renewals and
betterments are capitalized.
In December 2008, the Company decided
to develop a new customer service order tracking IT system to improve the speed,
accuracy and consistency of services provided to its Portamedic and Hooper
Holmes Services customers. The new IT system is scheduled for
completion in mid-2010. As a result of the development of this new
system, in December 2008 the Company reduced the estimated useful life of its
current IT system to terminate in mid-2010. This reduction in useful
life increased depreciation expense (a non-cash charge) by $2.7 million during
the year ended December 31, 2009.
(i)
Long-Lived Assets
Long-lived assets and intangible assets
with determinable useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future
undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets and would be charged to earnings. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less the costs to sell. Intangible assets are amortized on a straight
line basis over their respective estimated useful lives.
(j)
Deferred Rent
The Company accounts for scheduled rent
increases contained in its leases on a straight-line basis over the term of the
lease.
(k)
Advertising
Costs related to space in publications
are expensed as incurred. Advertising expense was approximately $0.3 million,
$0.3 million and $0.6 million in 2009, 2008 and 2007, respectively.
(l)
Revenue Recognition
Revenue is recognized for paramedical
and medical examinations when the examination of the insurance policy applicant
is completed. Revenues generated from medical record collection, laboratory
testing, fingerstick test kits, and other services are recognized when the
related service is completed.
Sales tax collected from customers and
remitted to governmental authorities is accounted for on a net basis and
therefore is excluded from revenues in the consolidated statements of
operations.
48
(m)
Share-Based Compensation
The
Company recognizes share-based compensation cost on a straight-line basis over
the vesting period. Compensation cost is measured at the grant date based on the
fair value of the award.
(n)
Income Taxes
Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income and the reversal of deferred tax liabilities during the
period in which related temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in
making this assessment.
The Company recognizes the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon
settlement with the tax authorities. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. The
Company records interest related to unrecognized tax benefits in interest
expense and penalties in income tax expense.
(o) Earnings (loss) per Common
Share
“Basic” earnings (loss) per share
equals net income (loss) divided by the weighted average common shares
outstanding during the period. “Diluted” earnings (loss) per share
equals net income (loss) divided by the sum of the weighted average common
shares outstanding during the period plus dilutive common stock
equivalents.
The Company’s net earning (loss) and
weighted average shares outstanding used for computing diluted loss per share
for continuing operations and discontinued operations were the same as that used
for computing basic loss per share for the years ended December 31, 2008 and
2007 because the inclusion of common stock equivalents would be
antidilutive. Outstanding stock options to purchase 4,857,100,
6,209,000 and 5,694,300 shares of common stock were excluded from the
calculation of diluted earnings per share for the years ended December 31, 2009,
2008 and 2007, respectively, because their exercise prices exceeded the average
market price of the Company’s common stock for such periods and therefore were
antidilutive.
(p)
Use of Estimates
The preparation of the accompanying
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions about future events. These estimates and
the underlying assumptions affect the amounts of assets and liabilities
reported, disclosures about contingent assets and liabilities, and reported
amounts of revenues and expenses. Such estimates include the
valuation of accounts receivable, intangible assets, and deferred tax assets and
the assessment of contingencies, among others. These estimates and
assumptions are based on the Company’s best estimates and
judgment. The Company evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors, including the
current economic environment, which the Company believes to be reasonable under
the circumstances. The Company adjusts such estimates and assumptions
when facts and circumstances dictate. The downturn in the economy and
its negative impact on the life insurance industry in which the Company serves
have combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these
estimates. Changes in those estimates resulting from continuing
changes in the economic environment will be reflected in the consolidated
financial statements in future periods.
49
(q)
Concentration of Credit Risk
No one customer accounts for more than
10% of consolidated revenues.
The Company’s accounts receivable are
due primarily from insurance companies. As of December 31, 2009, the
Company had two customers that comprised approximately 9% and 7% of total
consolidated accounts receivable. At December 31, 2008, the Company
had two customers that comprised approximately 15% and 11% of total consolidated
accounts receivable.
(r)
Recently Issued Accounting Standards
Fair Value Measurements - In
September 2006, new authoritative accounting literature established a single
definition of fair value, set out a framework for measuring fair value, and
requires additional disclosures about fair-value measurement. This
accounting principle was effective January 1, 2008, except for certain
provisions which became effective January 1, 2009. The impact of the adoption of
this accounting principle was not material to the Company’s consolidated
financial statements.
Business Combinations - In
December 2007, new authoritative accounting literature significantly changed the
way companies account for business combinations and generally will require more
assets acquired and liabilities assumed to be measured at their acquisition-date
fair value. Under this accounting principle, legal fees and other
transaction-related costs are expensed as incurred and are no longer included in
goodwill as a cost of acquiring the business. This new accounting
principle also requires, among other things, acquirers to estimate the
acquisition date fair value of any contingent consideration and to recognize any
subsequent changes in the fair value of contingent consideration in
earnings. In addition, restructuring costs the acquirer expected, but
was not obligated to incur, will be recognized separately from the business
acquisition. This new accounting principle applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The adoption of this accounting principle did not impact
the Company during 2009 as the Company made no acquisitions during this
period.
Noncontrolling Interest in a
Subsidiary - In December 2007, new authoritative accounting literature
established accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. This new
accounting principle requires consolidated net income (loss) to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure on the face of
the consolidated statement of operations the amounts of consolidated net income
(loss) attributable to the parent and to the noncontrolling
interest. In addition, this accounting principle established a single
method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation and requires that a parent
recognize a gain or loss in net income (loss) when a subsidiary is
deconsolidated. This new accounting principle is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. In January 2010, additional accounting literature
was issued to clarify certain implementation issues. The adoption of
this accounting principle and, subsequent clarification, did not impact the
Company’s consolidated financial statements.
Share-Based Payment Transactions in
Computing Earnings Per Share - In June 2008, new authoritative accounting
literature addressed whether awards granted in share-based payment transactions
are participating securities prior to vesting and therefore, need to be included
in the earnings allocation in computing earnings (loss) per share using the
two-class method. Unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents are treated as a
separate class of securities in calculating earnings (loss) per
share. This accounting principle was effective beginning January 1,
2009, and did not impact the Company’s consolidated financial
statements.
Subsequent Events - In May 2009, and as amended in February 2010, new authoritative accounting literature established general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This accounting principle was effective for the Company as of June 30, 2009, and did not have a material impact on the Company’s consolidated financial statements.
50
Accounting Standards Codification -
In June 2009, new authoritative accounting literature established the
Accounting Standards Codification (the “Codification”) as the exclusive source
of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”)
recognized by the Financial Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
became nonauthoritative. The Codification was effective for the Company’s 2009
third fiscal quarter, and did not have a material impact on the Company’s
consolidated financial statements.
Multiple Element Arrangements
– In September 2009, new authoritative accounting literature became effective
requiring that revenue be allocated to each unit of accounting in many multiple
deliverable arrangements based on the relative selling price of each
deliverable. The literature also changed the level of evidence of
standalone selling price required to separate deliverables by allowing a “best
estimate” of the standalone selling price of deliverables when more objective
evidence of selling price is not available. This accounting principle
is effective for the Company as of June 15, 2010. Early adoption is
permitted. The Company does not expect the adoption of this
accounting principle to have a material impact on the Company’s consolidated
financial statements.
(s)
Reclassifications
The Company revised the prior year
balance sheet to properly record certain immaterial capital leases which were
previously recorded as operating leases and to correct the classification of its
current and long-term deferred rent liability. In addition, the
Company also revised the classification of its prior year statements of cash
flows related to these corrections as well as other reclassifications which were
individually and in the aggregate immaterial.
Note
2 —Goodwill and Intangibles
Intangible
Assets
As a result of the decline in revenues
during 2009 and 2008, principally due to the downturn in the economy and its
negative impact on the life insurance industry the Company serves, the Company
performed an impairment analysis of its intangible assets. Based on
the analysis, the Company concluded that the undiscounted cash flows expected to
be generated by its intangible assets (primarily customer relationships),
exceeded their carrying values. As a result, no impairment was
recorded on our intangible assets during 2009 and 2008.
During the third quarter of 2007, the
following events and circumstances triggered an impairment evaluation of the
Company’s amortizable intangible assets:
·
|
declining
revenues and operating profits during the second and third quarters of
2007 compared to 2006 and the expectation that this the decline would
continue into the fourth quarter;
|
·
|
2007
quarterly and year-to-date revenues and operating income were
significantly below budget and the expectation of below budget revenues
and operating income continuing for the remainder of
2007;
|
·
|
continued
contraction of the principal markets served by the CED;
and
|
·
|
reduced
revenues from three of the CED’s largest customers who had expanded their
vendor base resulting in fewer cases referred to the
CED.
|
The evaluation resulted in an
impairment of the Company’s intangible assets. Accordingly, during
the third quarter of 2007, the Company recorded an impairment charge totaling
$0.6 million in the CED. The impairment charge, consisting of a
write-off of tradenames and customer relationship intangibles, is recorded in
income (loss) from discontinued operations in the accompanying statement of
operations (see Note 4).
51
The following table presents certain
information regarding the Company’s intangible assets as of December 31, 2009
and 2008. All identifiable intangible assets are being amortized over
their estimated useful lives, as indicated below, with no residual
values.
Weighted
|
||||||||||||||||
Average
|
Gross
|
|||||||||||||||
Useful
Life
|
Carrying
|
Accumulated
|
Net
|
|||||||||||||
|
(years)
|
Amount
|
Amortization
|
Balance
|
||||||||||||
At
December 31, 2009:
|
||||||||||||||||
Non-Competition
agreements
|
4.7 | $ | 8,738 | $ | 8,738 | $ | - | |||||||||
Customer
relationships
|
9.7 | 12,502 | 11,675 | 827 | ||||||||||||
Trademarks
and tradenames
|
15.7 | 487 | 382 | 105 | ||||||||||||
$ | 21,727 | $ | 20,795 | $ | 932 | |||||||||||
At
December 31, 2008:
|
||||||||||||||||
Non-Competition
agreements
|
4.7 | $ | 8,738 | $ | 8,735 | $ | 3 | |||||||||
Customer
relationships
|
9.7 | 12,502 | 11,207 | 1,295 | ||||||||||||
Trademarks
and tradenames
|
15.7 | 487 | 356 | 131 | ||||||||||||
$ | 21,727 | $ | 20,298 | $ | 1,429 |
The aggregate intangible amortization
expense for the years ended December 31, 2009, 2008 and 2007 was approximately
$0.5 million, $0.9 million and $1.2 million, respectively. Assuming no
additional change in the gross carrying amount of intangible assets, the
estimated acquired intangible amortization expense for the fiscal years ended
December 31, 2010 to 2013 is $0.4 million, $0.3 million, $0.2 million and $0.03
million, respectively.
Goodwill
The Company considered all of the
impairment indicators previously discussed, as well as the impairment recorded
on its intangible assets and concluded that it needed to test the CED reporting
unit goodwill during the third quarter of 2007. The analysis
indicated a goodwill impairment of $5.7 million for the CED reporting unit,
which represented the Company’s entire goodwill balance. Accordingly,
the Company recorded a goodwill impairment charge during the third quarter of
2007, which is recorded in income (loss) from discontinued operations in the
accompanying statement of operations (see Note 4).
Note 3 ¾ Share-Based
Compensation
Employee Stock-Based Compensation Plan
— On May 29, 2008, the Company’s shareholders approved the Hooper Holmes, Inc.
2008 Omnibus Employee Incentive Plan (the “2008 Plan”) providing for the grant
of stock options, stock appreciation rights, non-vested stock and performance
shares. The 2008 Plan provides for the issuance of an aggregate total
of 5,000,000 shares. As of December 31, 2009, the Company is
authorized to grant share-based awards of approximately 1,380,000 shares under
the 2008 Plan.
Prior to the 2008 Plan, the Company’s
shareholders had approved stock option plans providing for the grant of options
exercisable for up to 4,000,000 shares of common stock in 1992 and 1994,
2,400,000 shares in 1997, 2,000,000 shares in 1999 and 3,000,000 shares in
2002. Upon the adoption of the 2008 Plan, no further awards were
granted under these prior stock option plans.
In general, options are granted at fair
value on the date of grant and are exercisable as follows: 25% after two years
and 25% on each of the next three anniversary dates thereafter, with contractual
lives of 10 years from the date of grant.
52
During
2009, 2008 and 2007 options granted totaled 725,000 shares, 2,665,000 shares and
1,030,000 shares, respectively. The fair value of each stock option granted
during the year is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
2009
|
2008
|
2007
|
||||||||||
Expected
life (years)
|
5.4 | 5.7 | 5.9 | |||||||||
Expected
volatility
|
85.27 | % | 59.67 | % | 46.93 | % | ||||||
Expected
dividend yield
|
- | - | - | |||||||||
Risk-free
interest rate
|
2.53 | % | 3.26 | % | 4.62 | % | ||||||
Weighted
average fair value of options granted during the year
|
$ | 0.30 | $ | 0.55 | $ | 1.39 |
The expected life of options granted is
derived from the Company’s historical experience and represents the period of
time that options granted are expected to be outstanding. Expected
volatility is based on the Company’s long-term historical
volatility. The risk-free interest rate for periods within the
contractual life of the options is based on the U.S. Treasury yield curve in
effect at the time of the grant.
The following table summarizes stock
option activity for the year ended December 31, 2009:
Weighted
|
Weighted
|
Aggregate
|
||||||||||||||
Number
of
|
Average
Exercise
|
Average
Remaining
|
Intrinsic
Value
|
|||||||||||||
Shares
|
Price
Per Share
|
Contractual
Life (Years)
|
(in
thousands)
|
|||||||||||||
Outstanding
at December 31, 2008
|
6,309,000 | $ | 3.52 | |||||||||||||
Granted
|
725,000 | 0.43 | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Cancelled
|
(855,650 | ) | 7.95 | |||||||||||||
Forfeited
|
(396,250 | ) | 2.61 | |||||||||||||
Outstanding
at December 31, 2009
|
5,782,100 | $ | 2.54 | 6.9 | $ | 645 | ||||||||||
Exercisable
at December 31, 2009
|
2,100,850 | $ | 4.91 | 4.0 | $ | 8 |
The aggregate intrinsic value disclosed
in the table above represents the difference between the Company’s closing stock
price on the last trading day of 2009 (December 31, 2009) and the
exercise price, multiplied by the number of in-the-money stock options for each
category.
No stock options were exercised during
the years ended December 31, 2009 and 2008. The total intrinsic value
of stock options exercised during the year ended December 31, 2007 was $1.0
million. Cash
received from stock options exercised during the year ended December 31, 2007
totaled $1.4 million, and no tax benefits were realized from these exercised
stock options.
Options for the purchase of 309,375,
613,700 and 245,000 shares of common stock vested during the years ended
December 31, 2009, 2008 and 2007, respectively, and the fair value of these
options was $0.5 million, $0.8 million and $0.4 million, respectively. As of
December 31, 2009, there was approximately $1.3 million of unrecognized
compensation cost related to stock options which is expected to be recognized
over a weighted average period of 3.1 years. Shares issued resulting
from stock option exercises may be made available from authorized but unissued
common stock or from treasury shares.
During the year ended December 31,
2009, 500,000 shares of non-vested stock were granted under the 2008 Plan. The
shares vest as follows: 25% after two years and 25% on each of the
next three anniversary dates thereafter. As of December 31, 2009, no non-vested
stock was cancelled or forfeited. The fair value of the non-vested
stock awards was based on the grant date fair value and totaled $0.2
million. As of December 31,
2009, there was approximately $0.2 million of total unrecognized compensation
cost related to non-vested stock awards. The cost is expected to be
recognized over 4.6 years.
The Company’s initial accruals for
share-based compensation expense are based on the estimated number of
instruments for which the requisite service is expected to be
rendered. Therefore, the Company is required to incorporate the
probability of pre-vesting forfeitures in determining the number of vested
options and restricted stock. The forfeiture rate is based on historical
forfeiture experience. The Company monitors employee termination
patterns to estimate forfeiture rates.
53
Employee Stock Purchase Plan
— The Company’s 2004 Employee Stock Purchase Plan (“the 2004 Plan”) provides for
the granting of purchase rights for up to 2,000,000 shares of Company stock to
eligible employees of the Company. The 2004 Plan provides employees with the
opportunity to purchase shares on the date 13 months from the grant date (“the
purchase date”) at a purchase price equal to 95% of the closing price of the
Company’s common stock on the NYSE Amex Stock Exchange on the grant date. During
the period between the grant date and the purchase date, up to 10% of a
participating employee’s compensation, not to exceed $.025 million, is withheld
to fund the purchase of shares. Employees can cancel their purchases at any time
during the period without penalty. In February 2008, purchase rights for 250,000
shares were granted with an aggregate fair value of $0.1 million, based on the
Black-Scholes pricing model. The February 2008 offering concluded in
March 2009 in accordance with the 2004 Plan’s automatic termination provision
with no shares being issued. In February 2009, purchase rights for up to 850,000
shares were granted with an aggregate fair value of $0.08 million, based on the
Black-Scholes pricing model. The February 2009 offering period will
conclude in March 2010.
Other Stock Awards — On May
30, 2007, the Company’s shareholders approved the Hooper Holmes, Inc. 2007
Non-Employee Director Restricted Stock Plan (the “2007 Plan”), which provides
for the automatic grant, on an annual basis for 10 years, of shares of the
Company’s stock. The total number of shares that may be awarded under
the 2007 Plan is 600,000. As of December 31, 2009, the Company is
authorized to grant restricted stock awards of approximately 485,000 shares
under the 2007 Plan. Effective June 1, 2007, each non-employee member
of the Board other than the non-executive chair receives 5,000 shares and the
non-executive chair receives 10,000 shares of the Company’s stock with such
shares vesting immediately upon issuance. The shares awarded under
the 2007 Plan are “restricted securities” as defined in SEC Rule 144 under the
Securities Act of 1933, as amended. The Company filed a Registration
Statement on Form S-8 with respect to the 2007 Plan on April 16,
2008. The directors who receive shares under the 2007 Plan are
“affiliates” as defined in Rule 144 of the Securities Act of 1933, as amended,
and thus remain subject to the applicable provisions of Rule 144. In
addition, the terms of the awards (whether or not restricted) specify that the
shares may not be sold or transferred by the recipient until the director ceases
to serve on the Board or, if at that time the director has not served on the
Board for at least four years, on the fourth anniversary of the date the
director first became a Board member. For the years ended December
31, 2009, 2008 and 2007, shares awarded under the 2007 Plan totaled 30,000,
40,000 and 45,000, respectively. The fair value of these stock awards
was based on the grant date market value and totaled $0.02 million, $0.04
million, and $0.2 million, respectively.
The Company recorded $0.7 million, $0.7
million and $1.2 million of share-based compensation expense in selling, general
and administrative expenses for the years ended December 31, 2009, 2008 and
2007, respectively related to stock options, non-vested stock, restricted stock
awards and the 2004 Employee Stock Purchase Plan. In connection with
the resignation of its former CEO, the Company reversed previously recorded
share-based compensation expense totaling $0.1 million during the year ended
December 31, 2008. The reversal was recorded in restructuring and
other charges (See Note 5).
Note
4: Discontinued Operations
On June 30, 2008, the Company sold
substantially all of the assets and liabilities of the CED operating segment for
$5.6 million and received cash payments totaling $5.1 million and a $0.5 million
note receivable due in six equal monthly installments beginning July 31,
2008. The note receivable was fully collected by March
2009. In connection with the sale of the CED, the Company has been
released as the primary obligor for certain lease obligations acquired but
remains secondarily liable in the event the buyer defaults. The
guarantee is provided for the term of the lease, which expires in July
2015. During the year ended December 31, 2008, the Company recorded a
reserve of $0.3 million representing the fair value of the guarantee
obligation. As of December 31, 2009, the maximum potential amount of
future payments under the guarantee is $0.6 million. The Company
recognized a net gain on the sale of the CED of approximately $0.9 million for
the year ended December 31, 2008, inclusive of the above mentioned reserve of
$0.3 million, which was reported in discontinued operations.
54
The following summarizes the operating
results of the CED which are reported in income (loss) from discontinued
operations in the accompanying consolidated statements of
operations:
Years
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Revenues
|
$ | 13,079 | $ | 29,045 | ||||
Pre-tax income
(loss)
|
$ | 234 | $ | (6,169 | ) | |||
Income
tax expense (benefit)
|
$ | 22 | $ | (3 | ) | |||
Included in income (loss) from
discontinued operations in the consolidated statement of operations for the year
ended December 31, 2007 is a goodwill and intangible asset impairment charge
totaling $6.3 million relating to the CED ($0.6 million relating to trade names
and customer relationships and $5.7 million relating to goodwill).
On October 9, 2007, the Company
completed the sale of MDG, for $15.3 million and received a cash payment of
$12.8 million, net of closing adjustments of $1.2 million. In
addition, the Company incurred $1.0 million of expenses related to the
sale. Additional payments to be received included $0.5 million within
nine months of the closing and $0.7 million within 24 months of the
closing. The Company recognized a net gain on the sale of
approximately $9.2 million, inclusive of $1.4 million of MDG foreign currency
translation gains, which was reported in discontinued operations in the
accompanying consolidated statement of operations for the year ended December
31, 2007.
The following summarizes the operating
results of MDG which are reported in income (loss) from discontinued operations
in the accompanying consolidated statements of operations.
Year
Ended December 31,
|
||||
2007
|
||||
Revenues
|
$ | 29,678 | ||
Pre-tax
income
|
$ | 286 | ||
Income
tax expense
|
$ | 80 |
In connection with the sale of MDG, the
Company agreed to indemnify the purchaser for certain pre-closing tax
liabilities. In 2008, information became available to the Company
relating to certain pre-closing tax obligations of MDG. Based on this
information, the Company recorded a reserve of $1.4 million in (loss) gain on
sale of subsidiaries. In the first quarter of 2009, the Company
recorded an additional liability of $0.04 million resulting in a total liability
for these pre-closing tax matters of $1.5 million as of March 31,
2009.
On May 7, 2009, the Company reached a
settlement agreement with Medicals Direct Holding Limited (“MD”)
(successor-in-interest to the purchaser of MDG) whereby the Company and MD
agreed to fully release and discharge each other from any and all claims known
or unknown under the MDG Stock Purchase Agreement and the Tax Deed executed on
October 9, 2007. On May 8, 2009 the Company paid MD the sum of $0.3 million, and
further released MD from the additional purchase price payments due the Company,
totaling $1.2 million. The $0.3 million payment is presented within
cash used by operating activities of discontinued operations in the accompanying
consolidated statement of cash flows for the year ended December 31,
2009.
Note
5 — Restructuring and Other Charges
During the year ended December 31,
2009, the Company recorded restructuring and other charges totaling $1.2
million. The restructuring charges consisted of employee severance
costs and branch office closure costs. For the year ended December
31, 2009, employee severance totaled $0.4 million and branch office closure
costs totaled $0.4 million. These restructuring charges relate to
cost reduction actions relating to the Company’s core Portamedic and Hooper
Holmes Services service lines. Other charges consisted of legal and other costs
incurred by the Company and by the shareholder nominees related to the 2009
Board of Directors election proxy contest during the second quarter of 2009,
totaling $0.4 million.
55
Following is a summary of the 2009
restructuring:
(In
millions)
|
2009
|
Balance
at
|
||||||||||
Charges
|
Payments
|
December
31, 2009
|
||||||||||
Severance
|
$ | 0.4 | $ | (0.4 | ) | $ | - | |||||
Lease
Obligations
|
0.4 | (0.1 | ) | 0.3 | ||||||||
Total
|
$ | 0.8 | $ | (0.5 | ) | $ | 0.3 |
During the year ended December 31,
2008, the Company recorded restructuring and other charges totaling $1.6
million. The restructuring charges consisted primarily of severance
related to the resignation of the former CEO ($0.4 million), branch office
closure costs ($0.2 million) and employee severance costs ($0.1 million),
recorded primarily as a result of further reorganization in the Company’s
Portamedic service line. Other charges consisted of an early
termination fee related to an agreement with the outside consultant utilized in
the Company’s 2006 strategic review and totaled $0.9 million which was paid in
the first quarter of 2008. As of December 31, 2008, all payments
relating to these restructuring charges were paid.
During the year ended December 31,
2007, the Company recorded restructuring and other charges totaling $4.7
million. The restructuring charges consisted primarily of branch
office closure costs ($1.6 million) and employee severance costs ($1.3 million),
recorded primarily as a result of a reorganization in the Company’s Portamedic
service line. As of December 31, 2008, all payments relating to
employee severance were paid. Other charges consisted of the write off of
business application software ($0.8 million) and legal settlements with an
insurance company client and a software supplier totaling ($1.0 million) which
were paid during 2008.
Following is a summary of the
remaining 2007 restructuring charges as of December 31, 2009:
(In
millions)
|
Balance
at
December
31, 2008
|
2009
Payments
|
Balance
at
December
31, 2009
|
|||||||||
Lease
Obligations
|
0.4 | (0.3 | ) | 0.1 | ||||||||
Total
|
$ | 0.4 | $ | (0.3 | ) | $ | 0.1 |
At December 31, 2009, $0.3 million of
restructuring charges are recorded in accrued expenses in the accompanying
consolidated balance sheet. Cash payments related to the above described
restructuring charges are expected to be completed within the next twelve
months, except for certain long-term branch office closure costs of $0.1
million, which are recorded in other long-term liabilities as of December 31,
2009.
Note
6 — Property, Plant and Equipment
Property and equipment, at cost,
consists of the following:
Estimated
|
||||||||||||
December
31,
|
Useful
Life
|
|||||||||||
2009
|
2008
|
In
Years
|
||||||||||
Land
and improvements
|
$ | 628 | $ | 628 | 10 – 20 | |||||||
Building
and leasehold improvements
|
7,203 | 6,868 | 10 – 45 | |||||||||
Furniture,
fixtures and equipment
|
37,908 | 37,640 | 3 – 10 | |||||||||
45,739 | 45,136 | |||||||||||
Less
accumulated depreciation and amortization
|
34,184 | 29,395 | ||||||||||
Total
|
$ | 11,555 | $ | 15,741 |
56
Note 7 — Revolving
Credit Facility
Revolving Credit
Facility
As of December 31, 2008 and for the
majority of the first quarter of 2009, the Company had a three year Revolving
Credit Facility (the “Credit Facility”) with CitiCapital Commercial Corporation
(“CitiCapital”). The Credit Facility was due to expire on October 10,
2009. On March 9, 2009, the Company entered into a three year Loan
and Security Agreement (the “Loan and Security Agreement”) with TD Bank, N.A.
(“TD Bank”) which expires on March 8, 2012. In connection with the
Company entering into the Loan and Security Agreement with TD Bank, the Company
terminated its Credit Facility with CitiCapital.
Loan and Security
Agreement
The Loan
and Security Agreement provides the Company with a revolving line of credit, the
proceeds of which are to be used for general working capital
purposes. Under the terms of the Loan and Security Agreement, TD Bank
has agreed to make revolving credit loans to the Company in an aggregate
principal amount at any one time outstanding which, when combined with the
aggregate undrawn amount of all unexpired letters of credit, does not exceed 85%
of “Eligible Receivables” (as that term is defined in the Loan and Security
Agreement), provided that in no event can the aggregate amount of the revolving
credit loans and letters of credit outstanding at any time exceed $15
million. The maximum aggregate face amount of letters of credit that
may be outstanding at any time may not exceed $1.5 million.
Borrowings of revolving credit loans
shall take the form of LIBOR rate advances with the applicable interest rate
being the greater of 1% per annum or the LIBOR rate, plus 3.5%.
In
connection with the Loan and Security Agreement, the Company paid closing fees
of $0.2 million to the lender. The Company is also obligated to pay,
on a monthly basis in arrears, an unused line fee (usage fee) equal to 1% per
annum on the difference between $15 million and the average outstanding
principal balance of cash advances under the revolving credit line plus the
average daily aggregate undrawn portion of all outstanding letters of credit for
the preceding month. In addition, the Company is required to pay an
annual loan fee of $0.1 million. During 2009, the Company incurred
unused fees of $0.1 million.
As security for the Company’s full and
timely payment and other obligations under the Loan and Security Agreement, the
Company has granted TD Bank a security interest in all existing and
after-acquired property of the Company and its subsidiary guarantors, including
its receivables (which are subject to a lockbox account arrangement), inventory
and equipment. As further security, the Company has granted TD Bank a
mortgage lien encumbering the Company’s corporate headquarters. In
addition, the obligations are secured under the terms of security agreements and
guarantees provided by all of the Company’s subsidiaries. The
aforementioned security interest and mortgage lien are referred to herein as the
“Collateral”.
TD Bank, in its sole discretion based
upon its reasonable credit judgment, may (A) establish and change reserves
required against Eligible Receivables, (B) change the advance rate against
Eligible Receivables or the fair market value of the Company’s corporate
headquarters, and (C) impose additional restrictions on the standards of
eligibility for Eligible Receivables, any of which could reduce the aggregate
amount of indebtedness that may be incurred under the Loan and Security
Agreement.
The Loan and Security Agreement
contains covenants that, among other things, restrict the Company’s ability, and
that of its subsidiaries, to:
·
|
pay
any dividends or distributions on, or purchase, redeem or retire any
shares of any class of its capital stock or other equity
interests;
|
·
|
incur
additional indebtedness;
|
·
|
sell
or otherwise dispose of any of its assets, other than in the ordinary
course of business;
|
·
|
create
liens on its assets;
|
57
·
|
enter
into any sale and leaseback transactions;
and
|
·
|
enter
into transactions with any of its affiliates on other than an arm’s-length
or no less favorable basis.
|
The Loan
and Security Agreement contains a financial covenant, which requires the Company
to maintain a fixed charge coverage ratio (as defined in the Loan and Security
Agreement), measured on a trailing 12-month basis, of no less than 1.1 to 1.0 as
of January 31, 2010, and as of the end of each of the Company’s fiscal quarters
thereafter. The fixed charge coverage ratio allows for the exclusion
of capital expenditures in excess of one dollar from the denominator of the
calculation, provided the Company maintains pre-defined minimum cash balances at
TD Bank on average for the 90 days ended as of the measurement
date. As of December 31, 2009, the Company’s average cash balances at
TD Bank for the 90 days ended December 31, 2009 exceeded the pre-defined cash
balance requirement under the fixed charge coverage ratio, thereby allowing all
capital expenditures in excess of one dollar to be excluded from the denominator
of the fixed charge coverage ratio calculation. As of December 31,
2009, the Company’s fixed charge coverage ratio measured on a trailing 12-month
period was 10.3 to 1.0. If December 31 were the measurement date, the
Company would satisfy this financial covenant. However, there is no
assurance that the Company will satisfy this financial covenant in the
future.
On April
22, 2009, the Company obtained from TD Bank and issued a letter of credit under
the Loan and Security Agreement in the amount of $0.5 million to the landlord of
the Company’s Heritage Labs facility as security for performance of the
Company’s obligations under the lease. The letter of credit will
automatically extend for additional periods of one year, unless notice is given
to terminate the letter of credit 60 days prior to its expiration
date. In no event shall the letter of credit be renewed beyond
December 31, 2011. Also, in December 2009, the Company opened a $0.1
million TD VISA credit card account to be used by Hooper Holmes Services medical
records retrieval service line. The letter of credit and the credit card reduced
the Company’s borrowing capacity under its revolving line of
credit. As of December 31, 2009, the Company’s borrowing capacity
under the revolving line of credit totals $14.4 million.
The failure of the Company or any
subsidiary guarantor to comply with any of the covenants or the breach of any of
its or their representations and warranties, contained in the Loan and Security
Agreement, constitutes an event of default under the agreement. In
addition, the Loan and Security Agreement provides that “Events of Default”
include the occurrence or failure of any event or condition that, in TD Bank’s
sole judgment, could have a material adverse effect (i) on the business,
operations, assets, management, liabilities or condition of the Company, (ii) in
the value of or the perfection or priority of TD Bank’s lien upon the
Collateral, or (iii) in the ability of the Company and its subsidiary guarantors
to perform under the Loan and Security Agreement.
The revolving credit loans are payable
in full, together with all accrued and unpaid interest, on the earlier of March
8, 2012 or the date of termination of the loan commitments, termination being
one of the actions TD Bank may take upon the occurrence of an event of
default. The Company may prepay any revolving credit loan, in whole
or in part without penalty. The Company may also terminate the Loan
and Security Agreement, provided that on the date of such termination all of its
obligations are paid in full. The Company will be required to pay an
early termination fee equal to $0.3 million if the termination occurs prior to
the first anniversary of the date of the parties’ execution of the Loan and
Security Agreement, $0.2 million if termination occurs after the first
anniversary but prior to the second anniversary, and $0.1 million if termination
occurs after the second anniversary, but prior to the Loan and Security
Agreement expiration date.
Note
8 —Commitments and Contingencies
The Company leases branch field offices
under a number of operating leases which expire in various years through 2018.
These leases generally contain renewal options and require the Company to pay
all executory costs (such as property taxes, maintenance and insurance). The
Company also leases telephone, computer and other miscellaneous equipment. These
leases expire in various years through 2014. The Company is also obligated under
capital leases covering certain equipment that expire at various dates through
2014. At December 31, 2009 and 2008, the net amount of equipment
recorded under capital leases was $0.3 million and $0.4 million,
respectively.
58
Following is a schedule of future
minimum lease payments for operating leases (with initial or remaining terms in
excess of one year) and future minimum capital lease payments as of December 31,
2009:
Year
ending December 31,
|
Operating
Leases
|
Capital
Leases
|
||||||
2010
|
$ | 4,850 | $ | 146 | ||||
2011
|
3,704 | 135 | ||||||
2012
|
3,209 | 18 | ||||||
2013
|
2,357 | 12 | ||||||
2014
|
1,523 | - | ||||||
Thereafter
|
4,971 | - | ||||||
Total
minimum lease payments
|
$ | 20,614 | $ | 311 | ||||
Less
amount representing interest (4.2%)
|
15 | |||||||
Present
value of minimum capital lease payments
|
296 | |||||||
Less
current installments of obligations
under
capital leases
|
136 | |||||||
Obligations
under capital leases,
excluding
current installments
|
$ | 160 |
Rental expense under operating leases
totaled $5.7 million, $7.5 million and $9.8 million in 2009, 2008 and 2007,
respectively.
Included in accrued expenses at
December 31, 2009 and 2008 is a liability for reimbursement of examiners travel
costs of approximately $0.6 million and $1.9 million,
respectively. Also included in accrued expenses at December 31, 2009
and 2008 is a reserve for unclaimed property totaling $2.9 million and $3.0
million, respectively.
The Company has employment retention or
change in control agreements with the executive officers of the Company for one
or two year periods from the date a change in control occurs as further defined
in the agreements.
In the third quarter of 2007, the
Company became aware that it did not file with the SEC a registration statement
on Form S-8 to register the shares of its common stock issuable under either the
Hooper Holmes, Inc. 2002 Stock Option Plan (the "2002 Stock Option Plan") or the
Hooper Holmes, Inc. Stock Purchase Plan (2004) (the "2004 Employee Stock
Purchase Plan") at the time such plans were approved by the Company’s
shareholders in May 2002 and May 2003, respectively. To address this
oversight, in 2007 the Company filed with the SEC a registration statement on
Form S-8 (the "Registration Statement") covering shares that remain issuable
under these plans.
The terms of the 2002 Stock Option Plan
provide that a total of 3,000,000 shares of common stock may be issued in
connection with grants under the plan. To date, options exercisable
for an aggregate of 2,197,900 shares have been granted under the plan and are
currently outstanding. The options granted under the 2002 Stock
Option Plan were granted to employees of the Company, primarily members of the
Company’s senior management. Option exercises occurred in May 2007
(45,000 shares purchased at an exercise price of $3.46 per share) and between
June 2003 and January 2004 (3,200 shares purchased at an exercise price of $6.18
per share). The Company believes that the acquisition of the shares
upon exercise of these options was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the “Securities Act”).
The terms of the 2004 Employee Stock
Purchase Plan provide that a total of 2,000,000 shares of common stock may be
issued under the 2004 Employee Stock Purchase Plan. To date,
participants in the 2004 Employee Stock Purchase Plan have purchased an
aggregate of 81,508 shares under the 2004 Employee Stock Purchase Plan at a per
share purchase price of $2.70. The aggregate purchase price of these
shares was approximately $0.2 million. Such shares were issued in
March 2007.
59
The issuances of shares upon exercise
of purchase rights granted under the 2004 Employee Stock Purchase Plan, which
occurred prior to the filing of the Registration Statement, may not have been
exempt from registration under the Securities Act and applicable state
securities laws and regulations. As a result, the Company may have
potential liability to those employees (and, in some cases, now former
employees) to whom the Company issued its shares upon the exercise of purchase
rights granted under the plan. The Company may also have potential
liability with respect to shares issued under the 2002 Stock Option Plan if the
acquisition of shares under the plan is not exempt from registration under
Section 4(2) of the Securities Act. However, based on the number of
shares at issue and taking into consideration the current price of the Company’s
common stock, as reported on the NYSE Amex Stock Exchange, the Company believes
that its current potential liability for rescission claims is not material to
its consolidated financial condition, results of operations or cash
flows.
On July 11, 2003, the Company received
a determination from the Internal Revenue Service that one individual the
Company contracted with as an independent contractor, should have been
classified as an employee in 2002. This ruling also applies to any other
individuals engaged by the Company under similar circumstances. The ruling
stated that the Company may not be subject to adverse consequences as the
Company may be entitled to relief under applicable tax laws (Section 530 of the
Revenue Act of 1978). Management believes that the Company qualifies for relief
under Section 530. To date, the Company has not received any further
communication from the Internal Revenue Service.
In the past, some state agencies have
claimed that the Company improperly classified its examiners as independent
contractors for purposes of state unemployment and/or worker’s compensation tax
laws and that the Company was therefore liable for taxes in arrears, or for
penalties for failure to comply with their interpretation of the
laws. There are no assurances that the Company will not be subject to
similar claims in other states in the future.
By letter dated November 19, 2009, the
Company was informed by a life insurance company client of its belief that a
number of reports prepared by the Company in connection with telephone
interviews with insurance applicants contained inaccuracies that affected the
rating or issuance of insurance policies written by the client. The
client claims that it has sustained losses as a result of this incident, and is
seeking reimbursement from the Company. The Company has notified its
insurance carrier of the claim and is currently in discussions with the client
and with the Company’s insurance carrier about a potential resolution. In 2009,
the Company recorded a reserve and a corresponding insurance receivable in
connection with this claim.
Note
9 — Litigation
On February 28, 2008, a physician, John
McGee, M.D., filed suit in the United States District Court for the Eastern
District of New York in which he alleged, among other things, that an insurance
company and numerous other named and unnamed defendants including Hooper
Evaluations, Inc. (which was part of the CED the Company sold in June 2008),
violated various laws, including the Racketeer Influenced Corrupt Organization
Act (“RICO”), in connection with the arranging of independent medical
examinations. The substance of the claim appears to be that the
plaintiff physician was denied compensation for medical services allegedly
rendered to persons claiming to have been injured in automobile accidents, after
independent medical examinations arranged by the defendant insurance company
indicated no basis for those services. It is not yet possible to
estimate the size of the alleged claim against the defendants as a whole, or the
CED in particular. The Company believes the plaintiff’s claims are
without merit and intends to defend itself vigorously in this
matter. The Company, along with the other defendants, have
moved to dismiss the case, and these motions are pending. The motions are based
on grounds similar to those asserted in the motion to dismiss filed in the
Sundahl matter, described below. On July 31, 2009, plaintiffs filed an amended
complaint which modifies the claims for relief, primarily against a defendant
insurance company. On February 11, 2010, based on the fact that the amended
complaint appears to allege claims only against the insurance company, the court
dismissed the case as against all other defendants including Hooper Evaluations,
Inc., without prejudice to plaintiffs seeking to further amend the
complaint. The Company has retained liability for this litigation
following the sale of substantially all of the assets of the CED.
60
On April 3, 2008, Gregory Sundahl and
Jesse Sundahl, individually and on behalf of all others similarly situated,
filed suit in the United States District Court for the Eastern District of New
York in which they alleged, among other things, that an insurance company and
numerous other named and unnamed defendants including Hooper Evaluations, Inc.
(which was part of the CED the Company sold in June 2008), violated various
laws, including RICO, in connection with the arranging of independent medical
examinations. This suit was filed by the same lawyer that filed the
McGee case described above, and contains similar allegations, but on behalf of
the patients who were allegedly injured in automobile accidents whose medical
services were not paid for based on the results of independent medical
examinations. It is not yet possible to estimate the size of the
alleged claim against the defendants as a whole, or CED in
particular. The Company believes the plaintiff’s claims are without
merit and intends to defend itself vigorously in this matter. The
Company, along with the other defendants, moved to dismiss the case, and this
motion was granted on March 31, 2009. The alleged claims under
federal law have been dismissed with prejudice; the alleged claims under state
law were dismissed without prejudice to plaintiffs re-filing them in state
court. On April 22, 2009, plaintiffs moved for reconsideration of the
dismissal order; the Company’s opposition to that motion was filed May 4,
2009. Plaintiffs also filed, on May 8, 2009, a notice of appeal
from the dismissal order. The Company has retained liability for this
litigation following the sale of substantially all of the assets of the
CED.
On July 22, 2009, an individual named
Nicolo Genovese filed suit in the Supreme Court of the State of New York, County
of Suffolk in which he alleged, among other things, that an insurance company
and numerous other corporate and individual defendants, including Hooper
Evaluations, Inc. (which was part of the CED the Company sold in June 2008) and
Hooper Holmes, Inc. violated various state laws in connection with the arranging
of independent medical exams. With respect to Hooper Evaluations,
Inc. and certain other named defendants who were part of the CED, the Company
has retained liability for this litigation following the sale of substantially
all of the assets of the CED. It is not yet possible to estimate the
size of the alleged claim against the defendants as a whole, or the Company or
the former CED entities in particular. On October 26, 2009, a motion
to dismiss the complaint was filed on behalf of the Company and the former CED
entities. The Company believes the plaintiff’s claims are without
merit and intends to defend itself vigorously in this matter. The
Company has also initiated steps to invoke insurance coverage that may apply to
some or all of the potential liability and/or costs of suit.
The Company is a party to a number of
other legal actions arising in the ordinary course of its business. In the
opinion of management, the Company has substantial legal defenses and/or
insurance coverage with respect to all of its pending legal actions.
Accordingly, none of these actions is expected to have a material adverse effect
on the Company’s liquidity, its consolidated results of operations or its
consolidated financial position.
Note
10 — Income Taxes
The components of the income tax
(benefit) provision are as follows:
2009
|
2008
|
2007
|
||||||||||
Federal:
|
||||||||||||
Current
|
$ | (1,461 | ) | $ | - | $ | - | |||||
Deferred
|
- | - | - | |||||||||
State
and local:
|
||||||||||||
Current
|
45 | 14 | (72 | ) | ||||||||
Deferred
|
- | - | - | |||||||||
$ | (1,416 | ) | $ | 14 | $ | (72 | ) |
The following reconciles the
“statutory” federal income tax rate to the effective income tax
rate:
2009
|
2008
|
2007
|
|
Computed
“expected” income tax benefit
|
(35%)
|
(35%)
|
(35%)
|
(Increase)
reduction in income tax benefit resulting from:
|
|||
State
tax, net of federal benefit
|
2
|
1
|
-
|
Non
deductible portion of impairment charge
|
-
|
-
|
4
|
Change
in federal valuation allowance
|
(70)
|
41
|
30
|
Other
|
-
|
(6)
|
-
|
Effective
income tax rate
|
(103)%
|
1%
|
(1)%
|
61
The tax
effects of temporary differences that give rise to the deferred tax assets and
liabilities at December 31, 2009 and 2008 are as follows:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Receivable
allowance
|
$ | 481 | $ | 1,184 | ||||
Goodwill
|
12,994 | 15,208 | ||||||
Intangible
assets
|
2,304 | 2,601 | ||||||
Capital
loss
|
2,016 | 4,412 | ||||||
Compensation
expense
|
1,124 | 832 | ||||||
Federal
net operating loss carryforward
|
28,084 | 25,664 | ||||||
State
net operating loss carryforward
|
3,381 | 2,873 | ||||||
Legal
settlement
|
58 | 78 | ||||||
AMT
credit carry forward
|
157 | 157 | ||||||
Accrued
expenses
|
286 | 815 | ||||||
Deferred
rent
|
213 | 123 | ||||||
Other
|
145 | 158 | ||||||
Gross
deferred tax assets
|
$ | 51,243 | $ | 54,105 | ||||
Valuation
allowance
|
(50,935 | ) | (53,182 | ) | ||||
$ | 308 | $ | 923 | |||||
Deferred
tax liabilities:
|
||||||||
Accumulated
depreciation
|
(308 | ) | (893 | ) | ||||
Acquisition
basis adjustment, primarily intangibles
|
- | (30 | ) | |||||
Gross
deferred tax liabilities
|
(308 | ) | (923 | ) | ||||
Net
deferred tax assets
|
$ | - | $ | - |
The Company has significant deferred
tax assets attributable to tax deductible intangibles, capital loss
carryforwards, and federal and state net operating loss carryforwards, which may
reduce taxable income in future periods. Based on the continued
decline in revenues, the cumulative tax and operating losses, the lack of taxes
in the carryback period, and the uncertainty surrounding the extent or timing of
future taxable income, the Company does not believe it will realize the tax
benefits of its deferred tax assets. Accordingly, the Company
continues to record a full valuation allowance on its net deferred tax assets of
$50.9 million and $53.2 million as of December 31, 2009 and 2008,
respectively. The net decrease in the valuation allowance of
approximately $2.3 million was primarily attributable to the expiration of a
capital loss, the utilization of prior year net operating losses, offset
by the current year net operating loss.
Prior to the passage of the “Worker,
Homeownership and Business Assistance Act of 2009” (the 2009 Act), signed into
law in the fourth quarter of 2009, corporations were allowed to carryback net
operating losses two years and forward 20 years to offset taxable
income. Under the 2009 Act, corporations can elect to carryback net
operating losses incurred in either 2008 or 2009 to a profitable fifth year
preceding the loss year. The net operating loss carried back is
limited to 50% of the available taxable income for that year. The
Company was able to carryback approximately $4.3 million of federal net
operating losses incurred in 2008 to tax year 2003 and in the fourth quarter of
2009, the Company filed an amended tax return to recover approximately $1.5
million of federal income tax previously paid. In February 2010, the
Company received $1.5 million of cash related to the carryback claim, which
included $0.02 million of interest.
The federal tax benefit recorded in the
year ended December 31, 2009 reflects the utilization of fully reserved net
operating losses that were carried back to 2003 under the 2009 Act referred to
above, offset by certain state tax liabilities. The income tax
expense recorded in the year ended December 31, 2008 reflects certain state tax
liabilities. The tax benefit recorded in the year ended December 31,
2007 reflects a state tax benefit.
As of December 31, 2009 and 2008, no
amounts were recorded for uncertain tax positions or for the payment of interest
or penalties.
62
In July 2008, the Company received
notification from the Internal Revenue Service (the “IRS”) that it had completed
its audits of the Company’s tax returns for the years 2001 through 2006 with no
adjustments. State income tax returns for the year 2005 and forward
are subject to examination.
As of December 31, 2009, the Company
has U.S. federal and state net operating loss carryforwards of approximately
$80.2 million and $99.9 million, respectively. The net
operating loss carryforwards, if unutilized, will expire in the years 2011
through 2029.
Note
11 — Capital Stock
Stock Repurchase Program — On
May 30, 2000, the Board of Directors adopted a resolution authorizing 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 $25.0 million per
year. On April 27, 2005 the Board of Directors amended its earlier resolution
limiting the repurchases to between 1.0 and 1.5 million shares of the Company’s
common stock in any calendar year. The Company is prohibited from
purchasing, redeeming or retiring any of its shares under its Loan and Security
Agreement. The Company did not purchase any shares during 2009 and
2008.
Rights Agreement — On
May 23, 2000, the Company’s Board of Directors declared a dividend of one right
(a “Right”) for each share of the Company’s common stock held of record on June
16, 2000 (the “Record Date”). The Board also authorized the issuance
of one Right for each share of common stock issued after the Record Date and
before the earliest to occur of the following:
|
(1)
|
June
15, 2010;
|
|
(2)
|
the
Board taking action to redeem the
Rights;
|
|
(3)
|
the
tenth day after any Person (as defined in the Rights Agreement, described
below) becomes the beneficial owner of 20% or more of the outstanding
shares of the Company’s common stock, other than as a result of a
Permitted Offer (as defined in the Rights Agreement);
or
|
|
(4)
|
the
tenth day after any Person commences a tender or exchange offer to acquire
(when added to any shares such Person is the beneficial owner of
immediately prior to the tender or exchange offer) 30% or more of the
outstanding shares of the Company’s common stock, other than a Permitted
Offer.
|
The
Company entered into a Rights Agreement, dated as of June 16, 2000, with First
City Transfer Company, as Rights Agent, to memorialize the terms of the
Rights. The Company did not enter into the Rights Agreement in
response to any known effort to acquire control of the
Company. Rather, the Rights Agreement was adopted in an effort
to ensure that all of the Company’s shareholders are treated fairly if an
attempt is made to take over the Company without paying all shareholders a full
and fair price for all of their shares of common stock. The following
description is a summary of the Rights Agreement.
The
Rights; How Evidenced; Transferability
Under the
Rights Agreement, the Rights are initially evidenced by shareholders’ stock
certificates. Subject to adjustment in connection with the Company’s
declaration or payment of a stock dividend, a stock split, reverse stock split,
or the issuance of shares of common stock (or other capital stock) in a
reclassification, merger or consolidation, one Right attaches to each share of
common stock and is transferable only together with the associated
share.
After the
occurrence of either of the events described in (3) and (4) above, each Right
will be transferable independent of the associated share of common
stock. At that time, each Right will entitle the holder of the Right
to purchase one share of common stock at an exercise price of $110 per share,
such exercise price being subject to adjustment, at any time prior to the
earlier to occur of the events described in (1) and (2) above, defined in the
Rights Agreement as the “Expiration Time.”
63
Flip-Over
Transaction or Event
If, prior
to the Expiration Time, the Company enters into, consummates or permits to occur
a Flip-over Transaction or Event, the Company, in general, must – for the
benefit of the holders of the Rights – enter into a supplemental agreement with
the Person engaging in the Flip-over Transaction or Event (the “Flip-over
Entity”). A “Flip-over Transaction or Event” is defined
as:
|
(A)
|
a
transaction in which the Company, directly or indirectly, consolidates
with, or merges with or into, any Person, or any Person consolidates with,
or merges with or into, the Company, and, in either case, all or part of
the outstanding shares of the Company’s common stock are changed in any
way or such shares are converted into or exchanged for stock, other
securities, cash or other property;
or
|
|
(B)
|
a
transaction (or series of transactions) in which the Company, directly or
indirectly, sells or otherwise transfers to any person Company assets
either (i) aggregating more than 50% of the Company’s total assets
(measured by their book value or fair market value), or (ii) generating
more than 50% of the Company’s operating income or cash
flow.
|
The
supplemental agreement is to provide that, upon consummation of the Flip-over
Transaction or Event, the holder of each Right is entitled to purchase from the
Flip-over Entity the number of shares of the Flip-over Entity’s common stock
having an aggregate market price equal to two times the Right’s
exercise price. The holder of the Right can effect such purchase by
exercising the Right and paying the then-applicable exercise price.
The
Company is not required to enter into a supplemental agreement in connection
with a Flip-over Transaction or Event if:
·
|
the
transaction or event is completed with a Person who acquires shares of the
Company’s common stock in a Permitted
Offer;
|
·
|
the
price per share of the Company’s common stock offered in the transaction
is not less than the price per share paid to shareholders whose shares
were purchased in the Permitted Offer;
and
|
·
|
the
form of consideration being offered to the Company’s remaining
shareholders in the transaction is the same form of consideration paid in
connection with the Permitted
Offer.
|
A
“Permitted Offer” is defined as a tender or exchange offer for all outstanding
shares of the Company’s common stock at a price and on terms that at least a
majority of the Board members (exclusive of any member who is a Company officer,
an acquiring Person, or an affiliate, associate, nominee or representative of
the acquiring Person) determine to be adequate and otherwise in the best
interests of the Company and its shareholders.
The
Rights Agreement prohibits the Company from entering into or consummating, or
permitting to occur, a Flip-over Transaction or Event if, at the time of such
transaction or event, the Company has any rights, warrants or other securities
outstanding, or any other arrangements, agreements or instruments, which would
eliminate or diminish in any respect the benefits intended to be afforded by the
Rights Agreement to the holders of Rights upon consummation of any such
transaction or event.
Flip-in
Event
If, prior
to the Expiration Time, any Person becomes the beneficial owner of 20% or more
of the outstanding shares of the Company’s common stock through other than a
Permitted Offer or a Flip-over Transaction or Event (defined as a “Flip-in
Event”), the Company is obligated to take the necessary action to ensure that
each Right constitutes the right to purchase from the Company a number of shares
of the Company’s common stock having an aggregate market price on the date of
the Flip-in Event equal to two
times the exercise price of the Right. The holder of the Right
can effect such purchase by exercising the Right and paying the then-applicable
exercise price. However, any Rights that are or were beneficially
owned by the acquiring Person, or any direct or indirect transferee of that
Person (to the extent the Board determines that the transfer is part of a plan
to avoid the consequences of a Flip-in Event), on or after the date the Person
becomes the beneficial owner of 20% of more the outstanding shares of the
Company’s common stock, will be void. The holder(s) of such Rights
will have no right to exercise or transfer such Rights under these
circumstances.
64
Redemption
of the Rights
The Board may, at its option, at any
time prior to the tenth day after any Person becomes the beneficial owner of 20%
or more of the outstanding shares of the Company’s common stock through other
than a Permitted Offer, elect to redeem all the then outstanding Rights at a
redemption price of $.01 per Right. In such case, the right to
exercise the Rights will terminate and each Right will thereafter represent only
the right to receive the redemption price. The Company may, at its option, pay
the redemption price in cash, shares of common stock (based on the market price
of such shares at the time of redemption) or any other form of consideration
deemed appropriate by the Board.
The Rights Agreement will expire on
June 15, 2010. In addition, the Rights may be redeemed for $0.01 per Right on or
prior to the tenth day after any person or group acquires 20% or more of the
Company’s common stock, thus clearing the way for an acquisition which the Board
believes to be in the best interests of the Company and its shareholders. The
Board has determined to allow the Rights Agreement to expire by its terms on
June 15, 2010 and does not presently anticipate adopting a successor
plan.
Note
12 — 401(k) Savings and Retirement Plan
The Company’s 401(k) Savings and
Retirement Plan (the “401(k) Plan”) is available to all employees with at least
one year of employment service with greater than 1,000 hours of service and at
least 21 years of age. Before suspending the Company match of 401(k)
contributions effective March 19, 2009, the Company matched 25% of the first 10%
of employee salary contributions. The Company’s charge to expense for 2009, 2008
and 2007 was $0.1 million, $0.4 million and $0.4 million, respectively. The
Company’s common stock is not an investment option to employees participating in
the 401(k) Plan.
Note
13 — Service Line Revenues
The Company’s business consists of one
operating segment for financial reporting purposes. The following represents
revenues by service line for the years ended December 31, 2009, 2008 and
2007:
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Portamedic
|
$ | 134,373 | $ | 140,720 | $ | 148,035 | ||||||
Heritage
Labs
|
14,955 | 15,738 | 17,445 | |||||||||
Health
& Wellness
|
10,961 | 7,587 | 5,007 | |||||||||
Hooper
Holmes Services
|
24,698 | 37,075 | 41,526 | |||||||||
Subtotal
|
184,987 | 201,120 | 212,013 | |||||||||
Intercompany
eliminations (a)
|
(2,586 | ) | (2,887 | ) | (3,381 | ) | ||||||
Total
|
$ | 182,401 | $ | 198,233 | $ | 208,632 | ||||||
(a)
Represents intercompany sales from Heritage Labs to
Portamedic
|
65
|
Quarterly
Financial Data (Unaudited)
|
|
(dollars
in thousands, except per share
data)
|
2009
Quarters
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Revenues
|
$ | 47,435 | $ | 46,212 | $ | 43,790 | $ | 44,964 | ||||||||
Gross
profit
|
$ | 12,396 | $ | 12,920 | $ | 11,518 | $ | 12,237 | ||||||||
(Loss)
income from continuing operations
|
$ | (1,750 | ) | $ | (501 | ) | $ | (719 | ) | $ | 3,007 | |||||
Loss
from discontinued operations
|
$ | (41 | ) | $ | - | $ | - | $ | - | |||||||
Net
(loss) income
|
$ | (1,791 | ) | $ | (501 | ) | $ | (719 | ) | $ | 3,007 | |||||
Basic
earnings per share(a)
|
||||||||||||||||
(Loss)
income from continuing operations
|
$ | (0.03 | ) | $ | (0.01 | ) | $ | ( 0.01 | ) | $ | 0.04 | |||||
Income
(loss) from discontinued operations
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Net
(loss) income per share
|
$ | (0.03 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.04 | |||||
Diluted
earnings per share(a)
|
||||||||||||||||
(Loss)
income from continuing operations
|
$ | (0.03 | ) | $ | (0.01 | ) | $ | ( 0.01 | ) | $ | 0.04 | |||||
Income
(loss) from discontinued operations
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Net
(loss) income per share
|
$ | (0.03 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.04 | |||||
2008
Quarters
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Revenues
|
$ | 52,379 | $ | 51,217 | $ | 47,197 | $ | 47,440 | ||||||||
Gross
profit
|
$ | 14,237 | $ | 12,987 | $ | 11,227 | $ | 11,497 | ||||||||
(Loss)
income from continuing operations
|
$ | (685 | ) | $ | (259 | ) | $ | (2,047 | ) | $ | 1,432 | |||||
Income
(loss) from discontinued operations
|
$ | 87 | $ | 405 | $ | (635 | ) | $ | (183 | ) | ||||||
Net
(loss) income
|
$ | (598 | ) | $ | 146 | $ | (2,682 | ) | $ | 1,249 | ||||||
Basic
earnings per share(a)
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.01 | ) | $ | - | $ | (0.03 | ) | $ | 0.02 | ||||||
Income
(loss) from discontinued operations
|
$ | - | $ | 0.01 | $ | (0.01 | ) | $ | - | |||||||
Net
(loss) income per share
|
$ | (0.01 | ) | $ | - | $ | (0.04 | ) | $ | 0.02 | ||||||
Diluted
earnings per share(a)
|
||||||||||||||||
Loss
from continuing operations
|
$ | (0.01 | ) | $ | - | $ | (0.03 | ) | $ | 0.02 | ||||||
Income
(loss) from discontinued operations
|
$ | - | $ | 0.01 | $ | (0.01 | ) | $ | - | |||||||
Net
(loss) income per share
|
$ | (0.01 | ) | $ | - | $ | (0.04 | ) | $ | 0.02 |
(a) Due
to rounding, the sum of the quarters may not equal the full year.
66
ITEM
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None
ITEM
9A
|
Controls
and Procedures
|
(a)
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer
and Chief Financial Officer, with the assistance of our disclosure committee,
have conducted an evaluation of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December
31, 2009. The Company’s disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and
communicated to the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, to allow for timely decisions
regarding required disclosures. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and
procedures have been designed to meet reasonable assurance
standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2009, and during the entire period covered by this
report.
(b)
Management’s Report on Internal Control over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is
a process designed under the supervision of the Company’s principal
executive officer and principal financial officer, and carried out by the
Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of the Company’s financial
reporting and the preparation of the Company’s consolidated financial statements
for external reporting purposes in accordance with U.S. generally accepted
accounting principles. The Company’s internal control over financial
reporting includes policies and procedures that:
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets of the
Company;
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of
management and directors of the Company;
and
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the consolidated financial
statements.
|
Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
67
As of
December 31, 2009, management has assessed the effectiveness of the Company’s
internal control over financial reporting based on the framework established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this
assessment, management concluded that as of` December 31, 2009 our internal
controls over financial reporting were effective.
(c)
Changes in Internal Control over Financial Reporting
There have been no changes in the
Company’s internal control over financial reporting during the quarter ended
December 31, 2009 and subsequent to the Evaluation Date that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
(d)
Remediation of Material Weaknesses in Internal Control Over Financial
Reporting
None
ITEM
9B
|
Other
Information
|
None.
Part
III
ITEM
10
|
Directors
and Executive Officers of the
Registrant
|
The information required by Item 10
will be included in our proxy statement for the 2010 annual meeting of
shareholders, and is hereby incorporated in this annual report on Form 10-K by
reference to the proxy statement.
ITEM
11
|
Executive
Compensation
|
The information required by Item 11
will be included in our proxy statement for the 2010 annual meeting of
shareholders, and is hereby incorporated in this annual report on Form 10-K by
reference to the proxy statement.
ITEM
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The information required by Item 12
will be included in our proxy statement for the 2010 annual meeting of
shareholders, and is hereby incorporated in this annual report on Form 10-K by
reference to the proxy statement.
ITEM
13
|
Certain
Relationships and Related
Transactions
|
The information required by Item 13
will be included in our proxy statement for the 2010 annual meeting of
shareholders, and is hereby incorporated in this annual report on Form 10-K by
reference to the proxy statement.
ITEM
14
|
Principal
Accountant Fees and Services
|
The information required by Item 14
will be included in our proxy statement for the 2010 annual meeting of
shareholders, and is hereby incorporated in this annual report on Form 10-K by
reference to the proxy statement.
68
ITEM
15
|
Exhibits
and Financial Statement Schedules
|
(a) (1) The
following financial statements and independent auditors’ report are included in
theRegistrant’s 2009 Annual
Report to Shareholders.
Report of Independent Registered Public
Accounting Firm
Consolidated Balance Sheets
—
|
December
31, 2009 and 2008
|
Consolidated Statements of Operations
—
Years ended December 31, 2009, 2008 and
2007
Consolidated Statements of
Stockholders’ Equity —
Years ended December 31, 2009, 2008 and
2007
Consolidated Statements of Cash Flows
—
Years ended December 31, 2009, 2008 and
2007
Notes to Consolidated Financial
Statements
(2) The
following financial statement schedule is included in the report:
Schedule II – Valuation and Qualifying
Accounts
Schedules other than those listed above
are omitted because they are not required, inapplicable,
or the information is otherwise shown
in the financial statements or notes thereto.
(3) Exhibits
included herein
(b) EXHIBIT
3.1
|
Restated
Certificate of Incorporation of Hooper Holmes, Inc., as amended
(1)
|
3.2
|
Certificate
of Amendment of the Certificate of Incorporation of Hooper Holmes, Inc.
(2)
|
3.3
|
Bylaws
of Hooper Holmes, Inc., as amended (3)
|
4.1
|
Rights
Agreement between Hooper Holmes, Inc. and First City Transfer Company
(4)
|
4.2
|
Amendment
to Rights Agreement (5)
|
10.1
|
Employment
Agreement by and between Hooper Holmes, Inc., and James D. Calver
(6)
|
10.2
|
Form
of Indemnification Agreement (7)
|
10.3
|
Employee
Retention Agreement by and between Hooper Holmes, Inc. and James D. Calver
(8)
|
10.4
|
Hooper
Holmes, Inc. 1994 Stock Option Plan (9)
|
10.5
|
Employee
Retention Agreement by and between Hooper Holmes, Inc. and Michael Shea
(10)
|
10.6
|
1997
Stock Option Plan (11)
|
10.7
|
1997
Director Option Plan (12)
|
10.8
|
Employment
Agreement by and between Hooper Holmes, Inc. and Roy H.
Bubbs
|
10.9
|
Executive
Change-in-Control Agreement by and between Hooper Holmes, Inc. and Roy H.
Bubbs
|
10.10
|
Employment
Agreement by and between Hooper Holmes, Inc. and Michael
Shea
|
10.11
|
Form
of Employee Retention Agreement by and between Hooper Holmes, Inc. and
Executive Officers of Hooper Holmes, Inc. (13)
|
10.12
|
1999
Stock Option Plan (14)
|
10.13
|
2002
Stock Option Plan (15)
|
10.14
|
Stock
Purchase Plan (2004) of Hooper Holmes, Inc. (16)
|
10.15
|
2007
Non-Employee Director Restricted Stock Plan (17)
|
10.16
|
2008
Omnibus Employee Incentive Plan (18)
|
10.17
|
Loan
and Security Agreement between Hooper Holmes, Inc. and CitiCapital
Commercial Corporation (19)
|
10.18
|
Loan
and Security Agreement between Hooper Holmes, Inc. and TD Bank, N.A. dated
March 9, 2009 (20)
|
10.19
|
Agreement
between Hooper Holmes, Inc. and EHS Partners, LLC, signed by Hooper Holmes
on June 8, 2006 (21)
|
10.20
|
Amendment
to agreement between Hooper Holmes, Inc. and EHS Partners, LLC, dated
March 1, 2007 (22)
|
10.21
|
Final
settlement of agreement between the Company and EHS Partners, LLC, dated
March 14, 2008 (23)
|
14
|
Hooper
Holmes, Inc. Code of Conduct (24)
|
21
|
Subsidiaries
of Hooper Holmes, Inc
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
24
|
Power
of attorney
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act, as amended
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act, as amended
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
|
69
|
(1)
|
Incorporated
by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
1992.
|
|
(2)
|
Incorporated
by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
1999.
|
|
(3)
|
Incorporated
by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
dated January 18, 2008
|
|
(4)
|
Incorporated
by reference to Exhibit 4.1 of the Company’s Report on Form 10-K for the
fiscal year ended December 31,
2000.
|
|
(5)
|
Incorporated
by reference to Exhibit 4.2 of the Company’s Report on Form 10-K for the
fiscal year ended December 31,
2002.
|
|
(6)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
dated January 13, 2006.
|
(7) Incorporated
by reference to Exhibit 10.4 of the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31,
1990.
|
(8)
|
Incorporated
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K
dated January 13, 2006.
|
(9) Incorporated
by reference to Exhibit 10.16 of the Company’s Annual Report on Form
10-K
|
for
the fiscal year ended December 31,
1994.
|
|
(10)
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated May 23, 2006.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
1997.
|
|
(12)
(13)
|
Incorporated
by reference to Exhibit 10.11 of Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
Incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
|
|
(14)
|
Incorporated
by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
1999.
|
(15) Incorporated
by reference to Attachment to the Company’s Proxy Statement for the
Annual
Meeting of Shareholders held on May 21,
2002.
|
(16)
|
Incorporated
by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
2003.
|
|
(17)
|
Incorporated
by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K
dated March 17, 2008.
|
|
(18)
|
Incorporated
by reference to Annex A to the Company’s Proxy Statement for the Annual
Meeting of Shareholders held on May 29,
2008.
|
|
(19)
|
Incorporated
by reference to Exhibit 1.01 of the Company’s Current Report on Form 8-K
dated October 13, 2006.
|
|
(20)
|
Incorporated
by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K
dated March 13, 2009.
|
|
(21)
|
Incorporated
by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K
dated March 17, 2008.
|
|
(22)
|
Incorporated
by reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K
dated March 17, 2008.
|
|
(23)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated March 17,
2008.
|
|
(24)
|
Incorporated
by reference to the Exhibit 14 of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31,
2003.
|
70
Schedule
II
Hooper
Holmes, Inc
Valuation
and Qualifying Accounts
For
the Three Years Ended December 31, 2009
(In
thousands)
Balance
at Beginning of
Period
|
Additions
Charged to Revenues and Expenses
(1)
|
Deductions (2)
|
Balance
at
End
of
Period
|
|||||||||||||
Description
|
||||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||
Reserves and
allowances
Accounts receivable
allowance
|
$ | 3,036 | $ | 3,724 | $ | (5,523 | ) | $ | 1,237 | |||||||
Year
ended December 31, 2008
|
||||||||||||||||
Reserves and
allowances
Accounts receivable
allowance
|
$ | 3,750 | $ | 4,975 | $ | (5,689 | ) | $ | 3,036 | |||||||
Year
ended December 31, 2007
|
||||||||||||||||
Reserves and
allowances
Accounts receivable
allowance
|
$ | 2,412 | $ | 7,906 | $ | (6,568 | ) | $ | 3,750 | |||||||
(1) Includes
$3.7 million, $4.8 million and 7.8 million in 2009, 2008 and 2007, respectively,
charged as a reduction to revenues.
(2) Represents
accounts receivable write-offs, net of recoveries and reserve reductions
credited to revenue.
|
.
|
71
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HOOPER
HOLMES, INC.
(Registrant)
By: /s/
Roy H. Bubbs
Roy H. Bubbs
Chief Executive Officer
Date: March
12, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
__
__________________________/s/ Roy H.
Bubbs______
Date: March
12, 2010
Roy H.
Bubbs Chief
Executive Officer;
Director
________________________________________________ Date: March
12, 2010
* Ronald
Apprahamian Director
________________________________________________ Date: March
12, 2010
*
Benjamin A.
Currier Director
________________________________________________ Date: March
12, 2010
* Larry
Ferguson Director
________________________________________________ Date: March
12, 2010
* John W.
Remshard Director
________________________________________________ Date: March
12, 2010
* Elaine
Rigolosi Director
________________________________________________ Date: March
12, 2010
* Kenneth
R.
Rossano
Director
____________________________/s/ Michael J.
Shea_____
Date: March
12, 2010
Michael J.
Shea Senior
V.P. and Chief
Financial and Accounting
Officer
*Roy H.
Bubbs, by signing his name hereto, does hereby sign this report for the persons
before whose printed name an asterisk appears, pursuant to the power of attorney
duly executed by such person and filed as Exhibit 24 hereto with the Securities
and Exchange Commission.
72
Directors
Benjamin
A. Currier
Retired.
Formerly Senior Vice President, Security Life of Denver Ins. Co. —
ING/Barings
Mr.
Currier, age 76, served as Interim Chief Executive Officer of the Company from
August 2005 until January 2006 and as Lead Director from September 2004 until
August 2005. He was Senior Vice President of Operations for Security
Life of Denver Insurance Company, a subsidiary of ING/Barings, in Denver,
Colorado prior to his retirement in 1997. He has been a director of the Company
since 1996, and he is Chair of the Governance and Nominating Committee, and a
member of the Strategic Alternative Committee. (Term expires at the Annual
Meeting in 2011.)
Dr.
Elaine L. Rigolosi
Professor
of Education Department of Organization and Leadership, Teachers College,
Columbia University
Dr.
Rigolosi, Ed.D, J.D., age 65, is Professor of Education in the Department of
Organization and Leadership at Teachers College, Columbia University. She has
been associated with Columbia University since 1976, and has maintained a
private consulting practice in management for health care organizations since
1974. Dr. Rigolosi has been a director of the Company since 1989, and she is the
Chair of the Compensation Committee and a member of the Governance and
Nominating Committee. (Term expires at the Annual Meeting in 2011.)
Kenneth
R. Rossano
Private
Investor.
Mr.
Rossano, age 75, is a private investor and consultant to Korn Ferry
International in Boston, MA. He has been a director of the Company since 1967,
and is a member of the Audit Committee and the Compensation Committee. Mr.
Rossano is also a director of Active International, Inc. (Term expires at the
Annual Meeting in 2010.)
John
W. Remshard
Retired,
Former Senior Vice President and Chief Financial Officer,
Wellchoice
Mr.
Remshard, age 63, was Senior Vice President and Chief Financial Officer of
Wellchoice until his retirement in February 2006. Mr. Remshard became
a director of the Company on July 27, 2006 and is the Chair of the Audit
Committee and a member of the Governance and Nominating Committee. (Term expires
at the Annual Meeting in 2011.)
Roy
H. Bubbs
Mr.
Bubbs, age 60, has been in the financial services industry for 38
years. As President of Mony Partners he created the brokerage
division for the Mony Group, leading strategy, infrastructure, operations and
business plan implementation. His experience in expanding
distribution channels, instituting new technology platforms and developing new
product portfolios enabled Mony to generate significant growth. Prior
to joining Mony, Mr. Bubbs was Senior Vice President for Manulife, US, where his
responsibilities included developing and implementing a multiple distribution
channel strategy to reinvigorate insurance sales and eliminate distribution
expense losses. For the first 24 years of his career, Mr. Bubbs was
with Cigna, where he served as an agent, agency manager and senior
executive. As Senior Vice President, he was responsible for half of
Cigna’s career agency sales force. He also ran the distribution and
field service unit for Cigna’s Pension Division and built the Annuity
Division. (Term expires at the Annual Meeting in 2010.)
73
Directors
Ronald
V. Aprahamian
Private
Investor
Mr.
Aprahamian, age 63, was elected a director of the Company at the 2009 annual
meeting. He has a long record of involvement in business development
activities as an investor, a board member, a chief executive officer, and a
consultant for companies engaged in healthcare, technology, banking and other
industries. Most recently, he has served on the boards of Sunrise
Senior Living, Inc., Superior Consultant Holdings Corp. and First Consulting
Group, Inc. Mr. Aprahamian chairs the Strategic Alternatives
Committee and is a member of the Governance and Nominating
Committee. (Term expires at the Annual Meeting in 2012.)
Larry
Ferguson
Chief
Executive Officer – The Ferguson Group; Formerly Chief Executive
Officer – First Consulting Group, Inc.
Mr.
Ferguson, age 60, was elected a director of the Company at the 2009 annual
meeting, and was named Chair of the Board in July 2009. He has served
as CEO of several publicly traded and privately held companies, including First
Consulting Group, Inc. from 2006-2008. He has served on more than
twelve corporate boards, including positions as board chair and committee
chair. He currently serves as CEO
of the Ferguson Group, a private equity consulting and investment firm focused
on healthcare and life sciences IT companies. He also serves on the
board of Accelrys, Inc., a publicly traded company, and on the boards of two
private companies He
has also held executive positions with American Express and First Data
Corporation. In addition to serving as Chair of the Board, Mr.
Ferguson is a member of the Compensation Committee and the Audit
Committee. (Term expires at the Annual Meeting in 2012.)
Officers
Roy H.
Bubbs
Chief
Executive Officer and President
Michael
J. Shea
Senior
Vice President and Chief Financial Officer, Treasurer
Burt R.
Wolder
Senior
Vice President and Chief Marketing Officer
Mark C.
Rosenblum
Senior
Vice President, General Counsel and Secretary
Joseph A.
Marone
Vice
President and Controller
Richard
Whitbeck
Senior
Vice President, President of Portamedic
Christopher
J. Behling
Senior
Vice President, President of Health & Wellness
74