[LOGO OF HOOPER HOOPER
HOLMES APPEARS HERE] HOLMES
1998 Annual Report
[PHOTO OF ANNUAL REPORT COVER APPEARS HERE]
1899 - 1999 100 Years and Growing
[ARTWORK APPEARS HERE]
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 the nation's major life and health insurers, and
the Company performed approximately 2.5 million tests on insurance applicants in
1998 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.
Contents
Financial Highlights ...................................................... 1
Letter to Shareholders .................................................... 2
Review of Operations ...................................................... 4
Office Locations .......................................................... 12
Financial Contents ........................................................ 13
Corporate Information ........................................ inside back cover
Hooper Holmes, Inc.
Common Stock Price History
[GRAPH APPEARS HERE]
1998 Operating Highlights
. In 1998 Hooper Holmes generated record revenues and earnings.
. The Company's market capitalization grew 101 percent to $408 million at
year-end 1998.
. Hooper Holmes, the technology leader in insurance industry outsourcing,
enhanced its position by introducing a sophisticated website to improve and
accelerate customer service.
. The Company's Portamedic division performed approximately 2.5 million
examinations in 1998.
. The Company acquired a majority interest in Heritage Labs International, a
clinical reference laboratory in Olathe, Kansas. The transaction creates
significant new opportunities for Hooper Holmes.
[GRAPH APPEARS HERE]
Financial Highlights
Year ended December 31,
-------------------------------------------
(dollars in thousands except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------
Revenues $ 185,210 $ 165,353 $ 156,254
Operating income 25,592 16,344 8,576
Income from continuing operations 14,185 8,770 4,086
Loss from discontinued operations (1,485) -- --
Net income 12,700 8,770 4,086
Earnings per share -- basic
Continuing operations .50 .32 .15
Discontinued operations (.05) -- --
Net income .45 .32 .15
Earnings per share -- diluted
Continuing operations .48 .31 .15
Discontinued operations (.05) -- --
Net income $ .43 $ .31 $ .15
Cash dividend per share $ .04 $ .03 $ .02
Weighted average number of shares--basic 28,120,685 27,536,668 26,910,876
Weighted average number of shares--diluted 29,859,710 28,564,132 27,243,802
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Per share and share amounts have been adjusted to effect a two for one stock
split effective January 8, 1999.
[BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]
Revenues Operating Income Earnings Per Share from
Dollars in Millions Dollars in Millions Continuing Operations
Dollars
1994 92.5 1994 3.8 1994 0.06
1995 111.3 1995 4.1 1995 0.06
1996 156.3 1996 8.6 1996 0.15
1997 165.4 1997 16.3 1997 0.31
1998 185.2 1998 25.6 1998 0.48
1999 Annual Report 1
To Our Shareholders
Nineteen ninety-nine marks the centennial year for Hooper Holmes, and we and our
shareholders have a great deal to celebrate. During 1998, we again achieved or
exceeded almost all of our corporate goals. We increased our market share,
improved our profit margins, increased our return on equity and assets to record
levels, expanded our presence on the Internet, substantially increased our
business with direct life insurance marketers and made a strategic acquisition
that complements our core business.
The stock market certainly responded positively to these achievements. Our
total market capitalization rose 101% to $408 million at the end of 1998,
following a 72% gain in the previous year. For the second time in 18 months, we
declared a two for one stock split and increased our cash dividend payout.
[BAR GRAPH APPEARS HERE]
Return on Equity
Percenage
1994 5.8%
1995 4.2%
1996 11.5%
1997 20.3%
1998 22.9%
In 1998, we continued to execute efficiently and control costs. Profits
grew at a significantly faster pace than revenues, indicating our ability to
continue to leverage our branch network and technology infrastructure. As a
result, we were able to again dramatically expand our margins in 1998. The
prescription for profit growth that we established three years ago remains in
place: Generate material revenue growth with only minimal cost increases. Last
year, in fact, our revenue growth accelerated, as we achieved double-digit gains
in each quarter. The keys to these gains were an increase in the average number
of services performed per applicant contact and building our industry-leading
market share, which stood at approximately 27% in 1998.
We are increasing our market share for a variety of reasons, but two stand
out. As the insurance industry consolidates, companies are more inclined to
choose outsourcing partners with a national presence. In addition, new direct
marketers entering the life insurance industry rely heavily on state-of-the-art
technology. They insist on partnering with companies that are equally skilled in
using technology, which is one of Hooper Holmes' strengths. We believe our
leadership position in technology will continue to make us the preferred
outsourcing partner for most insurers, large and small.
Record Financial Results
In 1998, we reported record revenues and earnings. Operating income for the year
ended December 31, 1998 rose 57% to $25.6 million from $16.3 million in 1997,
excluding an after-tax charge in 1998 of $1.5 million from discontinued
operations. Income from continuing operations rose 62% to $14.2 million, from
$8.8 million last year. Earnings per diluted share, adjusted for a
[BAR GRAPH APPEARS HERE]
Return on Assets
Percentage
1994 2.6%
1995 1.7%
1996 5.3%
1997 13.8%
1998 16.8%
2 Hooper Holmes, Inc.
two for one stock split that took effect in January 1999, increased 55% to
$0.48, excluding the discontinued operations charge, compared to the $0.31
reported last year. Our revenues grew much faster than they did in 1997, rising
12% to $185.2 million.
As a result of our continued focus on cost containment, our operating
margin showed a strong increase, rising from 9.9% to 13.8% for the year. We
expect further margin improvements in coming years, with profit growth
percentages outstripping revenue gains.
Our balance sheet improved as well. We now have nearly $30 million in cash
on hand and virtually no debt. This provides us with substantial resources to
pursue our strategies for growth, including making acquisitions that are
immediately accretive to earnings. We are actively looking for acquisition
candidates that complement our core business and provide us with an opportunity
to leverage the strong relationships we have with our customers. In addition, we
have a disciplined approach to acquisitions, and will only undertake a
transaction if the price is right and the benefits to our shareholders are
clear.
New Initiatives
Since its founding 100 years ago, Hooper Holmes has been a technology leader in
providing services to the insurance industry. Our business may have changed over
the decades, but our reliance on cutting-edge tools has not. We intend to
maintain and enhance our leadership position in providing health information by
continuing to invest in technology to improve the level of service we provide.
"Our centennial year has been marked by record financial performance and
substantial strategic progress."
[PHOTO OF JAMES M. MCNAMEE APPEARS HERE]
James M. McNamee
Chairman, President and
Chief Executive Officer
In 1998, we expanded our Portamedic / Infolink website, and it now
represents a breakthrough in our industry. Today, customers can handle several
aspects of their business with us online. They can place the order, check its
status and determine that the case is complete.
In December, we acquired a majority interest in Heritage Labs
International, a clinical reference laboratory serving life insurers. The
addition of Heritage provides long-term opportunities for us to expand our
relationships with life and health insurers nationwide, and further develop
alternative distribution channels.
The Future
The key industry trends that have helped us in recent years remain in
place. New direct marketers continue to enter the insurance business, and our
sophisticated technology has helped us gain a leading share of this market. The
traditional agent/broker business is expected to experience a rebound from
previous years, complementing the increasing direct response business. Total
potential life insurance buyers are on the rise as aging Baby Boomers enter the
prime insurance-buying years. The growth in outsourcing means insurers will be
requiring more service per applicant contact, which causes our revenue per unit
sale to rise.
In short, we are the leader in an industry that is enjoying solid growth,
which puts us in a great position to maximize future opportunities. We want to
thank all of our employees for making 1998 another outstanding year for Hooper
Holmes. We are also grateful to our customers and shareholders, and we hope to
do great things for them in the year -- and the century -- that lies ahead.
/s/ James M. McNamee
James. M. McNamee
Chairman, President, and
Chief Executive Officer
1998 Annual Report 3
Review of Operations
Industry Leadership
Hooper Holmes has been a leader in the alternate-site health information
business for many years. We are one of the largest providers of outsourced
health information to life and health insurers, performing approximately 2.5
million examinations per year, or more than 10,000 examinations every business
day. The registered nurses, licensed nurse practitioners, physicians, and
medical and paramedical technicians in our Portamedic division examine and test
insurance applicants in their offices or homes, according to the desire of the
applicants. Hooper Holmes is the leading company in this expanding $750 million
industry, with a market share of approximately 27%, and the Company performs 50%
more tests than its closest competitor. These tests range from blood pressure
monitoring to much more sophisticated procedures such as electrocardiograms and
long-term care cognitive assessments. The Company has strong relationships with
48 of the top 50 life and health insurance companies in the United States, as
well as more than 800 other companies and independent insurance agents and
brokers.
Among Hooper Holmes' competitive advantages are:
. Size - In our industry, being the largest is a significant benefit. Because
Portamedic has 200 offices throughout the country and 8,700 medical examiners,
there are relatively few potential insurance applicants who are not within an
easy drive of one of our examiners.
. Speed - No one in our industry works faster than we do. Quick turnaround of
cases is always desirable, but in the insurance industry it is particularly
critical. Insurance companies and insurance agents and brokers know that the
faster an applicant can be approved, the more likely he or she is to close a
sale. The speed of our processing system helps insurance companies deliver swift
service to their customers.
. Quality - In our business, quality is as important as speed. Our customers
know that they cannot find better service or more reliable reports anywhere. We
carefully audit our examiners and laboratory facilities to make sure that we are
providing clients with the best possible service.
That is not just our opinion. Independent research reveals that Hooper
Holmes' commitment to quality is broadly recognized in the industry. Maintaining
impeccable quality standards is the only way we know how to do business; it also
happens to be an excellent formula for ensuring high levels of customer
satisfaction.
"The Company's network of 200 branch offices and state-of-the art technology
infrastructure are unmatched in the industry."
Income from Continuing Operations
Dollars in Millions
[BAR GRAPH APPEARS HERE]
1994 1.5
1995 1.7
1996 4.1
1997 8.8
1998 14.2
4 Hooper Holmes, Inc.
The Early Years
1899 - 1912
On March 6, 1899, William DeMattos Hooper and Bayard P. Holmes started a company
called the National Insurance Information Bureau. It served as a clearinghouse
for the exchange of information among underwriters of Accident and Sickness
Insurance, and its main purpose was to prevent fraud by policyholders.
[GRAPHIC APPEARS HERE]
[GRAPHIC APPEARS HERE]
The firm's first offices were at 87 Nassau Street in New York City, just a block
away from Wall Street, the center of the insurance industry. In 1906, the
business was incorporated and its name changed to the Hooper Holmes Information
Bureau.
[GRAPHIC APPEARS HERE]
John J. King was in his early twenties when he drove a stagecoach out of Grand
Junction, Colorado. He later entered the insurance field as an investigator and
joined Hooper Holmes in 1912 as an assistant manager.
[GRAPHIC APPEARS HERE]
1911 - In the early years of the century, accident claims involving bicycles,
automobiles, and streetcars were common and prompted the need for Hooper Holmes'
central claim files.
1998 Annual Report 5
Review of Operations
Technological Innovation
Perhaps more than anything else, it is our groundbreaking application of
technology that makes Hooper Holmes the industry leader. We have the most
automated branch network and operating system in the industry, and that provides
direct benefits to our clients and to our Company.
Our life insurance clients can use our recently expanded Portamedic Web
page, Portamedic.com, to order examinations and check information on line.
Additionally, they can track the status of each applicant electronically.
Certain results of our services are provided electronically, if requested.
Our Internet presence is not confined to our own website. For example, we
participate in Quicken's InsureMarket Web site and when a visiting consumer
elects to apply for insurance, the chances are good that we will perform the
required examination. We believe we are well positioned to grow our business as
insurance sales over the Internet increase.
Our technical capabilities are of particular value to direct marketers of
life insurance products. Many of these newer entrants operate as "virtual"
insurance companies, outsourcing almost all of their required services. This
industry segment is growing rapidly, and at Hooper Holmes this business is
rapidly expanding. In 1997, business with direct marketers accounted for 6% of
our revenues. Last year, the figure jumped to 13%, making us industry leader in
this market segment.
Our Teledex and Infolink systems provide customers with information
gathering flexibility. Typically, the systems are used when the policy amount is
insufficient to justify an in-person visit or when an underwriter determines
that additional information is required. With an Infolink request, we
electronically send clients employment information, physical and medical
histories, and attending physician statements. When Teledex is chosen, the same
information is sent, along with the highlights of a phone interview with the
applicant. Teledex and Infolink are the kind of ancillary services that reflect
Hooper Holmes' potential to leverage our extensive technological network.
All in all, our innovative application of state-of-the-art technology helps
keep a lid on our costs. And it helps us to maintain our leadership position in
financial performance. Our return on equity is 25%, almost double the 13%
average for our peer group.
Growth Opportunities
We will work hard to ensure that the Company enjoys strong growth for many years
to come. Our extensive branch network and technological infrastructure will
enable us to expand the services we provide with only
"Our technological capabilities are a key factor driving the rapid growth of our
business, including direct marketers of life insurance."
Total Assets
Dollars in Millions
[BAR GRAPH APPEARS HERE]
1994 103.2
1995 94.0
1996 61.3
1997 65.9
1998 85.0
6 Hooper Holmes, Inc.
Building the Business
1912 - 1971
William Hooper died in 1912. In the same year, John King began to lead the
expansion of the inspection department, and his influence grew. He created the
branch network that now extends throughout the U.S. and Canada, and ran the
Company for 35 years. Three of Mr. King's sons would lead Hooper Holmes as well.
(Below): The Annual Inspectors Dinner in December, 1924.
[PHOTO OF JOHN J. KING APPEARS HERE]
[PHOTO OF ANNUAL INSPECTORS DINNER [PHOTO OF EDWARD KING APPEARS HERE]
APPEARS HERE] [PHOTO OF FREDERICK KING APPEARS HERE]
[PHOTO OF J. CHARLES KING APPEARS HERE]
[GRAPHIC APPEARS HERE] [GRAPHIC APPEARS HERE]
1942 - During World War II, the Company performed inspections for the U.S.
government primarily involving defense industry employment.
[PHOTO OF FREDERICK D. KING APPEARS HERE]
1950 - Hooper Holmes built new headquarters in Morristown, N.J. and opened its
doors on September 4, 1951.
[PHOTO OF HOOPER HOLMES APPEARS HERE]
[PHOTO APPEARS HERE]
1962 - Mechanized rolling files were the latest in technological innovation for
accessing the Company's Casualty Index. 1970 - Having outgrown the Morristown
offices, the Company built a larger headquarters in Basking Ridge, N.J.
1998 Annual Report 7
Review of Operations
a marginal increase in costs. This ability to leverage our nationwide network
positions us to continue to grow profits at a significantly faster pace than
revenues. New initiatives and acquisitions should contribute to our growth. In
addition, many important demographic and industry trends are helping us now and
should continue to benefit us in the future.
Acquisitions. In December, Hooper Holmes acquired a majority stake in
Heritage Labs International, an Olathe, Kansas-based outsourcer of laboratory
testing services for insurance companies. The laboratory has excellent cost
controls and is a low-cost producer, which offers us a chance to increase
profits while saving money for our customers. In addition, Heritage has an
experienced management team and the capacity to absorb additional business with
only a minimal increase in costs.
This transaction also represents a longer-term opportunity for Hooper
Holmes to leverage its strong customer relationships. In the normal course of
business, we send specimens to laboratories that are designated by insurance
companies. Additionally, we plan to position Heritage Laboratory as the
laboratory of choice to meet the specific needs of the emerging life insurance
alternative distribution market. Our initial focus will be on marketing
Heritage's services to Hooper Holmes' existing customers to create a unique
one-stop advantage for insurers outsourcing these services.
The Heritage acquisition offers benefits to our customers as well,
including the ability to transmit data, including lab results, necessary to
underwrite the application. We intend to grow our laboratory business and to
service our clients more efficiently at the same time.
While the equity stake in Heritage presents opportunities for us, it is
also emblematic of the many acquisitions opportunities that exist in our
industry. We are actively looking to make strategic acquisitions that are
accretive, complement our core business and enable us to build on our
relationships with leading health and life insurance companies. We see
opportunities to expand the outsourcing services we provide in areas ranging
from the long-term care insurance industry to worker's compensation claims
support.
Demographics. The aging of the Baby-Boomer generation is already having a
positive impact on our business and should continue to do so. The prime
insurance-buying age is the late 30s to the late 50s; with a baby boomer turning
50 every eight seconds, the number of people in this prime buying group is set
to increase dramatically.
"The ability to leverage our nationwide network enables us to grow profits at a
significantly faster pace than revenues."
[BAR CHART APPEARS HERE]
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Working Capital
Dollars in Millions
---------------------
1994 6.4
1995 24.8
1996 11.8
1997 20.4
1998 33.5
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8 Hooper Holmes, Inc.
The Growth of Portamedic
1971 - 1984
In 1971, Frank Schwindler, then Vice President and Director of Sales and
Operations, decided to hire registered nurses to handle medical examinations for
life insurers. The previous method of using doctors exclusively had proven to be
too costly, inconvenient and frustrating, as doctors were often unavailable.
[PHOTO OF FRANK J. SCHWINDLER [PHOTO OF JAMES M. MCNAMEE
APPEARS HERE] APPEARS HERE]
[PHOTO OF A PORTAMEDIC EXAM APPEARS HERE]
In 1972, James M. McNamee, then Product Manager of New Services, played an
important role in developing this new system and gave it a name -- Portamedic.
Through aggressive expansion and acquisitions, Portamedic grew quickly. By 1984,
it accounted for nearly half of the Company's revenues.
[LOGO OF PORTAMEDIC APPEARS HERE]
[PHOTO APPEARS HERE]
Using registered nurses and a specially designed examination kit, Portamedic
became the nation's leading provider of alternate-site health information.
1977 - The Company used state-of-the-art computer technology to update the old
card files to support an expanding national network of 89 offices by 1984.
[PHOTO APPEARS HERE]
1980 - Hooper Holmes entered the health care field, offering relief personnel to
hospitals and providing registered nurses and skilled practitioners for home
health care. By 1984, Portamedic Health Care had revenues of $23.5 million.
[PHOTO APPEARS HERE]
1998 Annual Report 9
Review of Operations
Larger policy amounts, lower age thresholds. The demographics combined with the
types of policies being purchased are resulting in higher policy amounts. In
many areas, the age or dollar threshold triggering a paramedical exam continues
to decrease. Clients are electing to outsource more individual services,
particularly in the markets where policies are sold on a more direct basis.
Hooper Holmes has positioned ourselves to welcome the opportunity to provide
these new services.
Industry consolidation. The insurance industry is consolidating rapidly;
the big are getting bigger. This trend clearly benefits Hooper Holmes. Because
many of acquiring insurers are large, they prefer to work with a single vendor
that can meet all their needs. Hooper Holmes, which offers a full national
network and meets their technological needs, is well positioned to be their
vendor of choice.
Outsourcing. Outsourcing is a powerful global trend, one that is particularly
strong in the insurance industry. More and more insurers are choosing to "farm
out" administrative, marketing, and underwriting functions. As pressures to
reduce administrative costs increase, we believe that even more insurers will
opt to outsource non-core functions to companies like Hooper Holmes.
Quality People, Quality Service
The best thing about Hooper Holmes is its people. The highly motivated,
service-oriented and efficient individuals who comprise our organization have
worked extremely hard to make us successful. One of our greatest competitive
advantages is the fact that our field managers are very seasoned,
extraordinarily disciplined, and maintain strong relationships with our
customers. They help ensure that the service we provide is unmatched in our
business.
We recently instituted a new way of rewarding our people for their
dedication. Since 1997, our incentive plan has included stock options for all
eligible employees throughout the entire organization. We believe that allowing
employees to share in the success of the Company is a powerful motivator,
aligning their interests with those of the Company, its customers and its
shareholders
"The Company's experienced and disciplined field managers maintain strong
relationships with their customers."
[BAR GRAPH APPEARS HERE]
====================
Stockholder's Equity
Dollars in Millions
--------------------
1994 46.5
1995 33.1
1996 37.7
1997 48.5
1998 62.3
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10 Hooper Holmes, Inc.
Creating Shareholder Value
1984-1999
The Company raised $3.0 million in an initial public offering on July 28, 1984.
[GRAPHIC APPEARS HERE]
$10,000 invested in the Hooper Holmes IPO would be worth over $270,000 today.
[GRAPHIC APPEARS HERE]
1987 - The company continued to invest heavily in computers to increase its
information services capabilities. In 1988, Hooper Holmes introduced electronic
life and health reports under the name Infolink.
[GRAPHIC APPEARS HERE]
In 1992, Portamedic was the first in its industry to use a Paperless Electronic
Paramedical (PEP) system to keep information flowing smoothly and rapidly to
clients.
[GRAPHIC APPEARS HERE]
1998 - Hooper Holmes acquired a majority stake in Heritage Labs to maximize the
efficiency of blood sampling and other diagnostic capabilities. The Company
continues to look for acquisitions that will enhance share-holder value.
[GRAPHIC APPEARS HERE]
1998 - Portamedic unveiled a Web site that offers clients a full range of
information and ordering services. This was just one in a series of technology
efforts designed to expand Hooper Holmes' capabilities while keeping costs
under control.
[GRAPHIC APPEARS HERE]
1998 Annual Report 11
Nationwide Network
With an extensive network of more than 200 branch offices, Hooper Holmes is
always within close proximity to potential insurance applicants throughout the
U.S. The Company is headquartered in Basking Ridge, NJ.
[MAP OF THE UNITED STATES APPEARS HERE]
ALABAMA GEORGIA MINNESOTA OHIO UTAH
Birmingham Atlanta Minneapolis (2) Akron Salt Lake City
Huntsville Atlanta East Cincinnati
Mobile Columbus MISSISSIPPI Cleveland (2) VERMONT
Columbus* Jackson Columbus Burlington
ALASKA Macon Dayton
Anchorage MISSOURI Sandusky* VIRGINIA
GUAM St. Louis (2) Toledo Norfolk
ARIZONA Guam Youngstown* Richmond (2)
Phoenix MONTANA Roanoke
Tucson HAWAII Billings OKLAHOMA Washington, DC*
Honolulu Oklahoma City
ARKANSAS Honolulu* NEBRASKA Tulsa WASHINGTON
Little Rock Omaha Bellevue
IDAHO OREGON Seattle
CALIFORNIA Boise NEVADA Portland Spokane
Berkeley Las Vegas Salem Tacoma
Chico* ILLINOIS
Cypress Chicago (3) NEW HAMPSHIRE PENNSYLVANIA WEST VIRGINIA
Fresno Peoria Manchester Allentown Charleston
Los Angeles (3) Rockford Erie
Modesto Springfield NEW JERSEY Harrisburg WISCONSIN
Pasadena Clifton Philadelphia Metro Milwaukee
Riverside INDIANA East Brunswick Pittsburgh
Sacramento Ft. Wayne Ledgewood Valley Forge WYOMING
San Bernardino Indianapolis Paramus Casper
San Diego Randolph PUERTO RICO
San Francisco (2) IOWA Voorhees Puerto Nuevo* *Contractor Affiliate
Santa Ana Des Moines
Ventura NEW MEXICO RHODE ISLAND
KANSAS Albuquerque* Providence
COLORADO Kansas City (3)
Denver Wichita NEW YORK SOUTH CAROLINA
Greeley Albany Charleston
KENTUCKY Binghamton Columbia
CONNECTICUT Lexington Buffalo Greenville
Hartford Louisville Garden City, Long Island Greenville*
New Haven Hauppauge
New Haven* LOUISIANA Manhattan (2) SOUTH DAKOTA
Simsbury* New Orleans New York (Queens) Sioux Falls
Poughkeepsie
DELAWARE MAINE Rochester TENNESSEE
Wilmington Portland Scarsdale Knoxville
Staten Island Memphis
FLORIDA MARYLAND Syracuse Nashville (2)
Ft. Lauderdale Baltimore
Ft. Myers NORTH CAROLINA TEXAS
Jacksonville MASSACHUSETTS Asheville Austin
Miami Boston Charlotte Corpus Christi
Orlando (2) Springfield* Fayetteville Dallas (2)
Pensacola* Worcester Garner El Paso
Port St. Lucie Greensboro Ft. Worth
St. Petersburg MICHIGAN Raleigh Houston (2)
Tallahassee* Detroit (2) Lubbock
Tampa Grand Rapids NORTH DAKOTA McAllen
West Palm Beach Lansing Bismarck San Antonio
Tyler
Waco
12 Hooper Holmes, Inc.
Hooper Holmes, Inc. and Subsidiaries
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Financial Contents
Management's Discussion and Analysis 14
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Consolidated Balance Sheets 17
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Consolidated Statements of Income 18
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Consolidated Statements of Stockholders' Equity 19
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Consolidated Statements of Cash Flows 20
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Notes to Consolidated Financial Statements 21
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Independent Auditors' Report 30
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Selected Financial Data 31
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Quarterly Common Stock Price Ranges and Dividends 32
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Quarterly Financial Data 32
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13
Hooper Holmes, Inc. and Subsidiaries
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Management's Discussion and Analysis
Results of Operations
1998 Compared to 1997
Total revenues for 1998 increased 12.0% to $185.2 million from $165.4 million
for 1997. This growth results from a 9% increase in the number of paramedical
examinations performed, increases in revenues per unit of service, and is
consistent with the Company's efforts to increase market share.
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 totaled
69.8% for 1998 versus 72.1% for 1997. 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 branch automation
initiatives.
Selling, general and administrative (SG&A) expenses were $30.4 million for 1998
compared to $29.8 million for 1997. As a percentage of revenues, SG&A expenses
decreased to 16.4% for 1998 from 18.0% for 1997, which is due to management's
continued efforts to control corporate expenses.
Accordingly, the Company's operating income for 1998 increased to $25.6 million
versus $16.3 million for 1997, and as a percentage of revenues, increased to
13.8% for 1998 compared to 9.9% for 1997.
Other income items in 1998 were primarily interest earned on invested funds, the
average balance of which was greater than in 1997.
The effective tax rate was 46% and 48% for 1998 and 1997, respectively. The
decrease is the result of increased profitability which lessened the impact of
non-tax deductible amortization of goodwill.
As a result of the foregoing, net income from continuing operations in 1998
totaled $14.2 million or $0.48 per diluted share compared to $8.8 million or
$.31 for 1997.
The net loss from discontinued operations totaled $1.5 million or $0.05 per
diluted share in 1998. The charge evolved from residual worker's 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 $0.43
per diluted share compared to $8.8 million or $0.31 per diluted share. Net
income in 1998 includes a $1.5 million, or $0.05 per share charge from
discontinued operations, as previously noted.
Inflation did not have a significant effect on the Company's operations in 1998.
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
14
primarily interest earned on invested funds and certain deferred payments
received from the sale of the Company's Direct Marketing business in 1992.
The effective tax rate for 1997 and 1996 was 48%.
As a result of the foregoing, net income in 1997 totaled $8.8 million or $0.31
per diluted share compared to $4.1 million or $0.15 per diluted share for 1996.
Inflation did not have a significant effect on the Company's operations in 1997.
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, 1998, the net cash provided by operating
activities was $21.6 million as compared to $16.6 million in 1997. The
significant sources were net income of $12.7 million, $4.7 million of
depreciation and amortization, $5.1 million increase in accounts payable and
accrued expenses which were offset by an increase in other assets of $.6 million
and an increase in deferred taxes of $2.8 million. The Company has in place a
three year $20 million revolving credit facility, which expires on January 2,
2000, and may be extended for one year at the option of the Company. 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, 1998, the Company had
no borrowings against the revolver and a total of $18.5 million is available,
with $1.5 million committed to outstanding letters of credit. Capital
expenditures for 1999 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 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.
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
The Company recognizes the need to insure that its operations and relationships
with its customers, suppliers and other third parties will not be adversely
impacted by the Year 2000 software issue. In January 1997, the Company formed a
"Year 2000" compliance committee. The committee has been charged with
identifying all information and non-information technology systems that could be
affected by the Year 2000 issue.
The Company has developed a phased program to address its Year 2000 issues. The
first phase consisted of identifying the Company's IT Systems and Non-IT
Systems, and identifying suppliers and customers
15
whose operations could impact those of the Company. Phase one was completed on
schedule. The second phase consisted of determining whether those systems are
Year 2000 compliant, based on certifications received from suppliers and
customers, and on management's assessment of its internal systems. Many of the
Company's critical suppliers and vendors have indicated that they already are,
or will be Year 2000 compliant during 1999. The second phase was completed in
the fourth quarter 1998. Phase three, is already underway, and consists of
remediating non-compliant systems, as well as developing a worse case
contingency plan. The Company expects to complete this phase early in the second
quarter, 1999.
Since the Company's Year 2000 compliance is dependent upon key third parties
also being Year 2000 compliant on a timely basis, there can be no guarantee that
the Company's efforts will prevent a material adverse impact on its results of
operations, financial condition or cash flows. If our systems, or those of key
third parties are not fully Year 2000 functional, we estimate that up to a one
month disruption in operations could occur. Such a disruption could result in
delays in providing services and in issuing billings to customers. These
consequences could have a material adverse impact on our results of operations,
financial condition and cash flows if we are unable to substantially conduct our
business in the ordinary course. We believe that our efforts, including the
development of a contingency plan, will significantly reduce the adverse impact
that any disruption in business might have. Year 2000 costs are not expected to
exceed one quarter of a million dollars. The Company has attempted to identify
all of its Year 2000 problem areas, has communicated, and will continue to
communicate with its suppliers, customers, and other parties. Management
believes that it is taking adequate steps to insure that its systems will be
Year 2000 compliant. We believe our ongoing efforts to address the Year 2000
issue will minimize possible negative consequences to our Company.
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 becomes effective for our financial
statements beginning January 1, 2000. 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 our consolidated financial
statements.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and SOP 98-5, Reporting on the Costs of Start-up
Activities, which are effective in 1999. The Company does not expect adoption of
these SOPs to have a material impact on our consolidated financial statements.
16
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
December 31,
--------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $29,752,361 $13,159,431
Accounts receivable 18,145,856 18,520,347
Other current assets 5,396,202 2,481,818
- ------------------------------------------------------------------------------------------------------------
Total current assets 53,294,419 34,161,596
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment 22,487,225 20,498,119
Less: Accumulated depreciation and amortization 14,166,163 12,050,903
- ------------------------------------------------------------------------------------------------------------
8,321,062 8,447,216
- ------------------------------------------------------------------------------------------------------------
Goodwill (net of accumulated amortization of
$4,243,606 in 1998 and $3,460,240 in 1997) 16,398,245 15,089,108
- ------------------------------------------------------------------------------------------------------------
Intangible assets (net of accumulated amortization of
$5,714,039 in 1998 and $4,053,440 in 1997) 6,728,112 7,647,711
- ------------------------------------------------------------------------------------------------------------
Other assets 274,547 595,486
- ------------------------------------------------------------------------------------------------------------
$85,016,385 $65,941,117
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 450,000 $ --
Accounts payable 6,606,518 5,577,158
Accrued expenses:
Insurance benefits 1,662,747 1,969,403
Salaries, wages and fees 2,356,582 1,935,277
Payroll and other taxes 204,893 170,152
Income taxes payable 3,315,758 610,487
Discontinued operations 2,845,007 573,970
Other 2,377,001 2,944,248
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 19,818,506 13,780,695
- ------------------------------------------------------------------------------------------------------------
Deferred income taxes 2,518,487 3,641,051
Minority interest 385,441 --
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $.04 per share; authorized 80,000,000 shares,
issued 28,379,964 in 1998 and 13,939,115 in 1997 1,135,198 557,565
Additional paid-in capital 29,515,099 27,079,265
Retained earnings 32,616,294 20,901,043
- ------------------------------------------------------------------------------------------------------------
63,266,591 48,537,873
Less: Treasury stock at cost, 104,332 shares in 1998 and
6,732 shares in 1997 972,640 18,502
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 62,293,951 48,519,371
- ------------------------------------------------------------------------------------------------------------
$85,016,385 $65,941,117
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income
Years ended December 31,
-----------------------------------------------------------------
1998 1997 1996
Revenues $ 185,209,776 $ 165,352,706 $ 156,253,763
Cost of operations 129,261,234 119,193,062 117,959,274
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 55,948,542 46,159,644 38,294,489
Selling, general and administrative expenses 30,356,166 29,815,579 29,718,867
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 25,592,376 16,344,065 8,575,622
Other income (expense):
Interest expense (3,391) (168,266) (1,394,038)
Interest income 768,476 295,765 348,153
Other income, net (88,171) 419,899 328,035
- -----------------------------------------------------------------------------------------------------------------------------------
676,914 547,398 (717,850)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 26,269,290 16,891,463 7,857,772
- -----------------------------------------------------------------------------------------------------------------------------------
Income taxes 12,084,000 8,121,000 3,772,000
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 14,185,290 8,770,463 4,085,772
- -----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations
Loss on disposal, net of taxes (1,485,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,700,290 $ 8,770,463 $ 4,085,772
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share -- basic:
Income from continuing operations $ .50 $ .32 $ .15
Discontinued operations-- net of taxes (.05) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ .45 $ .32 $ .15
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share -- diluted:
Income from continuing operations $ .48 $ .31 $ .15
Discontinued operations-- net of taxes (.05) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ .43 $ .31 $ .15
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares -- basic 28,120,685 27,536,668 26,910,876
Weighted average shares -- diluted 29,859,710 28,564,132 27,243,802
- -----------------------------------------------------------------------------------------------------------------------------------
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, 1996, 1997 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------- Additional
Number of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
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 ($.015 per share) (403,818) (403,818)
Issuance of stock award 2,405 29,470 31,875
Exercise of stock options 47,037 1,881 349,300 309,181 660,362
Exercised stock options tax benefit 213,252 213,252
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,791,459 271,658 24,645,945 12,820,355 (18,502) 37,719,456
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 8,770,463 8,770,463
Cash dividends ($.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
- -----------------------------------------------------------------------------------------------------------------------------------
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,
-----------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net Income $ 12,700,290 $ 8,770,463 $ 4,085,772
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss on disposal 1,485,000 -- --
Depreciation and amortization 4,704,540 5,022,569 5,071,692
Provision for bad debt expense 130,000 480,000 380,000
Deferred tax expense (benefit) (2,804,000) 105,478 (467,448)
Issuance of stock awards 38,250 -- 31,875
Loss on sale of fixed assets 67,237 61,448 58,313
Change in assets and liabilities, net of effect
from acquisitions of businesses:
Accounts receivable 715,604 (869,320) 6,456,636
Other assets (566,046) 2,324,305 1,038,631
Income tax receivable -- -- 8,004,039
Accounts payable and accrued expenses 5,138,185 685,627 (8,347,222)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,609,060 16,580,570 16,312,288
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds including escrow funds from dispositions -- -- 15,000,000
Business acquisitions, net of cash acquired (2,820,352) -- (37,500)
Capital expenditures, net of disposals (1,833,818) (1,441,469) (1,103,601)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (4,654,170) (1,441,469) 13,858,899
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term debt -- -- 19,000,000
Principal payments on long-term debt -- (6,280,000) (47,770,000)
Proceeds from employee stock purchase plan 324,248 300,244 --
Proceeds related to the exercise of stock options 1,252,969 1,753,414 873,614
Treasury Stock acquired (954,138) -- --
Dividends paid (985,039) (689,775) (403,818)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (361,960) (4,916,117) (28,300,204)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 16,592,930 10,222,984 1,870,983
Cash and cash equivalents at beginning of year 13,159,431 2,936,447 1,065,464
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 29,752,361 $ 13,159,431 $ 2,936,447
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ -- $ 179,318 $ 1,668,018
Income taxes $ 11,573,729 $ 7,740,392 $ 1,955,316
=============================================================================================================================
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 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 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 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. 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.
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 by the sum of weighted average common shares
outstanding during the period plus
21
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
common stock equivalents. Common stock equivalents (1,739,025, 1,027,464 and
332,926 for 1998, 1997 and 1996, 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, at December 31, 1998 and 1997, 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.
Advertising
Costs related to space in publications are expensed the first time the
advertising occurs. Advertising expense was approximately $149,000, $161,000,
and $285,000 in 1998, 1997, and 1996, respectively.
Reclassification
Certain 1997 amounts were reclassified to conform with the 1998 presentation.
- --------------------------------------------------------------------------------
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
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 date of purchase. The results of
operations for 1998 or 1997 would not be materially different if these
acquisitions had occurred on January 1, 1997.
- --------------------------------------------------------------------------------
Note 4 -- Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts in the amount
of $1,091,499 and $872,114 in 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Note 5 -- Property, Plant and Equipment
Property, Plant and Equipment consists of the following:
Estimated
December 31, December 31, Useful Life
1998 1997 In Years
- --------------------------------------------------------------------------------
Land and improvements $ 591,213 $ 591,213 10 - 20
- --------------------------------------------------------------------------------
Building and improvements 4,550,903 4,231,689 10 - 45
- --------------------------------------------------------------------------------
Furniture, fixtures and equipment 17,345,109 15,675,217 3 - 10
- --------------------------------------------------------------------------------
$22,487,225 $20,498,119
================================================================================
- --------------------------------------------------------------------------------
Note 6 -- Long Term Debt
The Company's revolving loan facility is a $20.0 million revolving loan which
expires on January 2, 2000, with a one year renewable Company option. 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, 1998 was 7.75% and the maximum available credit amount was $18.5
million. Such amounts could be withdrawn if an event of default as defined
occurs. Also, commitment fees of 1/4% of the unused credit are charged and the
loan is unse-
23
Hooper Holmes, Inc. and Subsidiaries
cured. Dividend payments are limited to maximum quarterly amounts of
30% to 40% of average quarterly net incomes. As of December 31, 1998, there were
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, 1998, the amount was $1.5 million.
The note payable of $450,000 is an obligation of our majority owned
subsidiary. The interest rate at December 31, 1998 was 8.75%. 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 2003. 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
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, 1998:
Year Ending December 31,
1999 $ 7,345,267
2000 5,711,096
2001 3,071,076
2002 73,944
2003 10,160
- --------------------------------------------------------------------------------
Total minimum lease payments $16,211,543
- --------------------------------------------------------------------------------
Rental expenses under operating leases were $6,498,217, $5,789,786 and
$6,053,129 in 1998, 1997 and 1996, 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.
24
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 9 -- Income Taxes
Income tax expense is comprised of the following:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal:
Current $ 11,693 $ 6,741 $ 2,948
Deferred (1,277) (380) (354)
- --------------------------------------------------------------------------------
State and local:
Current 1,930 1,275 1,292
Deferred (262) 485 (114)
- --------------------------------------------------------------------------------
$ 12,084 $ 8,121 3,772
================================================================================
The following reconciles the "statutory" federal income tax rates to the
effective income tax rates:
1998 1997 1996
- --------------------------------------------------------------------------------
Computed "expected" tax expense 35% 35% 34%
- --------------------------------------------------------------------------------
Increase (reduction) in tax expense resulting from:
State tax, net of federal benefit 8 7 5
Non-tax deductible amortization of goodwill 1 5 10
Other 2 1 (1)
- --------------------------------------------------------------------------------
Effective income tax rates 46% 48% 48%
================================================================================
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Discontinued operation accruals $ 1,227 $ 241
Receivable allowance 471 366
Intangible assets 219 207
Insurance benefits 717 754
Other 735 119
- --------------------------------------------------------------------------------
3,369 1,687
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (637) (973)
Acquisition bases adjustment
primarily intangibles (2,556) (3,342)
- --------------------------------------------------------------------------------
(3,193) (4,315)
- --------------------------------------------------------------------------------
Net deferred tax asset (liability): $ 176 $(2,628)
================================================================================
Deferred tax assets (liabilities) are reflected in the consolidated
balance sheets at December 31, 1998 as follows: other current assets $2,694,000
and deferred income taxes (noncurrent) $(2,518,000) and at December 31, 1997,
other current assets $1,013,000 and deferred income taxes (noncurrent)
$(3,641,000).
25
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 1998 and 1997
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.
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.
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 will expire on March 16, 2000, unless
sooner redeemed
26
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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. This plan terminated
on December 31, 1998. 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. An employee
can cancel their purchase 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 and April 1998, the Company distributed 66,536 shares, and 80,904
shares, respectively, under the April 1996 and April 1997 grants, and the
aggregate purchase price was $300,244, and $324,248, respectively. In April
1998, the Company made a grant of approximately 71,000 shares, and the aggregate
purchase price is approximately $579,000.
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, 1998, 1997 and 1996, awards of
5,000, 4,000 and 10,000 shares, respectively, have been granted.
Stock Option Plan -- The Company's stockholders approved stock option plans
totaling 1,200,000 and 2,000,000 shares in 1988 and 1992, respectively, and
2,000,000 and 1,200,000 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 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 will become immediately exercisable in 1999, if two performance related
conditions are met: (a) the Company's earnings per share are at least $.35 for
the year ended December 31, 1998, and (b) the Company's closing stock price is
at least $7.50 per share for any consecutive 30 day period during the six months
ended June 30, 1999. These conditions have been met.
27
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table summarizes stock option activity:
Under Option
- --------------------------------------------------------------------------------
Shares Weighted
Available for Average Exercise
Grant Shares Price Per Share
- --------------------------------------------------------------------------------
Balance January 1, 1996 1,365,004 3,652,000 $ 2.72
Granted -- -- --
Exercised -- (300,648) 2.20
Cancelled 28,200 (28,200) 2.50
- --------------------------------------------------------------------------------
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
================================================================================
The weighted average fair value per stock option granted was $5.96 for the 1998
options, $2.36 for the 1997 options, and no options were granted in 1996. The
Company estimated the fair values using the Black-Scholes option pricing model,
modified for dividends and using the following assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield .34% .37% --
Risk-free interest rate 4.75% 6.13% --
Expected stock price volatility 41.90% 39.01% --
Expected term until exercise (years) 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 the 1998, 1997, and 1996 option grants:
(thousands of dollars, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $12,700 $8,770 $4,086
Pro forma 11,552 8,066 3,864
Basic earnings per share:
As reported $ .45 $ .32 $ .15
Pro forma .41 .29 .14
Diluted earnings per share:
As reported $ .43 $ .31 $ .15
Pro forma .39 .28 .14
================================================================================
28
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The pro forma effects on net income and earnings per share for 1998, 1997,
and 1996 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, 1998:
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Term (Years) Price at 12/31/98 Price
-----------------------------------------------------------------------------------------
$1.94 - $3.50 1,999,250 4.9 $ 2.49 1,272,300 $2.69
4.06 - 4.22 1,913,500 7.4 4.09 317,500 3.74
6.44 - 13.38 1,192,200 9.6 10.53 0 0
=========================================================================================
- --------------------------------------------------------------------------------
Note 11 -- This plan is available to all employees with at least one
401K Savings and year of service of greater than 1,000 hours of employment,
Retirement Plan 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 1998, 1997, and
1996, were $300,000, $251,000, and $228,000, 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
February 18, 1999
30
Hooper Holmes, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Selected Financial Data
For the years ended December 31,
----------------------------------------------------------------------------
(dollars in thousands except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenues $ 185,210 $ 165,353 $ 156,254 $ 111,313 $ 92,534
Operating income 25,592 16,344 8,576 4,059 3,803
Interest expense 3 168 1,394 1,674 994
Income from continuing operations 14,185 8,770 4,086 1,667 1,480
Income (loss) from discontinued operations/(1)/ (1,485) -- -- (14,716) 1,184
Net income (loss) 12,700 8,770 4,086 (13,049) 2,664
Earnings per share -- basic:
Income from continuing operations .50 .32 0.15 0.06 0.06
Discontinued operations/(1)/ (.05) -- -- (.55) 0.04
Net income (loss) .45 .32 0.15 (.49) 0.10
Earnings per share -- diluted:
Income from continuing operations .48 .31 0.15 0.06 0.06
Discontinued operations/(1)/ (.05) -- -- (.55) 0.04
Net income (loss) $ .43 $ .31 $ 0.15 $ (.49) $ 0.10
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ .036 $ 0.026 $ 0.015 $ 0.015 $ 0.075
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares -- basic 28,120,685 27,536,668 26,910,876 26,828,512 26,826,852
Weighted average shares -- diluted 29,859,710 28,564,132 27,243,802 26,904,714 26,915,582
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (as of December 31):
Working capital $ 33,476 $ 20,381 $ 11,807 $ 24,786 $ 6,407
Total assets 85,016 65,941 61,296 93,997 103,172
Current maturities of long-term debt 450 -- 1,030 8,800 2,150
Long-term debt, less current maturities -- -- 5,250 26,250 46,327
Total long-term debt 450 -- 6,280 35,050 48,477
Stockholders' equity $ 62,294 $ 48,519 $ 37,719 $ 33,132 $ 46,502
====================================================================================================================================
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
1998 1997
------------------------------ -----------------------------
Quarter High Low Dividend High Low Dividend
-------------------------------------------------------------------------
First 10 11/16 6 7/16 .008 4 13/32 3 7/8 .005
Second 12 29/32 10 3/32 .008 5 13/16 4 3/32 .005
Third 11 15/16 8 .01 6 27/32 5 17/32 .008
Fourth 14 15/16 9 3/8 .01 7 15/16 6 13/32 .008
-------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
1997
Fourth $ 42,539 $ 11,883 $ 2,851 $ 2,851 $ 0.10 $ 0.10
Third 40,701 11,544 2,280 2,280 0.08 0.08
Second 41,399 11,666 2,115 2,115 0.08 0.08
First 40,714 11,067 1,524 1,524 0.06 0.05
- -------------------------------------------------------------------------------------------------------------------------------
Total $165,353 $ 46,160 $ 8,770 $ 8,770 $ 0.32 $ 0.31
===============================================================================================================================
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
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 inquires to:
Secretary
Hooper Holmes, Inc.
170 Mt. Airy Road
Basking Ridge, NJ 07920
Independent Certified
Public Accountants
KPMG LLP
Short Hills, NJ
Transfer Agents & Registrar
First City Transfer Company
Iselin, NJ
Annual Meeting
May 25, 1999
at the Company's Corporate Headquarters
Basking Ridge, NJ