Hooper Holmes, Inc.
1997 Annual Report to Shareholders
[PICTURE OF UPWARD RIGHT MOVING ARROW APPEARS HERE]
Financial Results for 1997 are....
Financial Contents
Management's Discussion and Analysis 15
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Independent Auditor's Report 27
Selected Financial Data 28
Quarterly Common Stock Price Ranges and Dividends 29
Quarterly Financial Data 29
Directors and Officers 30
14
Hooper Holmes, Inc. and Subsidiaries
Directors and Officers
Directors
Benjamin A. Currier
Retired. Formerly
Senior Vice President,
Security Life of Denver Ins. Co. --
ING/Barrings
Quentin J. Kennedy
Retired. Formerly
Executive Vice President,
Secretary and Director
Federal Paper Board Company
Elaine La Monica 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
Francis A. Stiner
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 inquiries to:
Secretary
Hooper Holmes, Inc.
170 Mt. Airy Road
Basking Ridge, NJ 07920
Independent Certified
Public Accounts
KPMG Peat Marwick LLP
Short Hills, NJ
Transfer Agents & Registrar
First City Transfer Company
Iselin, NJ
Annual Meeting
May 19, 1998
at the American Stock Exchange
New York, NY
30
Hooper Holmes, Inc.
Corporate Headquarters
170 Mount Airy Road
Basking Ridge, NJ 07920
(908) 766-5000
About the Company
Hooper Holmes Inc. is the nation's leading provider of alternate-site health
information. Serving all 50 states, the Company's network of experienced medical
professionals conducts 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.
Hooper Holmes' customers include most of the nation's major life and health
insurers, and the Company performed approximately 2.3 million tests on insurance
applicants in 1997 under its trade name Portamedic. The Company offers the
industry's widest geographic coverage and up-to-date technology to ensure
timely, accurate delivery of health information. Hooper Holmes' today, is
recognized as a quality service provider that meets the needs of its customers,
employees, and shareholders. We pride ourselves on anticipating new challenges
that face our clients and finding solutions to help them adapt to change.
"off the charts"
Contents
Financial Highlights 2
Key Strategic Highlights 3
Letter to Shareholders 4
Review 6
Review of Operations 10
Financial Contents 14
1
Financial Highlights
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Years ended December 31,
(dollars in thousands except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------
Revenues $ 165,353 $ 156,254 $ 111,313
Operating income 16,344 8,576 4,059
Income from continuing operations 8,770 4,086 1,667
Loss from discontinued operations -- -- (14,716)
Net income (loss) 8,770 4,086 (13,049)
Earnings per share -- basic
Continuing operations .64 .30 .12
Discontinued operations -- -- (1.10)
Net Income (loss) .64 .30 (.98)
Earnings per share -- diluted
Continuing operations .61 .30 .12
Discontinued operations -- -- (1.09)
Net income (loss) $ .61 $ .30 $ (.97)
Cash dividend per share $ .05 $ .03 $ .03
Weighted average number of shares -- basic 13,768,334 13,455,438 13,414,256
Weighted average number of shares -- diluted 14,282,066 13,621,901 13,452,357
- ---------------------------------------------------------------------------------------
2
Key Strategic Highlights
. In 1997, Hooper Holmes generated record revenues and earnings. In addition,
the Company's market capitalization grew over 72% to $203 million.
. Hooper Holmes successfully leveraged its branch network and infrastructure to
generate strong incremental revenues with only a minimal increase in costs.
. Hooper Holmes' Portamedic division performed approximately 2.3 million
examinations on insurance applicants in 1997, up 2% from a year earlier.
. The Company's strong cash flow throughout the year enabled it to eliminate
its long-term debt.
. Hooper Holmes announced two agreements in 1997 that strengthen its position
in delivering alternate-site health information to direct response providers of
life insurance products.
Gross Profit
[LINE GRAPH APPEARS HERE]
(dollars in millions)
YEAR GROSS PROFIT
- ---- ------------
1995 $ 25.4
1996 $ 38.3
1997 $ 46.2
Operating Income
[LINE GRAPH APPEARS HERE]
(dollars in millions)
YEAR OPERATING INCOME
- ---- ----------------
1995 $ 4.1
1996 $ 8.6
1997 $ 16.3
Income Per Share
[LINE GRAPH APPEARS HERE]
(diluted-continuing operations)
YEAR INCOME PER SHARE
- ---- ----------------
1995 $ .12
1996 $ .30
1997 $ .61
To Our Shareholders
Nineteen ninety-seven was a great year for Hooper Holmes and its shareholders.
During 1997, we achieved or exceeded virtually all of our corporate goals. The
steps we have taken over the past two years to restructure the Company and focus
on building upon our position as the dominant provider of alternate-site health
information services continue to produce positive results. With record financial
performance and solid operating achievements, our performance in 1997 was "off
the charts." Our accomplishments have also been recognized by the market, as our
market capitalization grew over 72% to $203 million at the end of 1997 compared
to year-end 1996.
In 1997, we again demonstrated our ability to leverage our branch network and
technology infrastructure to generate strong incremental revenues with only a
minimal increase in our costs. Revenues grew at a rate that exceeds industry
trends for the year. Through the effective introduction of new automated
processes, we have actually reduced costs in some areas of our business. As
a result, we expanded our gross profit margin significantly -- a strong
indicator of our excellent corporate health. Importantly, we remain confident
that the network we have put in place for our core Portamedic and Infolink
services can continue to absorb new business without a corresponding material
increase in costs, while at the same time, investing in new technology to meet
the demand of newly-emerging distribution systems of life insurance products.
Record Financial Results
In 1997, we reported record revenues and earnings. Net income for the year ended
December 31, 1997 more than doubled to $8.8 million versus $4.1 million for
1996. Split-adjusted earnings per share, reflecting a two-for-one stock split
effective last August, more than doubled as well, rising to $0.61, compared to
$0.30 reported in 1996. Revenues grew to $165.4 million for the year, the
highest in this business in the Company's history. The improvement in our
operating margin was dramatic, with gross profit margins rising three full
percentage points to 28%.
Selling, general and administrative expenses (SG&A) as a percentage of sales
fell to 18%, a full percentage point decline from 1996. In the fourth quarter of
1997, the SG&A figure fell still further, to 16%, demonstrating our continued
focus on cost containment.
As we begin 1998, Hooper Holmes has a balance sheet that is rock solid. During
1997, we continued to use our growing cash flow to pay down debt, and we ended
the year free of long-term debt. As we move forward, this balance sheet strength
provides us with a significant ability to pursue strategic initiatives, such as
the Healthdex Division, that we believe will drive internal growth over the
longer term. Our strong capital position will also allow us to take advantage of
accretive acquisition opportunities that would complement our current business
and be additive to our margins.
1997: A Year of Accomplishments
Our strategy of targeting opportunities in an emerging segment of the life
insurance industry was also successful. Two of our newer clients are a large
discount securities broker and a major money-center bank. Revenue from these
non-traditional insurance vendors has grown rapidly over the last two years. We
see continued growth opportunities to examine potential policyholders on behalf
of the banks, brokers, mutual fund companies and credit card marketers that are
increasingly seeking to build their presence in the life insurance business
requiring not only examinations, but additional services that only a personal
contact with an applicant can accomplish.
Two new partnerships illustrate another way the Company intends to grow. Early
last year, we announced a strategic marketing agreement with the PMSI subsidiary
of Policy Management Systems Corporation (PMSC), under which users of PMSI's
4
[PHOTO OF JAMES M. MCNAMEE APPEARS HERE]
software-supported "smart" underwriting services gain easy access to our
Portamedic operation of 8,700 examiners. As anticipated, this new method of
ordering services is bringing in new clients and increasing the amount of
existing client business.
In January 1998, we announced a new pact with Ohio National Financial Services.
Ohio National has selected Portamedic as its exclusive provider of alternate-
site health information when the insurer markets its products on-line via
Quicken's InsureMarket Web site. We believe Hooper Holmes is strongly positioned
to benefit from the growing direct distribution of life insurance products over
the Internet, this initiative being only one example.
We are making effective use of technology in other ways as well. Over the past
18 months, we undertook a comprehensive program to upgrade the speed and memory
of our computer systems and introduce software to better manage work flows. The
upgraded software tracks the skills, training and equipment possessed by each
examiner, while simultaneously assessing his or her work load. This effort to
give the right assignment to the right person (at the right time) has
significantly increased our efficiency, as well as our ability to serve our
clients.
The benefits of our ongoing investment in systems is reflected in our
exceptional 1997 financial results. In addition, we believe that our technology
provides Hooper Holmes a competitive advantage that will help us remain the
industry leader.
The Future Looks Bright
Many key factors continue to make us optimistic about the future.
. Insurance policy applications appear to be growing and, as the Baby Boomers
age and enter the prime insurance-buying years, the industry should see
additional annual gains.
. New channels of distribution are emerging, creating additional opportunities.
. Total life insurance premium income is on the increase, pointing to the
possibility of higher policy face value and higher age of applicants. Both
factors should drive examination and testing needs.
. The national trend toward outsourcing is intensifying and the Company is
well-positioned to benefit in both the insurance business and our new effort to
examine and test patients who participate in clinical trials of prescription
drugs.
As we enter 1998, we have a great deal about which to be encouraged. We expect
our profitability to continue outpacing our growth in revenues, as we further
leverage our nationwide branch network and technology infrastructure. We have
strong relationships with most of the leading insurance providers, and have
demonstrated our ability to form innovative relationships with other financial
services companies.
In closing, we want to thank our employees for extraordinary work that led to
another outstanding year. We also thank our customers and shareholders for their
loyalty, and we hope to reward both of them in the exciting year ahead.
/s/ James M. McNamee
James M. McNamee
Chairman, President, and Chief Executive Officer
5
[PHOTO APPEARS HERE]
Portamedic and Infolink gather and deliver information
Our job begins when Portamedic is contacted by one of our Leading Customers:
Allstate Life
Continental Life
First Colony Life
Kemper Life
Lincoln Benefit Life
Metropolitan Life
New York Life
Northwestern Mutual
Prudential Iinsurance
State Farm Insurance
Transamerica
[PHOTO APPEARS HERE]
portamedic contacted...
receives application information from insurance source
The only company serving virtually every insurance firm in the United States
[PHOTO APPEARS HERE]
portamedic sets appointment...
normally within 24 - 30 hours
Interviews and examinations are tailored to insurance company criteria
6
[PHOTO OF APPEARS HERE]
portamedic visits applicant...
within 24-30 hours
Pertinent information as well as specimens are gathered onsite by a well trained
and experienced examiner
[PHOTO APPEARS HERE]
portamedic delivers exams...
immediately upon completion of the examination visit
The industry's most automated branch operating system is employed to speed the
information to the client
[PHOTO APPEARS HERE]
7
Portamedic and Infolink gather and deliver information
[PHOTO APPEARS HERE]
Infolink contacted...
Request is received via Fax, Computer or Phone
Requests can also be automatically ordered via the paramedical examination
process
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
Infolink applicant interview...
Professional telephone interviewers assure thorough responses to all questions
Reflexive questions develop underwriting details
8
[PHOTO APPEARS HERE]
Infolink report generated ...
A customized report is generated to the specifications of the individual client
Specific areas of concern can be highlighted for the underwriter
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
Infolink report received
The report will be received by the underwriting department within hours of
completion
Our system delivers the information when and where it is needed
9
Review of Operations
The Industry Leader
Hooper Holmes is one of the largest providers of health information services
to the life and health insurance underwriting industry. The trained
professionals in our Portamedic division -- registered nurses, licensed nurse
practitioners, physicians and medical and paramedical technicians -- visit
insurance applicants in all 50 states, giving a variety of medical tests ranging
from the basic to the sophisticated (from blood pressure monitoring to
electrocardiograms) and taking specimens for laboratory analysis. Our people
make millions of house calls, and office calls, every year.
With a market share of approximately 25%, we are the leading company in this
$750 million industry and we have strong relationships with 48 of the top 50
life and health insurance companies in the United States. We also work with
regional companies and independent insurance agents. One advantage of having
such a broad base of clients is that no one customer accounts for more than 10%
of our total revenues. We perform more than 2.3 million examinations every year,
or more than 10,000 examinations every working day.
Top insurers rely on us for four basic reasons.
. Unmatched scope. Our size means that our professionals can quickly get
wherever they need to be. Portamedic has 200 offices throughout the country and
retains 8,700 medical examiners on a full-time, part-time or contract basis. Our
examiners are within easy driving distance of the vast majority of the U.S.
population.
. Speed. Insurance companies, and, in particular, insurance agents, know that
the quicker they can get an applicant approved, the better their chances
of concluding a sale. Our superior time service supports that process.
No one in our industry works faster. We usually make an appointment with an
applicant within 24 hours and then perform interviews and testing within three
to four days. Specimens are then sent immediately to an independent lab for
analysis.
10
. Automation. We have invested heavily to create the most automated branch
network and operating system in the industry. Reports are faxed or
sent via overnight courier to our clients as required. Results of our ECG
(electrocardiogram) tests can be electronically transmitted to clients on-line.
Our Infolink Services Group offers customers another information-gathering
option. It is typically relied upon when the cost of an in-person visit is not
justified by the policy amount or when an underwriter concludes that
supplemental information is required. In such instances, we electronically send
clients occupational and employment information, a physical and medical history
and attending physician statements. Underwriting departments receive complete
reports in 24 hours. The automated transmission helps eliminate paper from key
steps in the application and underwriting process, thus allowing our customers
to reduce costs, slash turnaround time, and devote more of their energy to
selling rather than paper-shuffling.
. Quality. We audit our employees and laboratory facilities carefully to make
sure that we are providing clients with the best possible service. We verify the
credentials of every examiner. Our goal is not to be the cheapest provider in
the business, but to be the best-and the most accurate. Maintaining the highest
quality standards is the best way we know of to retain customers and win new
ones.
Independent client research reveals that Hooper Holmes' commitment to
quality is widely recognized in the insurance industry. We are willing to
continue spending time and resources to ensure that we maintain the highest
quality standards in our field.
11
Opportunities For Growth
We expect to enjoy strong, steady growth for the foreseeable future. The reason
for our optimism? The predominate trends affecting our business all suggest that
the wind is at our back, as long as we remain focused on the needs of our
clients, both long-standing and new.
Demographics. We are well-positioned to benefit from the aging of the huge Baby
Boomer generation. Most insurance buyers range in age from the late 30s to the
late 50s. A baby boomer now turns 50 years old every eight seconds, so the
number of prime insurance buying candidates should increase greatly in the next
decade. In 1996, there were 73.6 million Americans aged 35 to 54; by 2005, that
figure will jump to 84.7 million.
The boom in financial services. It is not the sheer number of Baby Boomers that
matters most. More important is the fact that they are becoming increasingly
concerned with providing financial security for their loved ones as they grow
older.
That trend is expected to reflect in new sales. Based upon current industry
estimates, the number of policies being applied for and sold should increase by
a few percentage points over future years.
Industry consolidation. The rapid consolidation occurring in the insurance
industry is another positive development for the company. Large insurance
companies with customers across the U.S. can benefit from the truly national
coverage we provide. At the same time, Hooper Holmes' services can be one way
for regional and independent agents to remain competitive. Our network of people
and technology is designed to meet the needs of insurance companies of any size.
Outsourcing. Increasingly, insurers are outsourcing some administrative,
marketing, and underwriting functions. Those that currently rely on their own
personnel to perform many processing and administrative functions, may soon
realize, as so many of their competitors have, that it is more cost-efficient
and timely to outsource these functions to companies such as Hooper Holmes.
12
New market participants. Non-traditional insurers are now selling millions of
dollars of life insurance. In recent years, banks, brokers, mutual fund
companies and credit card issuers have flocked to the market, and many have done
quite well. Some of these entrants have been described as "virtual" insurance
companies because they outsource nearly every service they provide. Several are
already using our services. We believe more will in the years to come.
New business initiatives. We expect to boost our revenues by strengthening
relationships with our best customers; increasing our use of the Internet as a
service and marketing tool; making smart acquisitions in our field; and turning
our new Healthdex unit into a success. Healthdex was created to serve major
pharmaceutical and medical device companies, which are increasingly turning to
outsourcers to handle many clinical trial functions. Annual outsourcing in this
industry currently totals $2.5 billion per year and is expected to grow at a 20-
25% rate over the next five years. We are convinced that we can save drug
companies money on clinical trials in two ways -- by keeping patients in trials
until conclusion and by allowing the trials to be done faster.
The Ability To Execute
Having a favorable operating environment is not enough, however. Ultimately, our
continued success will depend on the dedication and skill of our people
and our ability to execute our growth strategies.
Our management team is focused on enhancing the performance of our core
Portamedic and Infolink Services Group while continuing to identify ways
to further leverage our substantial technology infrastructure. Hooper Holmes has
built a reputation for being both the leader and the innovator in service
and technology. We will do everything possible to maintain, and enhance, that
position.
13
Hooper Holmes, Inc. and Subsidiaries
Management's Discussion and Analysis
Results of Operations
1997 Compared to 1996
Total revenues for 1997 increased 5.8% to $165.4 million from $156.3 million for
1996. This increase results from unit growth in the number of paramedical
examinations performed, price appreciation per unit of service, and is
consistent with the Company's efforts to increase market share.
The Company's cost of operations in 1997 totaled $119.2 million compared to
$118.0 million for 1996. Cost of operations as a percentage of revenues totaled
72.1% for 1997 versus 75.5% for 1996. As a percentage of revenues, the decrease
is due to ongoing efforts to control branch operating expenses, despite
increased revenue growth, and the efficiencies realized due to continued branch
automation initiatives.
Selling, general and administrative (SG&A) expenses were $29.8 million for 1997
compared to $29.7 million for 1996. As a percentage of revenues, SG&A expenses
decreased to 18.0% for 1997 from 19.0% for 1996, which is due to management's
efforts to control corporate expenses.
Accordingly, the Company's operating income for 1997 increased to $16.3 million
versus $8.6 million for 1996, and as a percentage of revenues, increased to 9.9%
for 1997 compared to 5.5% for 1996.
During 1997, the company reduced long-term debt by $6.3 million and therefore
interest expense decreased in 1997 to $.2 million compared to $1.4 million in
1996. Other income items in 1997 were primarily interest earned on invested
funds and certain deferred payments received from the sale of the Company's
Direct Marketing business in 1992.
As a result of the foregoing, net income in 1997 totaled $8.8 million or $0.61
per diluted share compared to $4.1 million or $0.30 per diluted share for 1996.
Inflation did not have a significant effect on the Company's operations in 1997.
1996 Compared to 1995
Total revenues for 1996 increased 40.4% to $156.3 million from $111.3 million
for 1995. This growth results from a 36% unit increase in the number of
paramedical examinations performed and a 25% increase in inspection and
attending physician statement units. The overall increase stems from revenue
growth in existing offices, the acquisition of ASB Meditest in September 1995,
and the result of market share gains.
The Company's cost of operations in 1996 totaled $118.0 million compared to
$85.9 million for 1995. Cost of operations as a percentage of revenues totaled
75.5% for 1996 versus 77.2% for 1995. The dollar increase was primarily due to
higher direct costs and branch operating expenses, partly due to the ASB
Meditest acquisition. As a percentage of revenues, the decrease is due to
ongoing efforts to reach the optimum number of branches, control branch
operating expenses, and the efficiencies realized from the integration of ASB
Meditest.
Selling, general and administrative expenses increased to $29.7 million for 1996
from $21.3 million for 1995. The increase of $8.4 million is attributed to the
additional corporate staffing functions and increased depreciation and
amortization expense as a result of the ASB Meditest acquisition in September
1995.
Accordingly, the Company's operating income for 1996 increased to $8.6 million
versus $4.1 million for 1995, and as a percentage of revenues, increased to 5.5%
for 1996 compared to 3.6% for 1995.
The Company reduced long-term debt by $28.8 million during 1996 and therefore
interest expense decreased in 1996 compared to 1995 by $.3 million. Other income
items in 1996 were primarily due to interest earned on the escrowed funds that
were part of the Nurses House Call transaction in September 1995 and were
approximately the same amount as in 1995.
As a result of the foregoing, net income from continuing operations in 1996
totaled $4.1 million or $0.30 per diluted share compared to $1.7 million or
$0.12 per diluted share for 1995. The 1995 net loss from discontinued operations
totaled $14.7 million, or $1.10 per diluted share.
Inflation did not have a significant effect on the Company's operations in 1996.
15
Hooper Holmes, Inc. and Subsidiaries
Management's Discussion and Analysis
Liquidity and Financial Resources
The Company's primary sources of cash are internally generated funds and the
Company's bank credit facility.
For the year ended December 31, 1997, the net cash provided by operating
activities was $16.6 million as compared to $16.3 million in 1996. The
significant sources were income from continuing operations of $8.8 million, $5.0
million of depreciation and amortization, $1.2 million of tax refunds, and a
$1.1 million decrease in other current assets, which were partially offset by an
increase in accounts receivable of $.9 million.
The Company replaced its $40 million revolving credit facility with a $20
million, three year revolving facility in December 1996. The revolver loan will
accrue interest at either the bank's base rate or at LIBOR, as adjusted, at the
option of the Company. At December 31, 1997, the Company had no long-term
borrowings. Capital expenditures for 1998 are anticipated to be less than $2.0
million.
Management believes that the combination of cash and cash equivalents, other
working capital sources, and available borrowings under the Company's credit
facility, along with anticipated cash flows from continuing operations, will
provide sufficient capital resources for the foreseeable future.
On January 27, 1998, the Board of Directors approved a Stock Repurchase Program,
which authorizes management to purchase shares of the Company's common stock at
prevailing market prices. The purchases shall not, in the aggregate exceed the
lesser of 100,000 shares or $1,500,000 in any calendar year.
On February 24, 1998, the stockholders approved a proposal to increase the
authorized number of common shares from 20 million to 80 million.
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
Many older computer software programs refer to years in terms of their final two
digits only. Such programs may interpret the year 2000 to mean some other year
or not interpret it at all. If not corrected, those programs could cause
date-related transaction failures.
A Year 2000 Select Committee was developed to address this issue. Information
services personnel have been focused on this issue for two years. Assessment of
both Company and client information systems continues and can affect a broad
number of areas. Systems critical to our business which have been identified as
non-Year 2000 compliant are being corrected through programming modifications.
In addition, the team is looking at Year 2000 readiness from other aspects of
our business, including customer software interface, vendor interface, and home
office process equipment. Outside companies such as vendors, major customers,
service suppliers, communications providers and banks are being asked to verify
their Year 2000 readiness. We expect these projects to be successfully completed
during 1998 and 1999.
External and internal costs specifically associated with modifying internal use
software for Year 2000 compliance are expensed as incurred and not considered
material. Such costs do not include normal system upgrades and replacements.
Based on our current plans and efforts to date, we expect that there will be no
material adverse effect on our operations and future costs to be incurred are
not considered to be material. There is no guarantee, however, that all problems
will be foreseen and corrected.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which becomes effective for the 1998 financial statements. SFAS No. 130
requires disclosure of comprehensive income, which consists of all changes in
equity from nonshareholder sources. The adoption of the statement will be
limited to the form and content of our disclosures and will not affect our
results. Currently the Company does not have any comprehensive income type
items.
16
Hooper Holmes, Inc. and Subsidiaries
Consolidated Balance Sheets
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December 31,
1997 1996
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Assets
Current assets:
Cash and cash equivalents $ 13,159,431 $ 2,936,447
Accounts receivable -- trade 18,011,490 17,035,255
Accounts receivable -- other 508,857 1,095,772
Refundable taxes 23,535 1,230,198
Other current assets 2,458,283 3,474,226
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Total current assets 34,161,596 25,771,898
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Property, plant and equipment 20,498,119 19,196,013
Less: Accumulated depreciation and amortization 12,050,903 9,712,650
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8,447,216 9,483,363
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Goodwill (net of accumulated amortization of $3,460,240 in 1997
and $2,600,613 in 1996) 15,089,108 15,948,735
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Intangible assets (net of accumulated amortization of $4,916,851 in 1997
and $3,170,077 in 1996) 7,647,711 9,394,485
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Other assets 595,486 697,185
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$ 65,941,117 $ 61,295,666
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Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ -- $ 1,030,000
Accounts payable 5,577,158 6,168,864
Accrued expenses:
Insurance benefits 1,969,403 1,536,315
Salaries, wages and fees 1,935,277 1,264,739
Payroll and other taxes 170,152 167,013
Income taxes payable 610,487 334,879
Discontinued operations 573,970 1,287,700
Other 2,944,248 2,175,651
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Total current liabilities 13,780,695 13,965,161
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Long-term debt, less current maturities -- 5,250,000
Deferred income taxes 3,641,051 4,361,049
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Commitments and contingencies
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Stockholders' equity:
Common stock, par value $.04 per share; authorized 20,000,000
shares, issued 13,939,115 in 1997 and 13,582,918 in 1996 557,565 271,658
Additional paid-in capital 27,079,265 24,645,945
Retained earnings 20,901,043 12,820,355
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48,537,873 37,737,958
Less: Treasury stock, 3,366 shares in 1997 and 1996 18,502 18,502
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 48,519,371 37,719,456
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$ 65,941,117 $ 61,295,666
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See accompanying notes to consolidated financial statements.
17
Hooper Holmes, Inc. and Subsidiaries
Consolidated Statements of Operations
- -----------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $165,352,706 $156,253,763 $111,313,005
Cost of operations 119,193,062 117,959,274 85,933,510
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 46,159,644 38,294,489 25,379,495
Selling, general and administrative expenses 29,815,579 29,718,867 21,320,852
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 16,344,065 8,575,622 4,058,643
Other income (expense):
Interest expense (168,266) (1,394,038) (1,673,548)
Interest income 295,765 348,153 262,247
Other income 419,899 328,035 383,793
- -----------------------------------------------------------------------------------------------------------------------------
547,398 (717,850) (1,027,508)
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,891,463 7,857,772 3,031,135
- -----------------------------------------------------------------------------------------------------------------------------
Income taxes 8,121,000 3,772,000 1,364,161
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 8,770,463 4,085,772 1,666,974
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations
Loss from operations, net of taxes -- -- (4,389,559)
Loss on disposal, net of taxes -- -- (10,326,068)
- -----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations -- -- (14,715,627)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,770,463 $ 4,085,772 $(13,048,653)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic:
Income from continuing operations $ .64 $ 0.30 $ 0.12
Discontinued operations - net of taxes -- -- (1.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .64 $ 0.30 $ (.98)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share - diluted:
Income from continuing operations $ .61 $ 0.30 $ 0.12
Discontinued operations - net of taxes -- -- (1.09)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .61 $ 0.30 $ (.97)
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average shares - basic 13,768,334 13,455,438 13,414,256
Weighted average shares - diluted 14,282,066 13,621,901 13,452,357
- -----------------------------------------------------------------------------------------------------------------------------
Per share calculations are adjusted to reflect a two for one stock split
effective August 22, 1997
See accompanying notes to consolidated financial statements.
18
Hooper Holmes, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------ Additional
Years ended December 31, 1995, 1996 Number of Paid-in Retained Treasury
and 1997 Shares Amount Capital Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 6,744,422 $269,777 $24,114,410 $22,589,370 $(471,149) $46,502,408
Net loss (13,048,653) (13,048,653)
Cash dividends ($.03 per share) (402,316) (402,316)
Exercise of stock options (16,728) 55,959 39,231
Issuance of stock award (16,694) 58,037 41,343
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,744,422 269,777 24,080,988 9,138,401 (357,153) 33,132,013
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 4,085,772 4,085,772
Cash dividends ($.03 per share) (403,818) (403,818)
Issuance of stock award 2,405 29,470 31,875
Exercise of stock options 47,037 1,881 349,300 309,181 660,362
Exercised stock options tax benefit 213,252 213,252
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,791,459 271,658 24,645,945 12,820,355 (18,502) 37,719,456
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 8,770,463 8,770,463
Cash dividends ($.05 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per share calculations are adjusted to reflect a two for one stock split
effective August 22, 1997
See accompanying notes to consolidated financial statements.
19
Hooper Holmes, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 8,770,463 $ 4,085,772 $ 1,666,974
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 5,022,569 5,071,692 2,469,116
Provision for bad debt expense 480,000 380,000 320,979
Deferred tax expense (benefit) 105,478 (467,448) 362,000
Issuance of stock awards -- 31,875 41,343
Loss on sale of fixed assets 61,448 58,313 14,429
Change in assets and liabilities, net of effect from
acquisitions/dispositions of businesses:
Accounts receivable (869,320) 6,456,636 (328,030)
Other assets 1,117,642 1,038,631 (646,540)
Income tax receivable 1,206,663 8,004,039 (1,269,570)
Accounts payable and accrued expenses 685,627 (8,347,222) 2,999,731
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of continuing operations 16,580,570 16,312,288 5,630,432
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of discontinued operations -- -- (3,265,830)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,580,570 16,312,288 2,364,602
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds including escrow funds from dispositions -- 15,000,000 12,449,646
Business acquisitions -- (37,500) --
Capital expenditures, net of disposals (1,441,469) (1,103,601) (857,126)
Net investing activities of discontinued operations -- -- (797,475)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,441,469) 13,858,899 10,795,045
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term debt -- 19,000,000 43,500,000
Principal payments on long-term debt (6,280,000) 47,770,000) (56,926,942)
Proceeds from employee stock purchase plan 300,244 -- --
Proceeds related to the exercise of stock options 1,753,414 873,614 39,231
Dividends paid (689,775) (403,818) (402,316)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,916,117) (28,300,204) (13,790,027)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,222,984 1,870,983 (630,380)
Cash and cash equivalents at beginning of year 2,936,447 1,065,464 1,695,844
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $13,159,431 $ 2,936,447 $ 1,065,464
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest 179,318 $ 1,668,018 $ 1,446,753
Income taxes $ 7,740,392 $ 1,955,316 $ 1,238,356
- ----------------------------------------------------------------------------------------------------------------------------------
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 wholly-owned subsidiaries (the "Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
Description of the Business
The Company provides alternate-site health information. 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 underwritng 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 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.
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.
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. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows, and
measures the impairment, if any, using discounted cash flows.
Earnings Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share", which
became effective in 1997, requires presentation of two calculations of 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 by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. Common stock
equivalents are shares assumed to be issued if outstanding stock options were
exercised.The Company has restated all prior period amounts to reflect these
calculations.All prior period amounts have also been restated for the 1997 stock
split (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
The carrying value of long-term debt at December 31, 1996 approximates its fair
value due to the variable interest rate and short interest rate reset period.
For all other financial instruments, at December 31, 1997 and 1996, their
carrying value approximates fair value due to the short maturity of these
instruments.
Employee Stock Options
Employee non-qualified stock options are granted with an exercise price equal to
the market price and, therefore, compensation expense is not recognized on the
issuance of employee stock options.
21
Hooper Holmes, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Advertising
Costs related to space in publications are expensed the first time the
advertising occurs. Advertising expense was approximately $161,000, $285,000,
and $318,000 in 1997, 1996, and 1995, 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 subject to the final adjustment of the cash portion of the
purchase price as discussed below. Pursuant to the Acquisition Agreement, Olsten
transferred to the Company all of the issued and outstanding capital stock of
American Service Bureau, Inc., which is 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"), $27.3 million in cash
as adjusted to reflect changes in the NHC Division Net Asset Amount, and in the
ASB Meditest Net Asset Amount between December 31, 1994 through the Closing Date
and assumed certain specified liabilities of approximately $5.1 million relating
to the NHC Division.
Net sales for the NHC Division for the period ended September 29, 1995 were
$117.2 million. Loss from operations of such business, for the period ending
September 29, 1995, was $4.1 million, and is net of tax benefits of $2.2
million. Interest expense was allocated to discontinued operations based on the
increase in debt required to fund the NHC Division's accounts receivable growth.
Interest expense allocated to the NHC Division was approximately $1.9 million.
The Company has 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.
Consistent with the Company's decision to discontinue its healthcare business,
the Company, in the 4th quarter of 1995, also discontinued the operations of its
Occupational Health segment acquired as part of the ASB Meditest acquisition,
and has reflected in its discontinued operations, a loss, net of taxes of $.3
million. In October 1995, the Company sold the Drug Screen portion of its
Occupational Health segment for $1.2 million. The Company concluded its seasonal
flu vaccination commitments late in 1995, and has not continued this business.
The 1995 figures exclude amounts for discontinued operations from captions
applicable to continuing operations.
Note 3 -- Acquisitions and Dispositions
On September 29, 1995, in connection with the NHC Transaction the Company
acquired all of the outstanding common stock of ASB Meditest, a national health
information services company. As a result of an independent valuation appraisal,
the Company has recorded goodwill of approximately $12.3 million, and intangible
assets in the amount of $10.8 million, comprised of assembled work force $2.3
million, contractor network $2.4 million, referral base $4.1 million, and a non-
competition agreement valued at $2.0 million. These amounts are all being
amortized over their useful lives.
The acquisition discussed above has been accounted for using the purchase method
of accounting and the purchase price of the acquisition 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 of ASB Meditest from September 29, 1995.
In 1992 the Company sold its Direct Marketing business and received cash and a
six year promissory note. The Company determined that the gain on this
transaction should be recognized as note payments are received. During 1997 and
1996, the Company received $291,000 and $324,000, respectively.Such amounts are
included in other income.The note was fully paid in 1997.
Note 4 -- Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts in the amount
of $812,114 and $733,797 in 1997 and 1996, respectively.
Note 5 -- Property, Plant and Equipment
Property, plant and equipment consists of the following:
- --------------------------------------------------------------------------------
Estimated
December 31, December 31, Useful Life
1997 1996 In Years
- --------------------------------------------------------------------------------
Land and
improvements $ 591,213 $ 571,314 10 - 20
- --------------------------------------------------------------------------------
Building and
improvements 4,231,689 3,841,703 10 - 45
- --------------------------------------------------------------------------------
Furniture, fixtures
and equipment 15,675,217 14,782,996 3 - 10
- --------------------------------------------------------------------------------
$20,498,119 $19,196,013
- --------------------------------------------------------------------------------
Note 6 -- Long-Term Debt
Long term debt, excluding the current portion, was $5.3 million at December 31,
1996, and consisted of a $1.3 million mortgage, due January 1998, and a $4.0
million revolving loan due January 2000.
22
Hooper Holmes, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The revolving loan is a $20.0 million three year revolving loan. The revolving
loan accrues interest at the bank's base rate minus 1/4% to 1 1/4% or LIBOR plus
3/4% to 1 3/4%, at the election of the Company. The interest rate at December
31, 1997 was 8.5% and the maximum available credit amount was $17.7 million.
Also, commitment fees of 1/4% of the unused credit are charged and the loan is
unsecured. Dividend payments are limited to maximum quarterly amounts of 30% to
40% of average quarterly net incomes. As of December 31, 1997, there are no
borrowings against the revolver loan.
The Company has entered into a one year renewable Letter of Credit to the
benefit of an insurance company relating to workers' compensation insurance. At
December 31, 1997, the amount was $2.3 million.
Note 7 -- Commitments and Contingencies
The Company leases branch field offices under a number of operating leases which
expire in various years through 2001. 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
2001. 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, 1997:
- --------------------------------------------------------------------------------
Year Ending December 31,
- --------------------------------------------------------------------------------
1998 $4,509,161
1999 2,937,951
2000 1,295,673
2001 73,086
- --------------------------------------------------------------------------------
Total minimum lease payments $8,815,871
- --------------------------------------------------------------------------------
Rental expenses under operating leases were $5,789,786, $6,053,129 and
$3,908,709 in 1997, 1996 and 1995, respectively.
In 1990, the Company entered into an employment retention contract with its
President for a two year period from the date a change in control occurs as
further defined in the contract and in 1996 with the remaining executive
officers of the Company.
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
results of operations or financial position.
Note 9 -- Income Taxes
Income tax expense is comprised of the following:
- --------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
United States Federal:
Current $ 6,741 $2,948 $ 699
Deferred (380) (354) 362
- --------------------------------------------------------------------------------
State and local:
Current 1,275 1,292 303
Deferred 485 (114) --
- --------------------------------------------------------------------------------
$ 8,121 $3,772 $ 1,364
- --------------------------------------------------------------------------------
The following reconciles the "statutory" federal income tax rates to the
effective income tax rates:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Computed "expected"
tax expense 35% 34% 34%
- --------------------------------------------------------------------------------
Increase (reduction) in tax
expense resulting from:
State tax, net of federal
benefit 7 5 6
Non-tax deductible
amortization of goodwill 5 10 7
Other 1 (1) (2)
- --------------------------------------------------------------------------------
Effective income tax rates 48% 48% 45%
- --------------------------------------------------------------------------------
23
Hooper Holmes, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Discontinued operation accruals $ 241 $ 541
Receivable allowance 366 308
Intangible assets 207 165
Acquisition bases adjustment
accounts receivable -- 665
Insurance benefits 754 572
Other 119 261
- --------------------------------------------------------------------------------
1,687 2,512
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (973) (833)
Acquisition bases adjustment
primarily intangibles (3,342) (4,017)
Other -- (185)
- --------------------------------------------------------------------------------
(4,315) (5,035)
- --------------------------------------------------------------------------------
Net deferred tax liability $(2,628) $(2,523)
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) are reflected in the consolidated balance
sheets at December 31, 1997 as follows: other current assets $1,013,000 and
deferred income taxes (noncurrent) $(3,641,000) and at December 31, 1996, other
current assets $1,838,000 and deferred income taxes (noncurrent) $(4,361,000).
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 1997 and 1996 include
differences between financial and tax reporting for depreciation and
amortization.
Note 10 -- Capital Stock
Stock Split and Authorized Shares -- Effective August 22, 1997, the Company
declared a stock split in the form of a 100% stock dividend to all stockholders,
which was distributed on September 5, 1997. The stock split resulted in an
additional 6,923,582 shares of common stock of which 1,683 were shares of
Treasury Stock. All share and per share amounts have been retroactively restated
for this event.
Stock Repurchase Program -- On January 27, 1998, the Board of Directors approved
a Stock Repurchase Program, which authorizes management to purchase shares of
the Company's common stock at prevailing market prices. The purchases shall not
in the aggregate exceed the lesser of 100,000 shares or $1,500,000 in any
calendar year.
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 $12.00, 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 $12.00, 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 will expire on March 16, 2000,
unless sooner redeemed
Stock Purchase Plan -- In 1993, the shareholders approved the 1993 Employee
Stock Purchase Plan which provides for granting of purchase rights to all
full-time employees, as defined, of up to 500,000 shares. This plan terminates
on December 31, 1998. The plan provides 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 is withheld for their purchase. An employee can
cancel their purchase any time during the year, without penalty. The purchase
price is 95% of the closing common stock price on the grant date. In April 1997,
the Company distributed 33,268 shares under the April 1996 grant, and the
aggregate purchase price was $300,244. In April 1997, the Company made a grant
of approximately 42,000 shares, and the aggregate purchase price will be
approximately $337,000.
24
Hooper Holmes, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Awards -- The Company's 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, 1997, 1996 and 1995, awards of 21,800, 2,500 and
6,000 (paid in cash at its fair value at the time of grant) shares,
respectively, have been granted. Additionally, the Company's Chairman is
entitled to a stock award in 1998 based on a performance related formula.
Stock Option Plan -- The Company's stockholders approved stock option plans
totaling 600,000 and 1,000,000 shares, in 1988 and 1992, respectively, and
1,000,000 and 600,000 shares in 1994 and 1997, respectively, 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 300,000 shares, which provides 50,000 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 200,000 shares to the Chief Executive Officer, at an
exercise price equal to the fair value at the date of grant. The options vest
40,000 shares annually for five years. Any unvested options will become
immediately exercisable if two performance related conditions are met: (a) the
Company's earnings per share are at least $.70 for the year ended December 31,
1998, and (b) the Company's closing stock price is at least $15 per share for
any consecutive 30 day period during the six months ended June 30, 1999.
The following table summarizes stock option activity:
- --------------------------------------------------------------------------------
Under Option
Shares Weighted
Available for Average Exercise
Grant Shares Price Per Share
- --------------------------------------------------------------------------------
Balance January 1, 1995 1,179,376 1,339,250 $ 6.20
Granted (729,700) 729,700 3.92
Exercised -- (10,124) 3.88
Cancelled 232,826 (232,826) 5.14
- --------------------------------------------------------------------------------
Balance December 31, 1995 682,502 1,826,000 5.44
Granted -- -- --
Exercised -- (150,324) 4.39
Cancelled 14,100 (14,100) 4.99
- --------------------------------------------------------------------------------
Balance December 31, 1996 696,602 1,661,576 5.54
Authorized 1,100,000 -- --
Granted (798,000) 798,000 8.38
Exercised -- (289,661) 6.05
Cancelled -- -- --
- --------------------------------------------------------------------------------
Balance December 31, 1997 998,602 2,169,915 $ 6.51
- --------------------------------------------------------------------------------
25
Hooper Holmes, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The weighted average fair value per stock option granted was $4.73 for the 1997
options, no options were granted in 1996, and $4.67 for those granted in 1995.
The Company estimated the fair values using the Black-Scholes option pricing
model, modified for dividends and using the following assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Expected dividend yield .37% -- .48%
Risk-free interest rate 6.13% -- 6.65%
Expected stock price volatility 39.01% -- 37.46%
Expected term until exercise (years) 9 -- 10
- --------------------------------------------------------------------------------
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 the 1997, 1996, and 1995 option grants:
(millions of dollars, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
Net income:
As reported $8,770 $4,086 $(13,049)
Pro forma 8,066 3,864 (13,165)
Basic earnings (loss) per share:
As reported $ .64 $ .30 $ (.97)
Pro forma .59 .29 (.98)
Diluted earnings (loss) per share:
As reported $ .61 $ .30 $ (.97)
Pro forma .56 .28 (.98)
- --------------------------------------------------------------------------------
The pro forma effects on net income (loss) and earnings (loss) per share for
1997, 1996, and 1995 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, 1997:
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Term (Years) Price at 12/31/97 Price
- --------------------------------------------------------------------------------
$ 2.75 -$ 4.19 622,825 7.1 $ 3.97 160,300 $ 3.95
5.94 - 6.50 791,490 6.8 6.08 328,490 6.28
7.00 - 8.75 755,600 7.5 8.06 241,700 7.25
- --------------------------------------------------------------------------------
On February 6, 1998, the Board of Directors granted 211,000 stock options to
certain employees. These options were granted under the 1997 stock option plan
with an exercise price that equalled the fair market value of the stock at the
date of grant.
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 1997, 1996, and 1995, were $251,000, $228,000, and
$137,000, respectively.
26
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, 1997 and 1996, 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, 1997. 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 at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Short Hills, New Jersey
February 19, 1998
27
Hooper Holmes, Inc. and Subsidiaries
Selected Financial Data
For the years ended December 31,
(dollars in thousands except per share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues $ 165,353 $ 156,254 $ 111,313 $ 92,534 $ 80,600
Operating income 16,344 8,576 4,059 3,803 5,020
Interest expense 168 1,394 1,674 994 237
Income from continuing operations 8,770 4,086 1,667 1,480 2,739
Income (loss) from discontinued operations (1) -- -- (14,716) 1,184 867
Net income (loss) 8,770 4,086 (13,049) 2,664 3,606
Earnings per share-basic:
Income from continuing operations .64 0.30 0.12 0.11 0.20
Discontinued operations (1) -- -- (1.10) 0.09 0.06
Net income (loss) .64 0.30 (.98) 0.20 0.26
Earnings per share-diluted:
Income from continuing operations .61 0.30 0.12 0.11 0.20
Discontinued operations (1) -- -- (1.09) 0.09 0.06
Net income (loss) $ .61 0.30 $ (.97) $ 0.20 $ 0.26
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.05 $ 0.03 $ 0.03 $ 0.15 $ 0.15
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares-basic 13,768,334 13,455,438 13,414,256 13,413,426 13,428,122
Weighted average number of shares-diluted 14,282,066 13,621,901 13,452,357 13,457,791 13,520,868
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital $ 20,381 $ 11,807 $ 24,786 $ 6,407 $ 4,024
Total assets 65,941 61,296 93,997 103,172 88,355
Current maturities of long-term debt -- 1,030 8,800 2,150 1,550
Long-term debt, less current maturities -- 5,250 26,250 46,327 29,950
Total long-term debt -- 6,280 35,050 48,477 31,500
Stockholders' equity $ 48,519 $ 37,719 $ 33,132 $ 46,502 $ 45,916
- -------------------------------------------------------------------------------------------------------------------------------
Per share calculations are adjusted to reflect a two-for-one stock split
effective August 22, 1997.
(1) See Note 2 to the consolidated financial statements.
28
Hooper Holmes, Inc. and Subsidiaries
Quarterly Common Stock Price Ranges and Dividends
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
High Low High Low
Quarter Bid Bid Dividend Bid Bid Dividend
- ----------------------------------------------------------------------------------------------------------------------------
First 8 13/16 7 3/4 .01 4 25/32 4 1/32 .005
Second 11 5/8 8 3/16 .01 6 15/16 4 1/8 .005
Third 13 11/16 11 1/16 .015 7 11/16 5 5/16 .01
Fourth 15 7/8 12 13/16 .015 9 1/4 7 1/4 .01
============================================================================================================================
Quarterly Financial Data (Unaudited)
(dollars in thousands except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Per share of common stock
-----------------------------------
Gross Net
Quarter Revenues profit income (loss) Basic Diluted
- ---------------------------------------------------------------------------------------------------------------------------
1997
Fourth $ 42,539 $ 11,883 $ 2,851 $ 21 $ .19
Third 40,701 11,544 2,280 .17 .16
Second 41,399 11,666 2,115 .15 .15
First 40,714 11,067 1,524 .11 .11
- ---------------------------------------------------------------------------------------------------------------------------
Total $165,353 $ 46,160 $ 8,770 $ .64 $ .61
- ---------------------------------------------------------------------------------------------------------------------------
1996
Fourth $ 39,922 $ 9,924 $ 1,494 $ .11 $ .11
Third 37,907 9,276 1,101 .08 .08
Second 39,814 9,897 946 .07 .07
First 38,611 9,197 545 .04 .04
- ---------------------------------------------------------------------------------------------------------------------------
Total $156,254 $ 38,294 $ 4,086 $ .30 $ .30
===========================================================================================================================
Per share calculations are adjusted to reflect a two for one stock split
effective August 22, 1997
29