Financial Highlights
Years ended December 31,
-----------------------------------------------------
(dollars in thousands except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Revenues $237,068 $ 185,210 $ 165,353
Operating income 36,535 25,592 16,344
Income from continuing operations 20,793 14,185 8,770
Loss from discontinued operations -- (1,485) --
Net income 20,793 12,700 8,770
Earnings per share -- basic
Continuing operations .72 .50 .32
Discontinued operations -- (.05) --
Net income .72 .45 .32
Earnings per share -- diluted
Continuing operations .68 .48) .31
Discontinued operations -- (.05) --
Net income .68 $ .43 $ .31
Cash dividend per share .05 $ .04 $ .03
Weighted average number of shares -- basic 28,780,282 28,120,685 27,536,668
Weighted average number of shares -- diluted 30,766,779 29,859,710 28,564,132
- ----------------------------------------------------------------------------------------------------------------------
Per share and share amounts have been adjusted to reflect a two for one stock
split effective January 8, 1999.
Revenues Operating Income Earnings Per Share
Dollars in Millions Dollars in Millions (From continuing operations)
Dollars
[GRAPH] [GRAPH] [GRAPH]
1999 Annual Report 1
"Our long-standing reputation and financial "strength create opportunities for
us that "we believe are unequaled in our industry."
To Our Shareholders:
Hooper Holmes reaffirmed its position in 1999 as the Leader in
Technology-Delivered Health Information to the life insurance industry. Our
progress was substantial and across the board. We generated strong financial
results, including record revenues, operating earnings and operating margins. We
completed a major acquisition that has expanded our geographical reach and
strengthened our sales and marketing base. In addition, our efforts to target
alternative distribution channels continued to be rewarded: By the fourth
quarter of 1999, non-traditional channels represented 19% of total revenues, up
dramatically from 14% in the year ago period.
Our financial and operating results demonstrate this Company's continued ability
to leverage its branch network and technology infrastructure. At Hooper Holmes,
we take great pride in delivering results that spur further growth and maximize
value for shareholders. We have also been gratified by the market's recognition
of the Company's achievements. Hooper Holmes' market capitalization at the end
of the year was nearly twice the value at the beginning -- a claim we are
pleased to make for the second year in a row.
Strong Financial Performance
The year 1999 marked the beginning of Hooper Holmes' second century as a
business. We completed our first year in our new century even stronger than we
finished the last. Revenue increased 28 percent to $237.1 million from $185.2
million in 1998. Operating income grew 43 percent to $36.5 million from $25.6
million a year ago. Operating margins for the year expanded a full 160 basis
points to 15.4% from 13.8% in 1998.
Net income from continuing operations rose 47 percent to $20.8 million from
$14.2 million in 1998. Earnings increased 42 percent to $0.68 per diluted share,
based on 30,766,779 diluted shares outstanding, from $0.48 per diluted share,
based on 29,859,710 diluted shares outstanding, excluding a 1998 after-tax
charge associated with a prior divestiture.
These strong financial results reflect an increase in overall unit volume,
a growing number of tests and services being performed per exam and
contributions from the acquisitions of Heritage Labs, which was completed in
December 1998, and Paramedical Services of America (PSA), which closed on
November 1, 1999.
Extending Our Reach
Atlanta-based PSA, which we acquired from Pediatric Services of America,
expanded our capabilities to provide outsourced health information for the life
and health insurance industries on a nationwide basis. With this acquisition,
Hooper Holmes not only increased its customer base, but also its ability to
serve the companies' customers through increased automation, improved
responsiveness and more complete geographic coverage. In addition, we broadened
our marketing and new customer opportunities and created significant operating
synergies.
2 Hooper Holmes, Inc.
[PHOTO]
James M. McNamee
Chairman, President and
Chief Executive Officer
To begin to realize the full benefits from this acquisition, Hooper Holmes
moved swiftly to integrate PSA. By the end of 1999, we had assessed the
administrative overlap of the PSA and Hooper Holmes offices and fully integrated
34 of PSA's more than 100 branches. The remaining PSA offices were merged into
existing Hooper Holmes locations. The entire process was completed by the end of
January 2000.
The Year Ahead
As we begin a new year, there are a number of trends in the life insurance
industry that we believe will benefit Hooper Holmes. First, there is a growing
trend among providers and marketers of life insurance, as well as traditional
insurance companies, to market their products through the Internet, direct mail
and the mass media. These alternative distribution channels (ADCs) have been
contributing progressively larger amounts to our revenues. Second, we believe
that insurance companies are gradually reducing the number of approved health
information service providers to include only those companies with a national
network that can meet insurers' technology, timing and quality needs. As the
leader in technology-delivered health information, Hooper Holmes is incomparably
well positioned to benefit from this. Third, as a result of the increasing size
of the average insurance policy and the rising age of the average applicant, we
believe that life insurers are requiring more examinations and other additional
information services to assess the risks of their insurance applicants.
We have strategically positioned ourselves to capitalize on all of these
industry trends. Our Company is using the most advanced automation technology to
provide the most comprehensive array of health information services to the life
insurance industry. We are also focused on increasing our efforts to expand
business with ADCs; leveraging our national network; continuing to pursue
strategic acquisitions; and expanding into related lines of business. Our
long-standing reputation and financial strength create opportunities for us that
we believe are unequaled in our industry.
Hooper Holmes pursues these strategies with a strong balance sheet.
Total stockholders' equity was up 44 percent to $89.7 million in 1999 from $62.3
million for 1998. In addition, our successful secondary offering of common
stock, which was completed in February 2000, has enabled us to repay
approximately $50 million of the $65 million in debt we incurred in connection
with the acquisition of PSA. In short, we continue to have the resources and
flexibility that have been the hallmarks of this Company.
Hooper Holmes has been able to achieve these outstanding results because of
the hard work and dedication of its employees, the business we receive from our
growing base of customers, and the support and confidence of our investors and
the financial community. We thank you all for your contributions to our success
and look forward to sharing more good news with you throughout 2000.
/s/ James M. McNamee
James M. McNamee
Chairman, President and Chief Executive Officer
1999 Annual Report 3
By using the most innovative technologies, Hooper Holmes is able to maintain a
strong competitive edge and offer its customers the most efficient and
convenient service in the industry.
[PHOTO]
Income from continuing operations rose
47% to $20.8 million in 1999 up from $14.2 million in 1998.
4 Hooper Holmes, Inc.
Technology Fueling Growth
"Our enthusiastic acceptance and pioneering "use of technology is a vital
component of "our growth and financial success."
Hooper Holmes has long been a leader in the health information services
business. Our leadership is reflected not only in terms of market share, but
also in how we have embraced technology. Our enthusiastic acceptance and
pioneering use of technology is a vital com-ponent of our growth and financial
success and has resulted in Hooper Holmes having the most automated branch
network and operating system in the industry. As a result, Hooper Holmes is
uniquely positioned to realize the benefits from the growth of the Internet and
the proliferation of alternative distribution channels (ADCs).
One of the technologies that has enabled us to significantly improve the
speed and efficiency of our service and the transparency of our exam results is
the Internet. In 1999, Hooper Holmes expanded its Portamedic website,
portamedic.com, to allow insurance companies to place orders and schedule
medical exams by Portamedic professionals for underwriting policies, monitor
order status and communicate client information quickly and securely. Our
website enhances our ability to serve both our existing agent-based business and
alternative distribution networks for life and health insurance. Moreover, it
enables us to further leverage our technology infrastructure and branch network
without compromising our high level of service. The success of our website is
illustrated by the dramatic increase in its use. Electronic ordering rose to 40%
of all orders in 1999.
Net Income
(from continuing operations)
Dollars in Millions
[GRAPH]
Transforming an Industry
The Internet is truly transforming the insurance industry -- not only in terms
of automation but also in terms of marketing. It has created an environment
in which insurers and brokers can efficiently and effectively reach consumers
directly. By making it easier for consumers to shop for and compare policies,
the Internet has revitalized policy sales in the insurance industry in a way
that is very beneficial to Hooper Holmes. We believe that as the success of
these marketing methods continues to unfold, the industry will become more
reliant on outsourcing for required services.
Hooper Holmes, while not an e-business per se, is in the enviable position
of having an infrastructure, production capabilities and network that are
ideally suited for ADCs, including the Internet. In fact, we are the leader in
the new ADC market. It is instructive to compare our operating model and
position with those of many emerging e-business companies. Those
business-to-business (B2B) and business-to-consumer (B2C) companies have been
able to establish a web presence -- but must make substantial investments to
attract customers, forge relationships with industry leaders and build an
infrastructure to deliver their products and services.
1999 Annual Report 5
With a network of 8,700 examiners and 230 branch offices, Portamedic is able to
schedule a medical exam within 24 hours anywhere in the country.
[PHOTO]
117%
Total assets rose 117% to $184.5 million
in 1999 up from $85.0 million in 1998.
6 Hooper Holmes, Inc.
Operations Review
"The Internet has revitalized policy sales in "the insurance industry in a way
that is very "beneficial to Hooper Holmes."
Hooper Holmes, in contrast, already possesses an established national
network that is second to none. And we already enjoy strong relationships
with all of the top 50 life and health insurance companies in the U.S. Indeed,
even before the Internet revolution, our Company had the infrastructure in place
to cost-effectively schedule and conduct exams nationwide. Alternative
distribution channels (ADC), including the Internet, has just made it easier and
less expensive to do so. For 1999 ADC-generated insurance applications accounted
for almost 19% of our total revenues, compared with 14% for 1998.
Leveraging the Network
Another way in which we utilize technology to help our customers gather health
information is by leveraging our infrastructure to provide ancillary services
for policies that are too small to warrant an in-person visit and for very large
policies in which the underwriter has requested additional information. Hooper
Holmes' Infolink system enables us to electronically send clients their
applicants' employment information, physical and medical histories and attending
physician statements. Our Teledex system supplies the above information, plus
highlights of a phone interview with the applicant.
One of the goals of our acquisition strategy is to broaden our core
business by achieving new technological niches that will enable us to expand our
service offerings both within the industry and in related areas, such as
monitoring clinical trials for drug companies. This will give us the opportunity
to win new customers, generate more revenue per customer and further improve our
margins.
One example of how we are executing this strategy is our recent acquisition
of the exclusive rights to a suite of software known as "TEAM 96" and "TEAM" for
our Portamedic division. This reliable, tested case-management and billing
software product will be used by our current contract affiliates, many of whom
have already used it in the past. In addition, the proprietary software can be
used to attract new affiliates to Portamedic.
Hooper Holmes sees a bounty of opportunities in its future to further
leverage its established technologies and expand into related areas by acquiring
new technologies. Our mission to offer our customers the most useful and
innovative services has always been and will continue to be the best way for us
to continue to provide our shareholders with optimal growth.
Growth By Acquisition
Hooper Holmes has been able to expand its service offerings, technology and
client base by acquiring companies that complement its core business. Our most
recent addition, Paramedical Services of America (PSA), acquired
during the fourth quarter of 1999, has enabled us to provide more complete
1999 Annual Report 7
Strategic acquisitions have enabled Hooper Holmes to offer complimentary
services, such as laboratory testing. It also allows us to attract more new
customers, build more significant relationships with our existing customers and
enhance our margin growth.
[PHOTO]
42%
Earnings per share rose 42% to $.68
in 1999 up from $.48 in 1998.
8 Hooper Holmes, Inc.
Operations Review
"Hooper Holmes will continue to pursue "acquisitions that fit our strategic
profile "in terms of leveraging our invested capital, "strong customer
relationships and "operations infrastructure."
geographic coverage to better serve our existing customers, and has enhanced our
overall sales and marketing base to reach prospective new customers. Following
the consolidation of this acquisition, Hooper Holmes added 34 branch offices and
about 3,000 production examiners throughout the U.S., giving us a total of over
230 offices and more than 8,700 examiners. By rapidly completing the assessment
and integration of PSA's offices, we are maximizing the immediate benefits of
the acquisition. This was a very important strategic move and is a shining
example of our ongoing efforts to enhance our competitive edge.
Heritage Labs, in which we acquired a majority share in 1998, generated
$6.4 million in revenue for 1999, which was right in line with our expectations.
We expect to nearly double Heritage's revenues this year by increasing the
number of units it processes electronically through Portamedic and by
introducing Portamedic Select, a new product that will bundle Heritage's blood-,
urine- and saliva-testing services under one umbrella. Portamedic Select is
designed to enable Hooper Holmes to benefit from an operating standpoint and
allow our customers to benefit from a pricing standpoint.
Hooper Holmes will continue to pursue acquisitions that fit our strategic
profile in terms of leveraging our invested capital, strong customer
relationships and operations infrastructure. We remain committed to a
disciplined approach to acquisitions that emphasizes both strategic and
financial benefits.
Working Capital
Dollars in Millions
[GRAPH]
Favorable Industry Trends
Consolidation of the insurance industry continued in 1999, and Hooper Holmes is
continuing to reap the benefits. Although there are now fewer companies in the
industry, they are larger. And bigger insurers tend to prefer working with a
limited number of vendors to meet their health information needs. Because of our
national network and sophisticated technology, we are their best choice.
As the Baby-Boomer generation ages, our prime demographic group is
continuing to increase. This ongoing trend results in a greater number of people
in their late 30s to late 50s - the most common age for insurance purchasers.
Moreover, the age of the applicants, combined with the types of policies they
are choosing, is continuing to result in the purchase of more expensive
policies. With the age or dollar threshold that triggers a paramedical exam
trending downward, along with the increase in the popularity of outsourcing,
Hooper Holmes is being presented with more service opportunities than ever
before in many areas.
1999 Annual Report 9
The employees at Hooper Holmes keep our Company strong and keep our growth
strategy securely on track.
[PHOTO]
44%
Stockholders' Equity rose 44% to
$89.7 million in 1999 up from
$62.3 million in 1998.
10 Hooper Holmes, Inc.
Operations Review
"Insurers, large and small, are looking to "work with a single vendor. Because
of "our national network and sophisticated "technology, we are their best
choice."
Employees that Care About Delivering Quality
A company is only as good as its people and, for Hooper Holmes, that's a very
positive thing. Our people are dedicated, hard working and committed to
delivering the very best service possible. They take great pride in their work,
and we take great pride in them. Our experienced field managers have been
especially effective at building and maintaining solid relationships with our
clients, which enables our Company to continue to expand its strong position in
the industry.
To keep our people motivated and reward them for their efforts on behalf
of Hooper Holmes, we provide a generous incentive plan for all eligible
employees throughout the organization. It is our way of recognizing their
invaluable contribution to our success.
Ready for the Future
To build on its many successes and achievements, Hooper Holmes remains focused
on executing a growth strategy that has served this Company and its shareholders
well. The key elements are:
. Continuing our commitment to industry leadership through automation.
In 1999, we received 40% of all orders electronically. We intend to continue to
invest in technology to further enhance our services and provide greater access
over the Internet.
. Increasing our focus on alternate distribution channels. We are committed to
aggressively pursuing sales to companies using these channels.
. Leveraging our national branch network. The combination of our extensive
branch network and technology infrastructure positions us to continue to
increase business volumes with marginal increases in branch operating expenses.
. Continuing to pursue strategic acquisitions. Our acquisitions of PSA and
Heritage Labs represent the kind of complementary acquisitions we will continue
to explore.
. Expanding into related lines of business. There are a number of business lines
that could potentially leverage our branch network, services capabilities or
customer base. We continue to look at services for the long-term care insurance
market and workers' compensation case management. We will continue to explore
opportunities that make strategic sense.
1999 Annual Report 11
Stockholder's Equity
Dollars in Millions
[GRAPH]
Nationwide Network
With an extensive network of more than 230 branch offices, Hooper Holmes is
always within close proximity to potential insurance applicants throughout the
United States. Our recent acquisition of PSA both increased our branch office
network and the total number of our field examiners. The Company is
headquartered in Basking Ridge, NJ.
[MAP]
Cash Flow "Hooper Holmes has Cash Flow EPS
(from continuing operations) generated increasing (from continuing operations)
Dollars in Millions free cash flows Dollars
as a result of our
[GRAPH] continued exceptional [GRAPH]
performance."
12 Hooper Holmes, Inc.
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Financial Contents
Management's Discussion and Analysis 14
- --------------------------------------------------------------------------------
Consolidated Balance Sheets 17
- --------------------------------------------------------------------------------
Consolidated Statements of Income 18
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity 19
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 20
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 21
- --------------------------------------------------------------------------------
Independent Auditors' Report 30
- --------------------------------------------------------------------------------
Selected Financial Data 31
- --------------------------------------------------------------------------------
Quarterly Common Stock Price Ranges and Dividends 32
- --------------------------------------------------------------------------------
Quarterly Financial Data 32
13
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Results of Operations
1999 Compared to 1998
Total revenues for 1999 increased 28% to $237.1 million from $185.2 million for
1998. This growth resulted from a 16% increase in the number of paramedical
examinations performed to 2,917,000 from 2,515,000, the acquisition of
Paramedical Services of America, Inc. (PSA) on November 1, 1999 (see Note 3 of
the consolidated financial statements), an increase in services performed per
examination, an increase in the number of Infolink reports to 350,000 from
303,000, and a modest price increase. The increase in Infolink reports resulted
from management reemphasizing branch generation of Infolink reports.
The Company's cost of operations in 1999 totaled $164.0 million compared to
$129.3 million for 1998. Cost of operations as a percentage of revenues totaled
69.2% for 1999 versus 69.8% for 1998. As a percentage of revenues, the decrease
is due to ongoing efforts to control branch operating expenses, despite
increased revenue growth and slightly lower direct production costs.
Selling, general and administrative (SG&A) expenses were $36.6 million for 1999
compared to $30.4 million for 1998. As a percentage of revenues, SG&A expenses
decreased to 15.4% for 1999 from 16.4% for 1998, which is due to management's
continued efforts to control corporate expenses.
Accordingly, the Company's operating income for 1999 increased to $36.5 million
versus $25.6 million for 1998, and as a percentage of revenues, increased to
15.4% for 1999 compared to 13.8% for 1998.
Other income items in 1999 were primarily interest earned on invested funds, the
average balance of which was $35.1 million in 1999 over $22.7 million for 1998,
and interest expense increased in 1999 to $.9 million, as a result of borrowings
against the Company's term loan, used to finance the acquisition of PSA.
The effective tax rate was 44% and 46% for 1999 and 1998, respectively. The
decrease is the result of increased profitability which lessened the impact of
non-tax deductible amortization of goodwill from a 1995 acquisition.
As a result of the foregoing, net income from continuing operations in 1999
totaled $20.8 million or $0.68 per diluted share compared to $14.2 million or
$.48 for 1998.
Inflation did not have a significant effect on the Company's operations in 1999.
1998 Compared to 1997
Revenues for 1998 increased 12.0% to $185.2 million from $165.4 million for
1997. This growth resulted from an 8.3% increase in the number of Portamedic
examinations performed to 2,515,000 from 2,323,000, an increase in the services
performed per examination, and a modest price increase and was offset by a 10.1%
decrease in Infolink reports to 303,000 from 337,000. The decrease in Infolink
reports resulted from a management decision to reduce the volume of the less
profitable portions of this business.
14
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Company's cost of operations in 1998 totaled $129.3 million compared to
$119.2 million for 1997. Cost of operations as a percentage of revenues
decreased from 72.1% for 1997 versus 69.8% for 1998. This decrease was due to
declining direct production costs and branch operating costs as a percentage of
revenues.
Selling, general and administrative expenses totaled $30.4 million as compared
to $29.8 million for 1998 and 1997, respectively, and as a percentage of
revenues totaled 16.4% as compared to 18.0%. As a percentage of revenues, this
reduction was the result of management's continued success in controlling
personnel and related corporate expenses.
Accordingly, our operating income improved to $25.6 million from $16.3 million,
and as a percentage of revenues, increased to 13.8% from 9.9% for 1998 and 1997,
respectively.
Other income items in 1998 were primarily interest earned on invested funds, the
average balance of which was $22.7 million for 1998 over $8.2 million for 1997.
The effective tax rates were 46% and 48% for 1998 and 1997, respectively. The
decrease was the result of increased profitability, which lessened the impact of
non-tax deductible amortization of goodwill from a 1995 acquisition.
As a result of the foregoing, net income from continuing operations in 1998
totaled $14.2 million or $.48 per diluted share, compared to $8.8 million or
$.31 for 1997.
The net loss from discontinued operations totaled $1.5 million or $.05 per
diluted share in 1998. The charge evolved from residual workers' compensation
charges and certain reimbursement issues associated with the divestiture of
Nurse's House Call in 1995. Net income for 1998 totaled $12.7 million or $.43
per diluted share, compared to $8.8 million or $.31 per diluted share for 1997.
Net income in 1998 included a $1.5 million, or $.05 per share charge from
discontinued operations, as previously noted.
As a result of the foregoing, net income in 1998 totaled $12.7 million or $0.43
per diluted share compared to $8.8 million or $0.31 per diluted share for 1997.
Inflation did not have a significant effect on the Company's operations in 1998.
Liquidity and Financial Resources
The Company's primary sources of cash are internally generated funds and the
Company's senior credit facility.
On February 29, 2000, the Company successfully completed a 3,675,000 share
offering of common stock, at an offering price of $25.125 per share and provided
net proceeds of approximately $87 million to the Company.
On October 29, 1999, the Company replaced its previous revolving loan facility
and entered into a senior credit facility with three banks that included a $65
million, six-year term loan, and a $35 million dollar, three-year revolving
loan. The loans bear interest at either the prime rate minus 1/2% to plus 1/4%
or LIBOR plus 3/4% to 1 3/4%, depending on our consolidated funded debt, as
defined, to our earnings before interest, taxes, depreciation and amortization
or "EBITDA" ratio. As of December 31, 1999, interest was payable at an effective
interest rate of 7.535% per annum. No principal payments are due on the term
loan for the first eighteen months. As of December 31, 1999, we borrowed the
entire amount of the term loan to finance a portion of the purchase price of
PSA. There are no borrowings against the revolving
15
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
loan. In conjunction with the February 29, 2000 secondary stock offering, the
Company repaid $50 million against the term loan.
For the year ended December 31, 1999, the net cash provided by operating
activities was $30.9 million as compared to $21.6 million in 1998. The
significant sources were net income of $20.8 million, $5.3 million of
depreciation and amortization, $11.1 million increase in accounts payable and
accrued expenses which were offset by an increase in accounts receivable of $6.0
million. The increase in accounts receivable was due to a 28% increase in
revenue for the year ended December 1999. Days sales outstanding "DSO" was 54.5
days at December 31, 1999, compared to 32.7 days at December 31, 1998. The
increase in DSO is driven by the increased revenue growth in the fourth quarter
1999. DSO for the 61 day period ending December 31, 1999, was 39.7 days, a more
representative level.
Our current ratio as of December 1999 was 3.0 to 1, compared to 2.7 to 1 at
December 31, 1998. Also, inflation has not had, nor is it expected to have, a
material impact on our consolidated financial results, and we currently have no
material commitments for capital expenditures. Quarterly dividends paid in 1999
were $.0125 per share.
Management believes that the combination of current cash and cash equivalents,
other working capital sources, and available borrowings under our senior credit
facility, along with anticipated cash flows from continuing operations, will
provide sufficient capital resources to satisfy both our short-term and
foreseeable long-term needs.
Safe Harbor Statement under the Private Securities Litigation Act
Except for the historical information contained herein, the matters discussed in
this annual report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices, and other factors discussed in the Company's filings with
the Securities and Exchange Commission.
Year 2000 Computer Systems Compliance
Our internal business critical systems and applications were updated for Year
2000 compliance. We did not experience any problems with our internal business
critical systems and applications nor are we aware of any continuing Year 2000
problems affecting our critical vendors or customers.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards (SFAS) No. 133. Accounting for Derivative
Instruments and Hedging Activities, which, as amended, becomes effective for our
financial statements beginning January 1, 2001. SFAS No. 133 requires a company
to recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value. The Company does not expect the adoption
of this Statement to have a material impact on its consolidated financial
statements.
16
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
December 31,
-----------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 41,363,019 $ 29,752,361
Accounts receivable 36,836,412 18,145,856
Other current assets 5,233,884 5,396,202
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 83,433,315 53,294,419
- ---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 26,465,947 22,487,225
Less: Accumulated depreciation and amortization 16,075,132 14,166,163
- ---------------------------------------------------------------------------------------------------------------------------
10,390,815 8,321,062
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill (net of accumulated amortization of
$5,483,514 in 1999 and $4,243,606 in 1998) 73,276,965 16,398,245
- ---------------------------------------------------------------------------------------------------------------------------
Intangible assets (net of accumulated amortization of
$7,658,860 in 1999 and $5,714,039 in 1998) 16,523,290 6,728,112
- ---------------------------------------------------------------------------------------------------------------------------
Other assets 846,943 274,547
- ---------------------------------------------------------------------------------------------------------------------------
$ 184,471,328 $ 85,016,385
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 142,953 $ 450,000
Accounts payable 11,543,665 6,606,518
Accrued expenses:
Insurance benefits 1,559,552 1,662,747
Salaries, wages and fees 3,209,031 2,356,582
Payroll and other taxes 357,029 204,893
Income taxes payable 5,033,946 3,315,758
Discontinued operations 293,736 2,845,007
Other 5,217,684 2,377,001
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 27,357,596 19,818,506
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 65,307,047 0
Deferred income taxes 1,911,027 2,518,487
Minority interest 203,962 385,441
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $.04 per share; authorized 240,000,000 shares,
issued 29,195,526 in 1999 and 28,379,964 in 1998 1,167,821 1,135,198
Additional paid-in capital 37,524,913 29,515,099
Retained earnings 51,971,602 32,616,294
- ---------------------------------------------------------------------------------------------------------------------------
90,664,336 63,266,591
Less: Treasury stock at cost, 104,332 shares 972,640 972,640
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 89,691,696 62,293,951
- ---------------------------------------------------------------------------------------------------------------------------
$ 184,471,328 $ 85,016,385
===========================================================================================================================
See accompanying notes to consolidated financial statements.
17
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income
Years ended December 31,
-------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $237,068,057 $185,209,776 $165,352,706
Cost of operations 163,958,380 129,261,234 119,193,062
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 73,109,677 55,948,542 46,159,644
Selling, general and administrative expenses 36,574,333 30,356,166 29,815,579
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 36,535,344 25,592,376 16,344,065
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (859,555) (3,391) (168,266)
Interest income 1,106,901 768,476 295,765
Other income, net 249,567 (88,171) 419,899
- ---------------------------------------------------------------------------------------------------------------------------
496,913 676,914 547,398
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 37,032,257 26,269,290 16,891,463
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes 16,239,000 12,084,000 8,121,000
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 20,793,257 14,185,290 8,770,463
- ---------------------------------------------------------------------------------------------------------------------------
Discontinued operations
Loss on disposal, net of taxes -- (1,485,000) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 20,793,257 $ 12,700,290 $ 8,770,463
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share -- basic:
Income from continuing operations $ .72 $ .50 $ .32
Discontinued operations-- net of taxes -- (.05) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .72 $ .45 $ .32
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share -- diluted:
Income from continuing operations $ .68 $ .48 $ .31
Discontinued operations-- net of taxes -- (.05) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .68 $ .43 $ .31
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average shares -- basic 28,780,282 28,120,685 27,536,668
Weighted average shares -- diluted 30,766,779 29,859,710 28,564,132
===========================================================================================================================
Per share calculations are adjusted to reflect a two for one stock split
effective January 8, 1999.
See accompanying notes to consolidated financial statements.
18
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1998 and 1999
- --------------------------------------------------------------------------------
Common Stock
---------------------- Additional
Number of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,791,459 $ 271,658 $24,645,945 $12,820,355 $ (18,502) $37,719,456
- ---------------------------------------------------------------------------------------------------------------------------
Net income 8,770,463 8,770,463
Cash dividends ($.026 per share) (689,775) (689,775)
Exercise of stock options 190,806 7,632 1,745,782 1,753,414
Exercised stock option tax benefit 665,569 665,569
Issuance of shares for employee
stock purchase plan 33,268 1,331 298,913 300,244
Two for one stock split effective
August 22, 1997 6,923,582 276,944 (276,944) --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 13,939,115 557,565 27,079,265 20,901,043 (18,502) 48,519,371
- ---------------------------------------------------------------------------------------------------------------------------
Net income 12,700,290 12,700,290
Cash dividends ($.036 per share) (985,039) (985,039)
Issuance of stock award 2,000 80 38,170 38,250
Exercise of stock options 208,415 8,336 1,244,633 1,252,969
Exercised stock option tax benefit 1,398,000 1,398,000
Issuance of shares for employee
stock purchase plan 40,452 1,618 322,630 324,248
Purchase of treasury stock (954,138) (954,138)
Two for one stock split effective
January 8, 1999 14,189,982 567,599 (567,599) --
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 28,379,964 1,135,198 29,515,099 32,616,294 (972,640) 62,293,951
- ---------------------------------------------------------------------------------------------------------------------------
Net income 20,793,257 20,793,257
Cash dividends ($.050 per share) (1,437,949) (1,437,949)
Issuance of stock award 5,000 200 63,850 64,050
Exercise of stock options 742,500 29,700 2,226,969 2,256,669
Exercised stock option tax benefit 5,170,000 5,170,000
Issuance of shares for employee
stock purchase plan 68,062 2,723 548,995 551,718
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 29,195,526 $1,167,821 $37,524,913 $51,971,602 $(972,640) $89,691,696
- ---------------------------------------------------------------------------------------------------------------------------
Per share amounts are adjusted to reflect a two for one stock split effective
January 8, 1999.
See accompanying notes to consolidated financial statements.
19
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years ended December 31
-------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 20,793,257 $ 12,700,290 $ 8,770,463
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss on disposal -- 1,485,000 --
Depreciation and amortization 5,317,466 4,704,540 5,022,569
Provision for bad debt expense -- 130,000 480,000
Deferred tax expense (benefit) 390,773 (2,804,000) 105,478
Issuance of stock awards 64,050 38,250 --
Loss on sale of fixed assets 46,037 67,237 61,448
Change in assets and liabilities, net of effect
from acquisitions of businesses:
Accounts receivable (5,964,107) 715,604 (869,320)
Other assets (815,693) (566,046) 2,324,305
Income tax receivable 7,408 -- --
Accounts payable and accrued expenses 11,064,431 5,138,185 685,627
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,903,622 21,609,060 16,580,570
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (82,949,063) (2,820,352) --
Capital expenditures, net of disposals (2,714,339) (1,833,818) (1,441,469)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (85,663,402) (4,654,170) (1,441,469)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term debt 65,100,000 -- --
Principal payments on long-term debt (100,000) -- (6,280,000)
Proceeds from employee stock purchase plan 551,718 324,248 300,244
Proceeds related to the exercise of stock options 2,256,669 1,252,969 1,753,414
Treasury stock acquired -- (954,138) --
Dividends paid (1,437,949) (985,039) (689,775)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in (provided by) financing activities 66,370,438 (361,960) (4,916,117)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,610,658 16,592,930 10,222,984
Cash and cash equivalents at beginning of year 29,752,361 13,159,431 2,936,447
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 41,363,019 $ 29,752,361 $13,159,431
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 70,473 $ -- $ 179,318
Income taxes $ 8,787,418 $ 9,140,543 $ 6,151,472
===========================================================================================================================
See accompanying notes to consolidated financial statements.
20
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1 --
Summary of Significant
Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Hooper Holmes,
Inc. and its majority owned subsidiaries (the "Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
Description of the Business
The Company provides health information services to the life and health
insurance industry. The Company's network of experienced medical professionals
conduct physical examinations, testing, and personal health interviews,
primarily for the life and health insurance industry. Information gathered in
these activities is used by insurance underwriters to assess risks and make
informed decisions. The Company is subject to certain risks and uncertainties as
a result of changes that could occur in the life and health insurance industry's
underwriting requirements and standards, and in the Company's customer base.
Use of Estimates
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures in
these consolidated financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of less
than ninety days to be cash equivalents.
Long-Lived Assets
Long-lived assets consist of property, plant and equipment, goodwill, and
identifiable intangibles.
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances occur that indicate that the carrying amount
of the assets may not be recoverable. Impairments are recognized when the
expected future undiscounted cash flows derived from such assets are less than
their carrying value. For such cases, losses are recognized for the difference
between the fair value and the carrying amount. The Company considers various
valuation factors, principally discounted cash flows, to assess the fair values
of long-lived assets.
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight line method over the assets estimated useful life. The cost
of maintenance and repairs is charged to income as incurred. Significant
renewals and betterments are capitalized.
Goodwill and intangible assets are being amortized using the straight line
method over lives ranging from 10-25 years and 1-15 years, respectively.
Earnings Per Common Share
Basic earnings per common share equals net income divided by weighted average
common shares outstanding during the period. "Diluted" earnings per common share
equals net income divided
21
Hooper Holmes Inc. and Subsidiaries
- --------------------------------------------------------------------------------
by the sum of weighted average common shares outstanding during the period plus
common stock equivalents.Common stock equivalents (1,986,497, 1,739,025 and
1,027,464 for 1999, 1998 and 1997, respectively) are shares assumed to be issued
if outstanding stock options were exercised. All appropriate share and per share
period amounts have also been restated for the January 8, 1999 and August 22,
1997 stock splits (see note 10, "Capital Stock").
Revenues
Revenues from services rendered are recognized when services are performed.
Income Taxes
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. 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.
Concentration of Credit Risk
The Company's accounts receivable are due primarily from insurance companies. No
one customer accounts for more than 10% of revenues.
Fair Value of Financial Instruments
For all financial instruments, except the long-term debt, at December 31, 1999
and 1998, their carrying value approximates fair value due to the short maturity
of these instruments. For long-term debt, the carrying value approximates fair
value due to the interest rate being set in November 1999.
Employee Stock Options
Employee non-qualified stock options are granted with an exercise price equal to
the market price at the date of grant, and therefore, compensation expense is
not recognized on the issuance of employee stock options.
Advertising
Costs related to space in publications are expensed the first time the
advertising occurs. Advertising expense was approximately $288,000, $149,000,
and $161,000 in 1999, 1998, and 1997, respectively.
- --------------------------------------------------------------------------------
Note 2--
Discontinued Operations
In 1995, the Company transferred substantially all of the assets and business of
its Nurse's House Call health care division (the "NHC division") to Olsten
Corporation, (the "NHC Transaction"), pursuant to an Agreement of Acquisition
between the Company and Olsten, dated May 26, 1995. The transaction closed
September 29, 1995. Pursuant to the Acquisition Agreement, Olsten transferred to
the Company all of the issued and outstanding capital stock of American Service
Bureau, Inc., which was engaged in the business of providing paramedical
examinations and related services to the life and health insurance industries
under the name ASB Meditest ("ASB Meditest"), approximately $27.3 million in
cash, and assumed certain specified liabilities of approximately $5.1 million
relating to the NHC Division.
22
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
In 1995, the Company recorded a loss in the amount of $10.3 million, net of
tax benefits of $7.6 million, on the disposal of the NHC Division. The Company
recorded a provision for certain costs related to the disposal including the
transaction loss, severance and other expenses, transaction fees, and accounts
receivable collection fees. During the fourth quarter of 1998, the Company
recorded an additional after tax charge of $1.5 million, net of a tax benefit of
$1.3 million. The charge resulted from residual worker's compensation charges
and certain reimbursement issues associated with the NHC Division.
- -------------------------------------------------------------------------------
Note 3 --
Acquisitions and
Dispositions
As of November 1, 1999, the Company purchased substantially all of the assets of
Paramedical Services of America, Inc., ("PSA"), an Atlanta based subsidiary of
Pediatric Services of America, Inc. The purchase price was approximately $80
million, and was financed with a $65 million term loan (see note 6) and
approximately $15 million in existing cash. As a result of an independent
appraisal, the Company has recorded costs in excess of net assets acquired of
approximately $58 million, and intangible assets in the amount of $11.6 million,
comprised of customer base $4.6 million, affiliate network $3.2 million,
assembled workforce $1.2 million, and a non-competition agreement valued at $2.6
million. The amounts are being amortized over their estimated useful lives of 25
years for costs in excess of net assets acquired, and between 5 to 9 years for
the remaining intangibles.
The liabilities assumed in the PSA acquisition included approximately $3.8
million for certain PSA facility exit costs and certain legal, accounting and
other acquisition costs. At December 31, 1999, the Company had closed 55
branches of PSA and had paid the majority of the other acquisition costs. The
remaining accrued amounts which total $1.4 million, which are included in other
accrued expenses on the accompanying December 31, 1999 consolidated balance
sheet, represent remaining costs for certain severance and office and equipment
leases for closed PSA branches which will be paid in 2000.
On August 12, 1998, the Company acquired specific assets of a health
information services company. The purchase price was $750,000. Cost in excess of
net assets acquired of approximately $597,000 is being amortized over 15 years.
Additionally, a non-competition agreement was entered into in the amount of
$150,000, and is being amortized over 5 years.
On November 30, 1998, the Company acquired a 55% ownership interest in
Heritage Labs International LLC, a national provider of laboratory testing
services, primarily to life and health insurance companies.The purchase price
was approximately $1.8 million. Cost in excess of net assets acquired of
approximately $1.4 million is being amortized over 15 years. Additionally, a
non-competition agreement was entered into in the amount of $.2 million, and is
being amortized over 3 years.
The acquisitions discussed above have been accounted for using the purchase
method of accounting and the purchase price of the acquisitions has been
assigned to the net assets based on the fair value of such assets and
liabilities at the date of acquisition. The consolidated financial statements
include the results of operations from the respective dates of purchase. The
following unaudited pro forma information has been prepared as if the 1999
acquisition of PSA had occurred on January 1, 1998 and does not include cost
savings expected from the transactions. The unaudited pro forma financial
information does not purport to represent our consolidated results of operations
or financial position that would have been achieved had the transactions to
which pro forma effect is given been consumated as of the dates or for the
periods indicated.
23
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Revenues $ 299,340 $ 275,319
Net income 15,842 9,689
Earnings per share - Diluted .51 .32
- --------------------------------------------------------------------------------
The 1998 acquisitions were not included herein as the results of operations of
the businesses acquired were not material.
- --------------------------------------------------------------------------------
Note 4 --
Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts in the amount
of $1,092,071 and $1,091,499 in 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
Note 5 --
Property, Plant
and Equipment
Property, plant and equipment consists of the following:
Estimated
December 31, December 31, Useful Life
1999 1998 In Years
- ---------------------------------------------------------------------------------------------------
Land and improvements $ 618,972 $ 591,213 10 - 20
- ---------------------------------------------------------------------------------------------------
Building and improvements 4,826,966 4,550,903 10 - 45
- ---------------------------------------------------------------------------------------------------
Furniture, fixtures and equipment 21,020,009 17,345,109 3 - 10
- ---------------------------------------------------------------------------------------------------
$26,465,947 $22,487,225
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 6 --
Long Term Debt
On October 29, 1999, the Company entered into a $100 million Amended and
Restated Revolving Credit and Term Loan Agreement with three banks. This senior
credit facility consists of a $65 million, six-year term loan, and a $35
million, three-year revolving loan. The $65 million term loan was used in
connection with the purchase of the assets of PSA. The term loan requires
interest payments only during the first 18 months, five principal payments of
$10 million each on April 30, 2001 through 2005, and a final payment of $15
million on January 31, 2006. The Company has not borrowed under the $35 million
revolving loan.
Both the term loan and the revolving loan bear interest at either the prime
rate minus 1/2% to plus 1/4% or LIBOR plus 3/4% to 13/4%, depending on the ratio
of our consolidated funded debt, as defined, to earnings before interest, taxes,
depreciation and amortization, or "EBITDA". Interest is payable on the term loan
at an effective annual interest rate of 7.535% for the period from November 4,
1999 through February 4, 2000.We can prepay either loan without penalty at any
time. Also, commitment fees up to 1/4% of the unused revolving loan are charged,
and the agreement contains certain financial covenants related to dividends,
fixed charge coverage and funded debt to EBITDA ratio.
The note payable of $450,000 is an obligation of our majority owned
subsidiary. The interest rate at December 31, 1999 was 9.5%. The note matures on
January 1, 2003 and monthly principal payments start February 2000.
- --------------------------------------------------------------------------------
Note 7 --
Commitments and
Contingencies
The Company leases branch field offices under a number of operating leases which
expire in various years through 2004. 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
24
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
in various years through 2002. The following is a schedule of future minimum
lease payments for operating leases (with initial or remaining terms in excess
of one year) as of December 31, 1999:
Year Ending December 31,
2000 $ 9,453,801
2001 6,419,593
2002 2,414,608
2003 1,199,820
2004 539,070
- --------------------------------------------------------------------------------
Total minimum lease payments $ 20,026,892
- --------------------------------------------------------------------------------
Rental expenses under operating leases were $10,768,315, $8,633,036 and
$8,510,183 in 1999, 1998 and 1997, respectively.
The Company has employment retention contracts with certain executive
officers of the Company for a two year period from the date a change in control
occurs as further defined in the contracts.
- --------------------------------------------------------------------------------
Note 8 --
Litigation
The Company is a party to a number of legal actions arising in the ordinary
course of its business. In the opinion of management, the Company has adequate
legal defense and/or insurance coverage respecting each of these actions and
does not believe their ultimate disposition will materially affect the Company's
consolidated results of operations or financial position.
- --------------------------------------------------------------------------------
Note 9 --
Income Taxes
Income tax expense is comprised of the following:
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Federal:
Current $ 13,603 $ 11,693 $ 6,741
Deferred 285 (1,277) (380)
- --------------------------------------------------------------------------------
State and local:
Current 2,245 1,930 1,275
Deferred 106 (262) 485
- --------------------------------------------------------------------------------
$ 16,239 $ 12,084 $ 8,121
- --------------------------------------------------------------------------------
The following reconciles the "statutory" federal income tax rates to the
effective income tax rates:
1999 1998 1997
- -------------------------------------------------------------------------------
Computed "expected" tax expense 35% 35% 35%
- -------------------------------------------------------------------------------
Increase (reduction) in tax expense resulting from:
State tax, net of federal benefit 8 7 7
Non-tax deductible amortization of goodwill 1 2 5
Other -- 2 1
- -------------------------------------------------------------------------------
Effective income tax rates 44% 46% 48%
- -------------------------------------------------------------------------------
25
Hooper Holmes, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Acquisition reserve $ 592 --
Discontinued operation accruals 123 $ 1,227
Receivable allowance 459 471
Intangible assets 234 219
Insurance benefits 655 717
Other 263 735
- --------------------------------------------------------------------------------
2,326 3,369
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (681) (637)
Acquisition bases adjustment
primarily intangibles (1,860) (2,556)
(2,541) (3,193)
- --------------------------------------------------------------------------------
Net deferred tax (liability) asset: $ (215) $ 176
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) are reflected in the consolidated balance
sheets at December 31, 1999 as follows: other current assets $1,696,000 and
deferred income taxes (noncurrent) $(1,911,000) and at December 31, 1998, other
current assets $2,694,000 and deferred income taxes (noncurrent) $(2,518,000).
No valuation allowance has been provided on deferred tax assets since
management believes that it is more likely than not that such assets will be
realized through the reversal of existing deferred tax liabilities and future
taxable income.
The principal components of the deferred tax provision in 1999 and 1998
include differences between financial and tax reporting for depreciation and
amortization.
- --------------------------------------------------------------------------------
Note 10--
Capital Stock
Stock Split and Authorized Shares -- Effective August 22, 1997 and January 8,
1999, the Company declared two for one stock splits in the form of 100% stock
dividends to all stockholders, which were distributed on September 5, 1997, and
January 29, 1999, respectively. The stock splits resulted in additional shares
of 6,923,582 shares and 14,189,982 shares of common stock, respectively, of
which, 1,683 shares and 52,166 shares, respectively, were shares of treasury
stock. All share and per share amounts have been retroactively restated for
these events. On February 24, 1998, the stockholders approved a proposal to
increase the authorized number of common shares from 20 million to 80 million.
On May 25, 1999, the stockholders approved a proposal to increase the authorized
number of common shares from 80 million to 240 million.
Stock Offering -- The Company completed a secondary common stock offering of
3,675,000 shares on February 29, 2000. The offering price was $25.125 and
provided approximately $87 million in net proceeds to the Company.
26
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Stock Repurchase Program -- On January 27, 1998, the Board of Directors approved
a Stock Repurchase Program, which authorized management to purchase shares of
the Company's common stock at prevailing market prices.During 1998, the Company
purchased 97,600 shares of its common stock at an aggregate price of $954,138.
No purchases occurred in 1999.
Stockholder Rights Plan -- On January 23, 1990, the Board of Directors adopted a
Stockholder Rights Plan, which was amended and restated on May 10, 1991 and
further amended on July 12, 1995. The Board declared a dividend of one Common
Share Right for each outstanding share of Common Stock distributable on April 2,
1990. Such rights only become exercisable ten business days after (a) the
Company or a person or group announces that such person or group (other than
certain specified persons, such as the Company, any wholly-owned subsidiary,
employee benefit plans of the Company and persons who held at least 20% of the
Common Stock when the Rights Plan was adopted, until the occurrence of certain
events, or as the result of an acquisition of shares by the Company) has
acquired beneficial ownership of 20% or more of the Company's Common Stock or
(b) the commencement of a tender offer by a person or group to acquire 30% or
more of the Company's Common Stock (such date, the "Separation Date"). Upon the
Separation Date, each right shall constitute the right to purchase one share of
Common Stock of the Company for $6.00, subject to adjustment. After (x) the
announcement of the acquisition by a person or group of 20% or more of the
Company's Common Stock (other than in a tender offer for all shares which has
been approved by the Board of Directors), or (y) the Company enters into or
consummates a merger or other similar business transaction, or a sale of more
than 50% of the assets or earning power, each right shall be adjusted to
constitute the right to purchase that number of shares of Common Stock of the
Company or capital stock of the acquiring company, as the case may be, having an
aggregate market price on the date of such announcement of the acquisition or
such consummation or occurrence of the transaction equal to twice the exercise
price of $6.00, also subject to adjustment. The rights may be redeemed for $0.05
per right at any time until the tenth day following public announcement that a
20% position has been acquired. The rights were extended by the Board of
Directors and will expire on June 16, 2000, unless sooner redeemed.
Stock Purchase Plan -- In 1993, the shareholders approved the 1993 Employee
Stock Purchase Plan which provided for granting of purchase rights to all
full-time employees, as defined, of up to 1,000,000 shares. The plan provided
for the purchase of shares on the date one year from the grant date. During the
year after the grant date, up to 10% of an employee's compensation was withheld
for their purchase. Employees can cancel their purchases any time during the
year, without penalty. The purchase price was 95% of the closing common stock
price on the grant date. In April 1997, April 1998, and April 1999, the Company
distributed 66,536, 80,904 and 68,062 shares, respectively, under the April
1996, April 1997 and April 1998 grants, and the aggregate purchase price was
$300,244, $324,248 and $551,718, respectively. In April 1999, the Company made a
grant of approximately 60,000 shares, and the aggregate purchase price was
approximately $718,000.
Stock Awards -- The Company's Chairman and President is entitled to receive
stock awards based on the attainment of performance goals established for any
given year. For the years ended December 31, 1999, 1998 and 1997, awards of
5,000, 5,000 and 4,000 shares, respectively, have been granted.
27
Hooper Holmes, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Stock Option Plans -- The Company's stockholders approved stock option plans
totaling 1,000,000 shares in 1999, 1,200,000 shares in 1998 and 1997, and
2,000,000 shares in 1994 and 1992, and which provide that options may be granted
to management. Options are granted at market value on the dates of the grants
and are exercisable as follows: 25% after two years and 25% on each of three
anniversary dates thereafter, and terminate after 10 years.
In May 1997, the Company's stockholders approved the 1997 Director Stock
Option Plan for 600,000 shares, which provides 100,000 options to non-employee
Directors. The options were granted at market value on the date of the grant,
and are exercisable in five equal annual installments beginning on the first
anniversary of the date of the grant. The Company currently has five
non-employee directors.
Also in May 1997, the Company's stockholders approved the CEO Stock Option
Agreement, which provides options to acquire 400,000 shares to the Chief
Executive Officer, at an exercise price equal to the fair value at the date of
grant.The options vest 80,000 shares annually for five years. Any unvested
options became immediately exercisable in 1999, because the two performance
related conditions were met: (a) the Company's earnings per share were at least
$.35 for the year ended December 31, 1998, and (b) the Company's closing stock
price was at least $7.50 per share for any consecutive 30 day period during the
six months ended June 30, 1999. These conditions were met, and such options are
vested.
The following table summarizes stock option activity:
Under Option
- -------------------------------------------------------------------------------
Shares Weighted
Available for Average Exercise
Grant Shares Price Per Share
- --------------------------------------------------------------------------------
Balance, December 31, 1996 1,393,204 3,323,152 2.77
Authorized 2,200,000 -- --
Granted (1,596,000) 1,596,000 4.17
Exercised -- (579,322) 3.03
- --------------------------------------------------------------------------------
Balance, December 31, 1997 1,997,204 4,339,830 3.25
Granted (1,210,800) 1,210,800 10.47
Exercised -- (416,830) 3.01
Cancelled 28,850 (28,850) 5.04
- --------------------------------------------------------------------------------
Balance, December 31, 1998 815,254 5,104,950 4.97
Granted (542,500) 542,500 25.75
Exercised -- (742,500) 3.04
Cancelled 34,600 (34,600) 11.17
- --------------------------------------------------------------------------------
Balance, December 31, 1999 307,354 4,870,350 $ 7.53
- --------------------------------------------------------------------------------
28
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The weighted average fair value per stock option granted was $15.78 for the 1999
options, $5.96 for the 1998 options, and $2.36 in 1997. The Company estimated
the fair values using the Black-Scholes option pricing model, modified for
dividends and using the following assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Expected dividend yield .26% .34% .37%
Risk-free interest rate 6.00% 4.75% 6.13%
Expected stock price volatility 40.98% 41.90% 39.01%
Expected term until exercise (years) 10 9 9
- --------------------------------------------------------------------------------
The Company does not record compensation expense for stock option grants.The
following table summarizes results as if the Company had recorded compensation
expense for option grants:
(thousands of dollars, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported $20,793 $12,700 $8,770
Pro forma 18,919 11,552 8,066
Basic earnings per share:
As reported $ .72 $ .45 $ .32
Pro forma .66 .41 .29
Diluted earnings per share:
As reported $ .68 $ .43 $ .31
Pro forma .61 .39 .28
- --------------------------------------------------------------------------------
The pro forma effects on net income and earnings per share for 1999, 1998, and
1997 may not be representative of the pro forma effects in future years since
compensation cost is allocated on a straight-line basis over the vesting periods
of the grants, which extend beyond the reported years.
The following table summarizes information concerning options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- --------------------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Term (Years) Price at 12/31/99 Price
- -----------------------------------------------------------------------------------------------
$1.94 - 3.50 1,528,950 3.8 2.50 1,222,788 2.63
4.06 - 4.22 1,651,500 6.7 4.13 454,500 4.03
6.44 -13.38 1,147,400 8.6 10.53 -- 8.08
25.75 542,500 10.0 25.75 -- 25.75
- -----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 11 --
401k Savings and
Retirement Plan
This plan is available to all employees with at least one year of service of
greater than 1,000 hours of employment, and is administered by Merrill Lynch.
The Company matches up to 25% of the first 10% of employee salary contributions.
The Company's payments for 1999, 1998, and 1997, were $345,000, $300,000, and
$251,000, respectively.
29
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Independent Auditors' Report
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
February 29, 2000
30
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Selected Financial Data
For the years ended December 31,
--------------------------------------------------------------------------
(dollars in thousands except per share data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenues $ 237,068 $ 185,210 $ 165,353 $ 156,254 $ 111,313
Operating income 36,535 25,592 16,344 8,576 4,059
Interest expense 860 3 168 1,394 1,674
Income from continuing operations 20,793 14,185 8,770 4,086 1,667
Loss from discontinued operations (1) -- (1,485) -- -- (14,716)
Net income (loss) 20,793 12,700 8,770 4,086 (13,049)
Earnings per share -- basic:
Income from continuing operations .72 .50 .32 .15 .06
Discontinued operations (1) -- (.05) -- -- (.55)
Net income (loss) .72 .45 .32 .15 (.49)
Earnings per share -- diluted:
Income from continuing operations .68 .48 .31 .15 .06
Discontinued operations (1) -- (.05) -- -- (.55)
Net income (loss) $ .68 $ .43 $ .31 $ .15 $ (.49)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .05 $ .036 $ .026 $ .015 $ .015
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average shares-- basic 28,780,282 28,120,685 27,536,668 26,910,876 26,828,512
Weighted average shares--diluted 30,766,779 29,859,710 28,564,132 27,243,802 26,904,714
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (as of December 31):
Working capital $ 56,076 $ 33,476 $ 20,381 $ 11,807 $ 24,786
Total assets 184,471 85,016 65,941 61,296 93,997
Current maturities of long-term debt 143 450 -- 1,030 8,800
Long-term debt, less current maturities 65,307 -- -- 5,250 26,250
Total long-term debt 65,450 450 -- 6,280 35,050
Stockholders' equity $ 89,692 $ 62,294 $ 48,519 $ 37,719 $ 33,132
- ---------------------------------------------------------------------------------------------------------------------------
Per share calculations are adjusted to reflect a two for one stock split
effective January 8, 1999.
(1) See note 2 to the consolidated financial statements.
31
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Quarterly Common Stock Price Ranges and Dividends
1999 1998
--------------------------------------------- ---------------------------------------------
Quarter High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------------------------------------------------------
First 16 9/16 12 3/8 .0125 10 11/16 6 7/16 .008
Second 21 5/8 15 .0125 12 29/32 10 3/32 .008
Third 25 5/8 18 5/16 .0125 11 15/16 8 .01
Fourth 27 3/8 22 1/4 .0125 14 15/16 9 3/8 .01
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted to reflect a two for one stock split effective January 8, 1999.
Quarterly Financial Data (Unaudited)
(dollars in thousands except per share data)
Per Share of Common Stock
Income from Net Income
Gross Continuing -------------------------
Quarter Revenues profit Operations Net Income Basic Diluted
- ----------------------------------------------------------------------------------------------------------------------------
1999
Fourth $ 75,827 $ 23,052 $ 6,232 $ 6,232 $ .21 $ .20
Third 53,830 16,077 4,989 4,989 .17 .16
Second 54,472 16,932 4,821 4,821 .17 .16
First 52,939 17,049 4,751 4,751 .17 .16
- ---------------------------------------------------------------------------------------------------------------------------
Total $237,068 $ 73,110 $ 20,793 $ 20,793 $ .72 $ .68
- ---------------------------------------------------------------------------------------------------------------------------
1998
Fourth $ 48,147 $ 14,078 $ 4,068 $ 2,583(1) $ 0.09(1) $ 0.09(1)
Third 45,383 13,623 3,538 3,538 0.13 0.12
Second 45,569 13,750 3,390 3,390 0.12 0.11
First 46,111 14,498 3,189 3,189 0.11 0.11
- ---------------------------------------------------------------------------------------------------------------------------
Total $185,210 $ 55,949 $ 14,185 $ 12,700 $ 0.45 $ 0.43
- ---------------------------------------------------------------------------------------------------------------------------
Per share calculations are adjusted to reflect a two for one stock split
effective January 8, 1999.
(1) Net income and earnings per share include a charge for discontinued
operations, net of tax of $1.5 million or $.05 per share.See note 2 to the
Consolidated Financial Statements.
32
Directors and Officers
Directors
BENJAMIN A. CURRIER
Retired. Formerly
Senior Vice President,
Security Life of Denver Ins. Co. --
ING/Barings
QUENTIN J. KENNEDY
Retired. Formerly
Executive Vice President,
Secretary and Director
Federal Paper Board Company
ELAINE L. RIGOLOSI
Professor of Education
Department of Organization
and Leadership
Teachers College
Columbia University
JAMES M. MCNAMEE
Chairman, President and
Chief Executive Officer
JOHN E. NOLAN
Partner
Steptoe &Johnson
KENNETH R. ROSSANO
Senior Vice President
Cassidy &Associates
G. EARLE WIGHT
Senior Vice President
Officers
JAMES M. MCNAMEE
Chairman, President and
Chief Executive Officer
PAUL W. KOLACKI
Executive Vice President and
Chief Operating Officer
ROBERT WILLIAM JEWETT
Senior Vice President,
General Counsel and Secretary
FRED LASH
Senior Vice President,
Chief Financial Officer
and Treasurer
G. EARLE WIGHT
Senior Vice President
Stock Listing
The Company's common stock is
traded on the American Stock Exchange
(AMEX) under the symbol "HH".
Form 10-K
Holders of the Company's common stock may obtain, without charge,
a copy of the Hooper Holmes, Inc. Annual Report on Form 10-K as filed with the
Securities and Exchange Commission upon request.
Address inquires to:
Secretary
Hooper Holmes, Inc.
170 Mt. Airy Road
Basking Ridge, NJ07920
Independent Certified
Public Accountants
KPMG LLP
Short Hills, NJ
Transfer Agents &Registrar
First City Transfer Company
Iselin, NJ
Annual Meeting
May 23, 2000
at the Company's Headquarters
170 Mt. Airy Road
Basking Ridge, NJ
Hooper Holmes, Inc.
Corporate Headquarters
170 Mt. Airy Road
Basking Ridge, NJ 07920
(908) 766-5000