<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-94729
(Pursuant to Rule 462(b),
also Registration No. 333-30998)
3,250,000 Shares
[LOGO] HOOPER HOLMES(TM)
Common Stock
----------------
We are offering 3,250,000 shares. Our common stock is listed on the American
Stock Exchange under the symbol "HH." On February 23, 2000, the last reported
sale price of our common stock on the American Stock Exchange was $25.50 per
share.
----------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 7.
----------------
PRICE $25.125 PER SHARE
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public offering price.................................... $25.125 $81,656,250
Underwriting discount.................................... $ 1.320 $ 4,290,000
Proceeds, before expenses, to Hooper Holmes.............. $23.805 $77,366,250
</TABLE>
We and the selling stockholder have granted the underwriters the right to
purchase up to 487,500 additional shares of common stock to cover over-
allotments. The underwriters expect to deliver the shares to purchasers on or
about February 29, 2000.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
----------------
A.G. Edwards & Sons, Inc.
Dain Rauscher Wessels
The Robinson-Humphrey Company
SG Cowen
Prospectus dated February 23, 2000
<PAGE>
A map of the United
States showing the
location of our branch
offices and contract
affiliate offices is
pictured here with the
following caption:
"Our network of over 300
branch and contract
affiliate offices
throughout the nation
provides accessibility
for customers and
convenience for
insurance applicants."
Another picture of an
examiner walking out the
door of a Hooper Holmes
office is pictured here
with the caption:
"Our mobile examiner visits the applicant's location."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our common stock. You should carefully read the entire
prospectus, including the documents incorporated by reference into it,
particularly the section entitled "Risk Factors" and the consolidated
financial statements and notes to the consolidated financial statements. In
this prospectus, "Hooper Holmes," "we," "us," and "our" refer to Hooper
Holmes, Inc., including its divisions and subsidiaries. Unless we specify
otherwise, all information in this prospectus assumes that the underwriters do
not exercise their over-allotment option and all share data in this prospectus
has been adjusted to reflect two-for-one stock splits effective August 22,
1997 and January 8, 1999.
Our Business
Hooper Holmes is the nation's leading provider of health information
services to the life insurance industry. Through our paramedical and medical
examinations, personal health interviews and record collection, and laboratory
testing, we provide information about life insurance applicants to life
insurance companies to help them evaluate the risks associated with
underwriting policies. We provide our services through our network of over
8,700 registered nurses, licensed practical nurses, physicians, phlebotomists
and medical and EKG technicians. We operate through approximately 230 branch
offices and 75 contract affiliate offices located in 50 states, Guam and
Puerto Rico. We have over 700 life insurance company customers, including the
50 largest in the United States.
The scope of our services that any of our customers may request typically
depends upon the age of the life insurance applicant and the amount of the
life insurance policy for which he or she applies. We conduct paramedical
examinations, which may include the collection of an applicant's medical
history, age, height, weight, blood pressure, and pulse, and may also include
blood, urine and saliva samples, and a resting electrocardiogram, or "EKG". We
usually perform paramedical examinations at the applicant's home or office.
For older applicants or higher face amounts, we may also conduct a medical
examination of the applicant, which may include a complete physical
examination performed by a physician, a stress EKG and a chest x-ray. To
supplement an examination or, in some cases, in lieu of an examination, we
obtain applicant information through personal health interviews and record
collection. Through our majority-owned Heritage Labs subsidiary, we also offer
our customers laboratory testing of any blood, urine or saliva samples that we
collect during an examination.
We believe that the following competitive strengths have helped us achieve
our industry-leading position:
. the geographic coverage of our network, and the proximity of our branch
offices to the homes and workplaces of applicants and insurance agents
and brokers;
. our electronic connectivity with customers;
. our ability to provide timely examination and information services; and
. our comprehensive quality assurance program.
Our Industry
Management estimates that the life insurance industry spent approximately
$770 million on health information services in 1998. The life insurance
industry is currently experiencing a number of trends that may affect our
industry which include:
. Growth in alternate distribution channels, including the Internet. A
variety of new providers and marketers of life insurance, as well as
traditional insurance companies, are increasingly marketing
3
<PAGE>
life insurance products through channels other than an insurance agent
or broker, including the Internet, direct mail and mass media. We
believe these new distribution channels are likely to create greater
demand for services from health information services companies,
particularly those with a national network and advanced automation
systems.
. The use of fewer approved health information service providers. We
believe that insurance companies are gradually reducing the number of
approved health information service providers, which also benefits
companies that have a national network and can meet insurers'
technology, timing and quality needs.
. Favorable insurance-applicant trends. We believe that, as a result of
increasing average insurance policy size and average applicant age, life
insurance companies are requiring more examinations and other
information services to assess the risks of their insurance applicants.
Our Growth Strategy
Our growth strategy is to enhance our industry leadership position by
capitalizing on industry trends and providing the most comprehensive array of
health information services to the life insurance industry. We will pursue this
strategy by:
. continuing our commitment to industry leadership through automation;
. increasing our focus on alternate distribution channels;
. leveraging our national network;
. continuing to pursue strategic acquisitions; and
. expanding into related lines of business.
Recent Developments
As of November 1, 1999, we purchased substantially all of the assets of
Paramedical Services of America, Inc., which we refer to as "PSA", the Atlanta-
based paramedical examination subsidiary of Pediatric Services of America,
Inc., for a purchase price of approximately $80 million in cash. We financed
this acquisition with a $65 million term loan and approximately $15 million in
existing cash. We expect this acquisition to position us to better serve our
customers through improved responsiveness and more complete geographic
coverage. We also expect it to enhance our marketing and new customer
opportunities and create significant operating efficiencies.
As of December 31, 1999, we have substantially completed our planned branch
office closings and consolidations, and contract affiliate terminations, and
have added approximately 30 branch offices and 60 contract affiliates to our
network. PSA generated approximately $83 million in revenue for the fiscal year
ended September 30, 1999. Assuming the acquisition, branch office closings and
consolidations, and contract affiliate terminations had been completed on
October 1, 1998, we believe approximately $21 million of PSA's reported $83
million in revenue for fiscal year 1999 would not have been achieved. For a
more complete description of PSA, see "Unaudited Pro Forma Condensed
Consolidated Financial Information" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- PSA Acquisition."
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered:
By Hooper Holmes................. 3,250,000 shares
Common stock outstanding
after the offering (1).............. 32,341,194 shares
Use of proceeds by Hooper Holmes..... Repay a portion of our acquisition indebtedness, fund
possible strategic acquisitions, provide working capital
and for general
corporate purposes.
American Stock Exchange symbol....... HH
Current annual dividend rate......... $.06 per share
Cash dividends paid since............ 1978
</TABLE>
- --------
(1) Based on shares outstanding as of December 31, 1999. Does not include
4,870,350 shares of common stock reserved for issuance upon exercise of
options outstanding as of December 31, 1999. If the underwriters exercise
their over-allotment option, we may issue up to an additional 487,500
shares of common stock, 62,500 of which will be issued upon exercise of
options held by the selling stockholder. See "Principal and Selling
Stockholders."
----------------
Our principal executive offices are located at 170 Mt. Airy Road, Basking
Ridge, New Jersey 07920, and our telephone number is (908) 766-5000.
- --------
Portamedic(R), Healthdex(R) and Teledex(R) are registered U.S. Service Marks of
Hooper Holmes, and we have applied to register "Infolink" as a U.S. Service
Mark and the Hooper Holmes logo as a U.S. Trademark.
5
<PAGE>
Summary Historical and Pro Forma Financial Data
(in thousands, except per share data)
The following financial data should be read in conjunction with, and are
qualified by reference to, "Selected Consolidated Financial and Operating
Data," "Unaudited Pro Forma Condensed Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine months ended September 30,
(Unaudited) Years ended December 31,
--------------------------------- ------------------------------------------
1999 1998
Pro Forma as Actual Pro Forma as Actual
Adjusted for ----------------- Adjusted for --------------------------
Offering (1)(2) 1999 1998 Offering (1)(2) 1998 1997 1996
--------------- -------- -------- --------------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues................ $223,513 $161,241 $137,063 $275,319 $185,210 $165,353 $156,254
Gross profit............ 65,915 50,058 41,871 79,288 55,949 46,160 38,294
Operating income........ 22,101 25,236 18,522 22,765 25,592 16,344 8,576
Interest income
(expense), net......... (579) 719 522 (966) 765 127 (1,046)
Income before income
taxes.................. 21,667 26,100 18,902 21,711 26,269 16,891 7,858
Income from continuing
operations............. 12,134 14,561 10,117 11,724 14,185 8,770 4,086
Net income.............. $ 12,134 $ 14,561 $ 10,117 $ 11,724 $ 12,700 $ 8,770 $ 4,086
Earnings per share --
basic................. $ .38 $ .51 $ .36 $ .37 $ .45 $ .32 $ .15
Earnings per share --
diluted............... $ .36 $ .48 $ .34 $ .35 $ .43 $ .31 $ .15
Cash dividends per
share.................. $ .038 $ .025 $ .036 $ .026 $ .015
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
(Unaudited)
--------------------------------------
Pro Forma as
Adjusted for
Actual Pro Forma (1) Offering (1)(2)
-------- ------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 40,547 $ 25,517 $52,233
Working capital........................ 55,175 49,054 75,770
Total assets........................... 101,566 170,930 197,646
Long-term debt, less current
maturities............................ -- 65,000 15,000
Stockholders' equity................... 83,632 83,632 160,348
</TABLE>
- --------
(1) As adjusted to give pro forma effect to our acquisition of PSA and our
borrowings under our senior credit facility as if they occurred on January
1, 1998 for purposes of the statement of income data and on September 30,
1999 for purposes of the balance sheet data.
(2) The same pro forma basis as described in (1) above, as further adjusted to
give effect to this offering and our use of the net proceeds. See "Use of
Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before purchasing our common stock.
We may not achieve the anticipated benefits from the PSA acquisition.
We will need to successfully integrate the personnel, locations and
operations of PSA, which may be difficult and time consuming, to achieve the
anticipated efficiencies and other benefits we expect to realize from this
acquisition. Several factors may adversely affect our ability to integrate PSA
into our business, including:
. lack of retention of a sufficient number of contract affiliates,
independent contractors and employees to meet our anticipated revenue
goals with this acquisition;
. difficulty consolidating PSA's financial, operational and administrative
functions; and
. diversion of management's time and attention from our existing
operations.
We believe that we have made significant progress toward achieving this
integration. However, we cannot be certain that we will be able to integrate
the PSA business, or that we will achieve the anticipated benefits from the
acquisition.
We are dependent on the trends and other developments affecting the life
insurance industry.
We currently derive nearly all of our revenues from life insurance
companies. Our business is largely dependent on demographic, economic and other
trends that affect consumers' demand for life insurance policies which, in
turn, drives life insurance companies' demand for our services. We face the
risk that demand for our services could decrease for the following reasons:
. The number of applications for life insurance might decrease. We have
no control over many factors that may affect the demand for life
insurance. In recent years, the life insurance industry has experienced
a decline in the number of insurance policies sold, though the total
amount of insurance coverage has increased. Among other developments, a
downturn in the economy and changes in laws and regulations affecting
the life insurance industry could adversely affect insurance policy
sales and also reduce the demand for our services. If Congress proposes
legislation that would make life insurance products taxable or would
impose estate taxes on life insurance proceeds, the demand and
applications for life insurance might significantly decrease. If fewer
people apply for life insurance policies, our business could be
substantially harmed.
. Even if the number of applications does not decrease, the percentage of
applications for which life insurance companies require our services
might decrease. We cannot predict how the percentage of applications for
which our customers require health information services, or the types of
services that they require, might change in the future. Life insurance
companies might change their criteria for determining which, if any, of
our services they require. This might include the introduction of new
products, shifting consumer preferences, improvements in risk management
procedures or advancements in laboratory testing technologies. If life
insurance companies significantly limit the types of applications for
which our services will be requested, our business could be
substantially harmed.
Our growth strategy depends in part on the continued growth of alternate
distribution channels, which may not achieve broad acceptance by our current or
prospective customers.
Our growth will depend in part upon the increased use of the Internet and
other alternate distribution channels by our customers to sell their life
insurance products. Rapid growth in the use of these distribution channels is a
recent phenomenon, and it may not continue, or these channels may ultimately be
discontinued or replaced. This might limit any growth in the number of
applications for life insurance policies, which could substantially harm our
business.
7
<PAGE>
We face the risk of losing our insurance company customers as a result of not
having long-term or exclusive contracts with them.
Our relationships with most of our customers are not covered by formal
written agreements, and we have exclusive relationships with only a small
number of our customers. Many of them use two or more providers of health
information services. This means that our customers are able to quickly shift
more of their business to our competitors who have existing relationships with
them, or to negotiate more aggressively based on price. With the recent trend
of consolidation in the insurance industry, losing any one customer would be a
greater risk to our business. In the event this consolidation continues and our
current or prospective customers are acquired, the resulting entity might not
choose to use our services. This process may accelerate with the recent passage
of the financial services overhaul legislation, which allows banks and
securities firms to sell life insurance. Our ability to retain these insurance
companies as customers will depend on our continued ability to serve their
needs and distinguish ourselves from our competitors.
We face the risk of increased competition from existing competitors and
potential new industry entrants who might acquire other providers or develop
their own online networks.
The market for providing health information services to life insurance
companies is becoming increasingly competitive. Our industry is highly
fragmented and may present opportunities for existing or new competitors to
grow through acquisitions and expand their services for life insurance
companies. Nationwide, we compete primarily with Examination Management
Services, Inc. and American Para Professional Systems. We also compete with a
significant number of regional and local firms that provide examination and
other health information services. Through our Heritage Labs subsidiary, we
also compete with laboratory testing companies, any of which might expand their
services to include paramedical and medical examinations and other information
services for life insurance customers to whom they now provide laboratory
testing services.
We also face the risk of increased competition from existing or future
competitors who may develop their own online networks to target life insurance
companies, particularly through alternate distribution channels. Our ability to
retain our customers will largely depend on our continued ability to
distinguish ourselves from our competitors, particularly with regard to our
technological capabilities and network infrastructure.
Loss of key management could adversely affect our business.
Our continued success is materially dependent upon our key management team,
including James M. McNamee, our Chairman, President and Chief Executive
Officer, none of whom has an employment agreement with us. In the event of a
loss of one or more of our executive officers, our inability to successfully
recruit and retain additional highly skilled and experienced management, or to
successfully train and promote existing personnel to serve in a managerial
capacity, could substantially harm our business.
Paul W. Kolacki, our Executive Vice President and Chief Operating Officer,
plans to retire on March 31, 2000. Mario Cavezza, an employee for 31 years and
our Senior Vice President, Northern Region Manager for the past three years,
has been appointed Senior Vice President and General Manager of Branch and
Affiliate Operations effective April 1, 2000. He will assume the overall field
operating responsibilities upon Mr. Kolacki's retirement. Mr. McNamee will
assume Mr. Kolacki's remaining responsibilities. Although we anticipate a
successful transition, our management changes could disrupt our business.
We face the risk that federal or state regulators will require us to classify
our independent contractors as employees, which would subject us to liability
for taxes and increased personnel costs.
We classify most of our examiners as independent contractors rather than
employees. As such they are responsible for their own employment taxes and
workers' compensation. This is a common practice in our industry and is based
upon our interpretation of the Internal Revenue Code, the rules and regulations
thereunder, and the publicly available interpretations of the Code.
8
<PAGE>
In the past, some state agencies have claimed that we improperly classified
our examiners as independent contractors for purposes of state unemployment tax
laws and that we were therefore liable for arrears of taxes, or for penalties
for failure to comply with these laws. We have recently received an adverse
determination in California on an unemployment tax issue and are currently
appealing that decision. Other similar state claims are also pending. We cannot
assure you that we will prevail in these pending cases, that we will not be
subject to similar claims in other states in the future, or that we will not be
subject to material liability on these matters in the future.
In the event that the Internal Revenue Code, rules and regulations under the
Code, interpretations of the Code or state or local rules and regulations are
amended or otherwise require us to classify our independent contractors as
employees, we would incur increased personnel costs. Further, if we did not
classify these individuals as employees, and we were required to do so, we
could be subject to a material liability for failure to withhold and pay
employee-related taxes. This could substantially harm our business.
Changes in government regulations may require us to change the way we do
business.
The states in which we operate, and, to a lesser extent, the federal
government, regulate some aspects of our business and our personnel. For
example, we are subject to regulations governing the examination services we
provide, including needle disposal and specimen testing procedures. These
regulations are continually updated and revised. We believe that we are
operating our business substantially in compliance with the regulations and
licensing requirements that are material to our business. However, as we expand
the scope of our services and we realize the impact of any growth of alternate
distribution channels, we might be required to comply with regulations
traditionally limited to insurance companies, including agent licensing
requirements. We are not able to predict what additional federal or state
enforcement, legislative or regulatory initiatives may be undertaken in the
future relating to our business, or what effect these initiatives might have on
us.
We need to continually enhance and expand our technology and network
infrastructure to accommodate the changing demands of our current and
prospective customers.
We are continually enhancing and expanding our technology and network
infrastructure to accommodate our customers' changing needs, including the
electronic ordering of our services and online status checks. We also need to
continue to adapt to the technological needs of insurance companies who begin
to rely more on alternate distribution channels, including the Internet, to
sell their products and outsource more of the administrative, non-medical
functions traditionally performed "in-house." We may be unsuccessful in these
efforts or we may be unable to accurately project the rate or timing of
increases in the volume of traffic through our website or direct electronic
links with our customers. Our failure to implement timely enhancements to our
automated systems could substantially harm our business.
The Year 2000 computer software problem could impair the computer programs and
systems upon which we depend.
We rely on computer applications to provide our insurance company customers
the status of our paramedical examinations, as well as to manage and monitor
our accounting, sales, development and administrative functions. In addition,
our customers, suppliers and service providers are reliant upon computer
applications, some of which may fail as a result of the recent change in
century. These failures could affect the interactions of these third parties
with us. While we have not experienced any Year 2000 problems to date and we do
not believe our computer systems, applications or embedded technologies
currently in use will fail to accommodate the change in century, it is possible
that we or our technology could be substantially harmed by it. Failure of our
software, hardware or embedded technology or that of our customers, suppliers
or services providers could substantially harm our business. For a more
detailed discussion of Year 2000 readiness issues, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
9
<PAGE>
If we are unable to safeguard the security and privacy of applicants' and
insurance companies' confidential data, our business may be harmed.
A significant factor that affects our business success is the secure
transmission of personally identifiable health and other personal information
of life insurance policy applicants, often over public networks. Advances in
computer capabilities or other developments could result in a compromise or
breach of the security measures we use to protect applicants' and insurance
companies' confidential information. A party who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. If any compromise or breach of security were
to occur, it could harm our reputation and expose us to liability. This could
reduce demand for our services, increase the cost of doing business, result in
litigation costs, or otherwise harm our business. We may be required to make
significant expenditures to protect against security breaches or to alleviate
problems caused by any breaches. To date, we have experienced no breaches in
our network security.
10
<PAGE>
USE OF PROCEEDS
Our net proceeds from this offering will be approximately $76.7 million, or
$87.0 million if the underwriters exercise their over-allotment option in full,
including approximately $210,000 from the exercise of options by the selling
stockholder. We have deducted underwriting discounts and commissions and
offering expenses payable by us. We will not receive any of the proceeds from
the sale of common stock by the selling stockholder.
The principal purpose of this offering is to repay $50 million of the $65
million term loan we incurred in connection with our acquisition of PSA. This
loan requires interest payments only during the first 18 months, five principal
payments of $10 million each on April 30, 2001 through 2005 and a final payment
of $15 million on January 31, 2006. The interest rate on the term loan is
either the prime rate minus 1/2% to plus 1/4% or LIBOR plus 3/4% to 1 3/4%,
depending on the ratio of our consolidated funded debt (as defined in the
senior credit facility) to our earnings before interest, taxes, depreciation
and amortization, or "EBITDA." Interest is currently payable at an effective
interest rate of 7.305%. See "Description of the Senior Credit Facility."
Other uses of proceeds include:
. funding for possible strategic acquisitions;
. working capital; and
. general corporate purposes.
We currently have no agreements or understandings to make any material
future acquisition. Until we use the net proceeds of this offering for the
above purposes, we intend to invest them in short-term, government securities
and other investment-grade, interest-bearing securities.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the American Stock Exchange under the symbol
"HH." The following table sets forth the range of high and low sale prices for
the common stock as reported on the American Stock Exchange for the quarters
indicated.
<TABLE>
<CAPTION>
Price Range
---------------
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
First Quarter................................................ $ 4.531 $ 3.844
Second Quarter............................................... 6.000 4.094
Third Quarter................................................ 7.219 4.906
Fourth Quarter............................................... 8.063 6.000
Fiscal Year Ended December 31, 1998
First Quarter................................................ $11.063 $ 6.250
Second Quarter............................................... 13.063 10.000
Third Quarter................................................ 12.000 7.719
Fourth Quarter............................................... 15.188 8.875
Fiscal Year Ended December 31, 1999
First Quarter................................................ $16.750 $11.750
Second Quarter............................................... 22.000 14.250
Third Quarter................................................ 26.125 17.500
Fourth Quarter............................................... 27.500 22.125
Fiscal Year Ended December 31, 2000
First Quarter (through February 23, 2000).................... $26.125 $18.250
</TABLE>
On February 23, 2000, the last reported sale price of the common stock on
the American Stock Exchange was $25.50 per share. As of such date, there were
approximately 880 holders of record of the common stock.
DIVIDEND POLICY
Holders of common stock may receive dividends that are declared by our board
of directors. We have paid regular quarterly cash dividends on our common stock
since 1978. Assuming no event of default under our senior credit facility would
exist after payment, we are able, under the senior credit facility, to pay
quarterly cash dividends not to exceed 40 percent of our quarterly average net
income for the preceding four calendar quarters. We presently intend to pay
regular quarterly cash dividends in the future, assuming our earnings and
financial condition and other factors permit us to do so prudently.
12
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of September
30, 1999, on:
. an actual basis;
. a pro forma basis as adjusted to give effect to our acquisition of PSA
and the related debt financing; and
. the same pro forma basis as further adjusted to reflect the sale of
3,250,000 shares of our common stock in this offering and the receipt of
the $76.7 million in net proceeds from this offering, after deducting
underwriting discounts and commissions and other offering expenses
payable by us.
This table should be read in conjunction with "Selected Consolidated Financial
and Operating Data", "Unaudited Pro Forma Condensed Consolidated Financial
Information" and our consolidated financial statements and notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
(in thousands, except share data)
(Unaudited)
--------------------------------------
Acquisition
Pro Forma as
Acquisition Adjusted for
Actual Pro Forma Offering
---------- ------------ -------------
<S> <C> <C> <C>
Cash and cash equivalents................ $ 40,547 $ 25,517 $ 52,233
========== =========== ===========
Long-term debt, less current maturities.. $ -- $ 65,000 $ 15,000
---------- ----------- -----------
Stockholders' equity:
Common stock, par value $.04 per share;
authorized 240,000,000 shares, issued
29,180,426 shares actual and pro forma
and 32,430,426 shares pro forma as
adjusted for this offering (1)........ 1,167 1,167 1,297
Additional paid-in capital............. 37,335 37,335 113,921
Retained earnings...................... 46,103 46,103 46,103
---------- ----------- -----------
84,605 84,605 161,321
Less: treasury stock at cost, 104,332
shares ............................... 973 973 973
---------- ----------- -----------
Total stockholders' equity............... 83,632 83,632 160,348
---------- ----------- -----------
Total capitalization................. $ 83,632 $ 148,632 $ 175,348
========== =========== ===========
</TABLE>
- --------
(1) The number of shares of our common stock to be outstanding after the
offering does not take into account 15,100 shares of our common stock
issued from September 30, 1999 to December 31, 1999 upon exercise of
options, and 4,870,350 shares issuable upon exercise of outstanding options
having a weighted average exercise price of $7.535 per share as of December
31, 1999.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share data)
The following selected consolidated financial data of Hooper Holmes should
be read in conjunction with, and are qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere in
this prospectus. The statement of income data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
are derived from the audited consolidated financial statements included
elsewhere in this prospectus, which have been audited by KPMG LLP, independent
certified public accountants. The financial data set forth below as of December
31, 1996, 1995 and 1994 and for the years ended December 31, 1995 and 1994 are
derived from our audited consolidated financial statements which were also
audited by KPMG LLP but are not included or incorporated by reference in this
prospectus. The statement of income data for the nine-month periods ended
September 30, 1999 and 1998 and the balance sheet data as of September 30, 1999
are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. In our opinion, our unaudited consolidated
financial statements have been prepared on a basis consistent with our audited
consolidated financial statements and reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of our
results of operations and financial position as of the end of and for such
periods. Results for the nine months ended September 30, 1999 are not
necessarily indicative of results that may be expected for the entire year.
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
------------------ -----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- -------
(Unaudited)
Statement of Income Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $161,241 $137,063 $185,210 $165,353 $156,254 $111,313 $92,534
Cost of operations ..... 111,183 95,192 129,261 119,193 117,959 85,934 70,678
-------- -------- -------- -------- -------- -------- -------
Gross profit........... 50,058 41,871 55,949 46,160 38,295 25,379 21,856
Selling, general and
administrative
expenses............... 24,822 23,349 30,357 29,816 29,719 21,320 18,053
-------- -------- -------- -------- -------- -------- -------
Operating income....... 25,236 18,522 25,592 16,344 8,576 4,059 3,803
Other income (expense):
Interest expense....... (30) -- (3) (168) (1,394) (1,674) (994)
Interest income........ 749 522 768 295 348 262 21
Other income, net...... 145 (142) (88) 420 328 384 --
-------- -------- -------- -------- -------- -------- -------
Income before income
taxes.................. 26,100 18,902 26,269 16,891 7,858 3,031 2,830
Income taxes............ 11,539 8,785 12,084 8,121 3,772 1,364 1,350
-------- -------- -------- -------- -------- -------- -------
Income from continuing
operations............. 14,561 10,117 14,185 8,770 4,086 1,667 1,480
Discontinued operations:
Income (loss) from
operations, net of
taxes................. -- -- -- -- -- (4,390) 1,184
Loss on disposal, net
of taxes.............. -- -- (1,485) -- -- (10,326) --
-------- -------- -------- -------- -------- -------- -------
Net income (loss)....... $ 14,561 $ 10,117 $ 12,700 $ 8,770 $ 4,086 $(13,049) $ 2,664
======== ======== ======== ======== ======== ======== =======
Earnings (loss) per
share--basic:
Income from continuing
operations............ $ .51 $ .36 $ .50 $ .32 $ .15 $ .06 $ .06
Discontinued
operations--net of
taxes................. -- -- (.05) -- -- (.55) .04
-------- -------- -------- -------- -------- -------- -------
Net income (loss)...... $ .51 $ .36 $ .45 $ .32 $ .15 $ (.49) $ .10
======== ======== ======== ======== ======== ======== =======
Earnings (loss) per
share--diluted:
Income from continuing
operations............ $ .48 $ .34 $ .48 $ .31 $ .15 $ .06 $ .06
Discontinued
operations--net of
taxes................. -- -- (.05) -- -- (.55) .04
-------- -------- -------- -------- -------- -------- -------
Net income (loss)...... $ .48 $ .34 $ .43 $ .31 $ .15 $ (.49) $ .10
======== ======== ======== ======== ======== ======== =======
Weighted average
shares--basic.......... 28,678 28,096 28,121 27,537 26,911 26,829 26,827
Weighted average
shares--diluted........ 30,642 29,783 29,860 28,564 27,244 26,905 26,916
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA -- (Continued)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Years ended December 31,
----------------- --------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
Selected Operating Data
(Unaudited):
<S> <C> <C> <C> <C> <C> <C> <C>
Portamedic
examinations........... 1,999 1,863 2,515 2,323 2,281 1,678 1,479
Infolink reports........ 260 223 303 337 409 327 266
<CAPTION>
September 30, December 31,
----------------- --------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 40,547 $24,728 $29,752 $13,159 $ 2,936 $ 1,065 $ 1,696
Working capital......... 55,175 32,604 33,476 20,381 11,807 24,786 6,407
Total assets............ 101,566 76,695 85,016 65,941 61,296 93,997 103,172
Long-term debt, less
current maturities..... -- -- -- -- 5,250 26,250 46,327
Stockholders' equity.... 83,632 59,176 62,294 48,519 37,719 33,132 46,502
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following presents certain unaudited pro forma condensed consolidated
financial information of Hooper Holmes for the periods as indicated. The
unaudited pro forma condensed consolidated financial information gives effect
to the PSA acquisition which occurred on November 1, 1999, the related bank
debt financing, as well as this offering and the use of the net proceeds, as if
such transactions had occurred on January 1, 1998 for purposes of the pro forma
statements of income for the year ended December 31, 1998 and the nine-month
period ended September 30, 1999, and on September 30, 1999 for purposes of the
pro forma balance sheet as of September 30, 1999. The pro forma financial
information was prepared using the assumptions described below and in the
related notes thereto.
The unaudited pro forma condensed consolidated financial information
reflects pro forma adjustments that are based upon available information and
certain assumptions that we believe are reasonable. The pro forma financial
information does not purport to represent our results of operations or
financial position that would have resulted had the transactions to which pro
forma effect is given been consummated as of the dates or for the periods
indicated. In preparing the pro forma financial information, we believe we have
utilized reasonable methods to conform the basis of presentation. The pro forma
financial statements have not been adjusted for certain cost savings that we
may realize in connection with the integration of PSA.
For purposes of the unaudited pro forma condensed consolidated statements of
income, our historical statement of income for the year ended December 31, 1998
was combined with PSA's historical statement of operations for the fiscal year
ended September 30, 1998. In addition, our historical statement of income for
the nine-month period ended September 30, 1999 was combined with PSA's
historical statement of operations for the same period.
The unaudited pro forma financial statements and accompanying notes should
be read in conjunction with the historical financial statements of Hooper
Holmes and PSA and with other financial information pertaining to the Company
including "Use of Proceeds," "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
or incorporated by reference in this prospectus.
Overview of Acquisition and Financing
We acquired the assets of PSA as of November 1, 1999. We accounted for this
acquisition using the purchase method of accounting. Accordingly, the excess of
the purchase price over the fair value of identifiable net tangible and
intangible assets acquired, representing goodwill, is included as an intangible
asset. The consideration and allocation of the purchase price are summarized
below (dollars in thousands):
<TABLE>
<S> <C>
Purchase Price Consideration:
Proceeds from term loan........................................... $65,000
Cash.............................................................. 15,030
Liability assumed (vacation accrual).............................. 529
Accrued expenses, including certain PSA facility exit costs and
certain legal, accounting and other acquisition costs............ 3,834
-------
$84,393
=======
Allocation of Purchase Price:
Accounts receivable............................................... $12,726
Other assets...................................................... 546
Property, plant and equipment (1)................................. 1,496
Intangible assets (2)............................................. 11,600
Goodwill.......................................................... 58,025
-------
$84,393
=======
</TABLE>
16
<PAGE>
- --------
(1) Property, plant and equipment excludes the historical net asset value of
certain capitalized software which is not going to be utilized by Hooper
Holmes to conduct on-going operations of the business.
(2) Intangible assets include the following components (dollars in thousands):
<TABLE>
<S> <C>
Customer base....................................................... $ 4,600
Contract affiliate network.......................................... 3,200
Covenant not to compete............................................. 2,600
Assembled workforce................................................. 1,200
-------
$11,600
=======
</TABLE>
On October 29, 1999, we entered into a $100 million Amended and Restated
Revolving Credit and Term Loan Agreement with a group of bank lenders. This
senior credit facility consists of a $65 million, six-year term loan, and a $35
million, three-year revolving loan. We used the $65 million term loan solely in
connection with the purchase of the assets. The term loan requires interest
payments only during the first 18 months, five principal payments of $10
million each on April 30, 2001 through 2005 and a final payment of $15 million
on January 31, 2006. We have not borrowed under the $35 million revolving loan.
Both the term loan and the revolving loan bear interest at either the prime
rate minus 1/2% to plus 1/4% or LIBOR plus 3/4% to 1 3/4%, depending on the
ratio of our consolidated funded debt (as defined in the senior credit
facility) to our earnings before interest, taxes, depreciation and
amortization. Interest was payable on the term loan at an effective annual
interest rate of 7.535% for the period from November 4, 1999 through February
4, 2000. We can prepay either loan without penalty at any time. Approximately
$50 million of the net proceeds of this offering will be used to repay a
portion of the term loan.
Prior to completing the PSA acquisition, we expected to close and
consolidate a number of branch offices and terminate a number of PSA's contract
affiliates. We were also aware that some of PSA's contract affiliates had
either terminated their relationships with PSA or planned not to continue as
our contract affiliates after the acquisition was completed. As an incentive to
those PSA contract affiliates which we want to retain, cash bonuses, partially
funded from amounts escrowed at closing, have been offered to those who remain
with us until June 1, 2000. We have substantially completed our planned branch
office closings and consolidations, and contract affiliate terminations, which
has resulted in the addition of approximately 30 branch offices and 60 contract
affiliates to our network, which is consistent with our expectations at the
time of the acquisition. Assuming the acquisition, branch office closings and
consolidations, and contract affiliate terminations had been completed on
October 1, 1998, we believe approximately $21 million of PSA's reported $83
million in revenue for fiscal year 1999 would not have been achieved.
Immediately upon closing, we began implementing a detailed integration plan,
which, in addition to branch office closings and consolidations, and contract
affiliate terminations described above, includes the following key tasks
relating to the PSA business:
. consolidating and relocating branch office personnel;
. reducing selling, general and administrative expenses, including
terminating PSA sales personnel;
. updating system hardware and software;
. transferring billing and collection systems; and
. implementing our quality assurance program.
We believe that our integration efforts will improve the operating margin of
the PSA business, which has historically been significantly less than ours. No
adjustments for either the revenue decrease described above or the results of
these tasks have been reflected in these pro forma statements of income.
17
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
----------------------------------------------------------------------
Historical
-----------------
Acquisition Offering
Hooper Pro Forma Acquisition Pro Forma Pro Forma
Holmes PSA Adjustments Pro Forma Adjustments Consolidated
-------- ------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $161,241 $62,272 $ -- $223,513 $ -- $223,513
Cost of operations...... 111,183 46,415 -- 157,598 -- 157,598
-------- ------- ------- -------- ------ --------
Gross profit.......... 50,058 15,857 -- 65,915 -- 65,915
-------- ------- ------- -------- ------ --------
Selling, general and
administrative
expenses............... 24,822 18,060 3,007 (1) 43,814 -- 43,814
(675)(2)
(1,400)(3)
-------- ------- ------- -------- ------ --------
Operating income
(loss)............... 25,236 (2,203) (932) 22,101 -- 22,101
-------- ------- ------- -------- ------ --------
Other income (expense)
Interest expense...... (30) (1,571) (3,673)(4) (3,703) 2,826(7) (877)
1,571 (5)
Interest income....... 749 -- (451)(4) 298 -- 298
Other income, net..... 145 -- -- 145 -- 145
-------- ------- ------- -------- ------ --------
864 (1,571) (2,553) (3,260) 2,826 (434)
-------- ------- ------- -------- ------ --------
Income (loss) before
income taxes......... 26,100 (3,774) (3,485) 18,841 2,826 21,667
Income taxes (benefit).. 11,539 (1,424) (1,825)(6) 8,290 1,243(8) 9,533
-------- ------- ------- -------- ------ --------
Income (loss) from
continuing
operations........... $ 14,561 $(2,350) $(1,660) $ 10,551 $1,583 $ 12,134
======== ======= ======= ======== ====== ========
Income per share from
continuing operations:
Basic................. $ .51 $ .37 $ .38
Diluted............... $ .48 $ .34 $ .36
======== ======== ========
Weighted average number
of shares:
Basic................. 28,678 28,678 3,250(9) 31,928
Diluted............... 30,642 30,642 3,250(9) 33,892
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Income.
18
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------------------------
Historical
-----------------
Acquisition Offering
Hooper Pro Forma Acquisition Pro Forma Pro Forma
Holmes PSA (a) Adjustments Pro Forma Adjustments Consolidated
-------- ------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $185,210 $90,109 $ -- $275,319 $ -- $275,319
Cost of operations...... 129,261 66,770 -- 196,031 -- 196,031
-------- ------- ------- -------- ------ --------
Gross profit.......... 55,949 23,339 -- 79,288 -- 79,288
-------- ------- ------- -------- ------ --------
Selling, general and
administrative
expenses............... 30,357 24,007 4,009 (1) 56,523 -- 56,523
(375)(2)
(1,475)(3)
-------- ------- ------- -------- ------ --------
Operating income
(loss)............... 25,592 (668) (2,159) 22,765 -- 22,765
-------- ------- ------- -------- ------ --------
Other income (expense)
Interest expense...... (3) (1,226) (4,898)(4) (4,901) 3,768(7) (1,133)
1,226 (5)
Interest income....... 768 -- (601)(4) 167 -- 167
Other income, net..... (88) -- -- (88) -- (88)
-------- ------- ------- -------- ------ --------
677 (1,226) (4,273) (4,822) 3,768 (1,054)
-------- ------- ------- -------- ------ --------
Income (loss) before
income taxes......... 26,269 (1,894) (6,432) 17,943 3,768 21,711
Income taxes (benefit).. 12,084 (667) (3,163)(6) 8,254 1,733(8) 9,987
-------- ------- ------- -------- ------ --------
Income (loss) from
continuing
operations........... $ 14,185 $(1,227) $(3,269) $ 9,689 $2,035 $ 11,724
======== ======= ======= ======== ====== ========
Income per share from
continuing operations:
Basic................. $ .50 $ .34 $ .37
Diluted............... $ .48 $ .32 $ .35
======== ======== ========
Weighted average number
of shares:
Basic................. 28,121 28,121 3,250(9) 31,371
Diluted............... 29,860 29,860 3,250(9) 33,110
</TABLE>
- --------
(a) The audited historical statement of operations data for the year ended
September 30, 1998 has been adjusted to reflect an estimate of the results
of operations of the PMI business, acquired by PSA through a "purchase" in
December 1997, for the three-month period ended December 1997. Also
included was an adjustment for additional goodwill amortization of $250 and
interest expense of $302.
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.
19
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
------------------ -----------------
debit (credit)
(in thousands)
<S> <C> <C>
Acquisition Adjustments:
(1) Adjustments to amortization expense
for the excess cost over fair value
of net assets acquired and other
intangible assets. Excess costs over
fair value of net assets acquired
(goodwill) and other intangible
assets are being amortized on a
straight-line basis over their
estimated useful lives which is 25
years for goodwill, and 5 to 9 years
for other intangible assets.......... $ 3,007 $ 4,009
(2) Adjustments to eliminate certain cost
allocations included in the PSA
historical financial results from its
parent company for services that will
be provided directly by Hooper Holmes
current personnel (primarily parent
company corporate salary expense and
certain information system consulting
costs for a system that will not be
utilized by us). As such, allocations
are not reasonable to be included in
pro forma combined results........... $ (675) $ (375)
(3) Adjustments to exclude depreciation
and amortization expense recorded for
PSA for property, plant and equipment
and goodwill not acquired by us...... $ (1,400) $ (1,475)
(4) Adjustments to eliminate certain
historical interest income on cash
balances used to fund the acquisition
(4% investment rate assumed) and to
reflect pro forma interest expense on
the term loan at an interest rate of
7.535%, consistent with the interest
rate in effect during the period from
November 4, 1999 through February 4,
2000. A .125% increase or decrease in
LIBOR would have resulted in a $61
and $81 adjustment to interest
expense for the nine-month period
ended September 30, 1999 and the year
ended December 31, 1998,
respectively.
Reduced interest income.............. $ 451 $ 601
Additional interest expense.......... $ 3,673 $ 4,898
(5) Adjustment to eliminate interest
expense allocated to PSA in its
historical audited financial
statements from its parent on cash
utilized by PSA on a 1997
acquisition.......................... $ (1,571) $ (1,226)
(6) Represents the income tax effect on
increased interest expense,
additional amortization and other
adjustments, as well as combining the
historical results of PSA with Hooper
Holmes. The combined effective income
tax rates of approximately 44% and
46%, for the nine-month period ended
September 30, 1999 and the year ended
December 31, 1998, are consistent
with our historical rate as the
amortization of goodwill and other
pro forma adjustments will be
deductible for income tax purposes... $ (1,825) $ (3,163)
Offering Adjustments:
(7) Adjustment to eliminate interest
expense on $50 million of term debt
assumed to be repaid from a portion
of the net proceeds of the offering
contemplated herein. No interest
income has been assumed on the
additional offering proceeds. ....... $(2,826) $(3,768)
(8) Represents the income tax effect on
the interest expense adjustment. The
combined effective income tax rate is
expected to be consistent with that
of Hooper's historical rate.......... $(1,243) $(1,733)
(9) To adjust outstanding weighted
average shares for the effect of the
sale and issuance of 3.25 million
common shares contemplated herein.
</TABLE>
20
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------------------------------------------
Historical Pro Forma Adjustments
---------------- --------------------------- Offering
Hooper Purchase Acquisition Pro Forma Pro Forma
Holmes PSA Elimination (1) Adjustments Pro Forma Adjustment (8) Consolidated
-------- ------- --------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 40,547 $ 362 $ (362) $(15,030)(2) $ 25,517 $ 26,716 $ 52,233
Accounts receivable.... 23,719 12,726 -- -- 36,445 -- 36,445
Other current assets... 6,627 3,042 (2,495) -- 7,174 -- 7,174
-------- ------- -------- -------- -------- -------- --------
Total current assets... 70,893 16,130 (2,857) (15,030) 69,136 26,716 95,852
Net property, plant and
equipment.............. 8,195 5,025 (3,529)(3) 9,691 -- 9,691
Goodwill, net........... 15,913 22,173 (22,173) 58,025 (4) 73,938 -- 73,938
Intangible assets, net.. 5,621 -- -- 11,600 (5) 17,221 -- 17,221
Other assets............ 944 -- -- -- 944 -- 944
-------- ------- -------- -------- -------- -------- --------
Total assets........... $101,566 $43,328 $(25,030) $ 51,066 $170,930 $ 26,716 $197,646
======== ======= ======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Note payable........... $ 450 $ -- $ -- $ -- $ 450 $ -- $ 450
Accounts payable....... 7,242 1,094 (1,094) -- 7,242 -- 7,242
Accrued expenses....... 8,026 5,876 (5,346) 3,834 (6) 12,390 -- 12,390
-------- ------- -------- -------- -------- -------- --------
Total current
liabilities........... 15,718 6,970 (6,440) 3,834 20,082 -- 20,082
Deferred income taxes... 2,013 774 (774) -- 2,013 -- 2,013
Minority interest....... 203 -- -- -- 203 -- 203
Long-term debt, less
current maturities..... -- -- -- 65,000 (2) 65,000 (50,000) 15,000
-------- ------- -------- -------- -------- -------- --------
Total liabilities...... 17,934 7,744 (7,214) 68,834 87,298 (50,000) 37,298
Total stockholders'
equity................. 83,632 35,584 (17,816) (17,768)(7) 83,632 76,716 160,348
-------- ------- -------- -------- -------- -------- --------
Total liabilities and
stockholders' equity.. $101,566 $43,328 $(25,030) $ 51,066 $170,930 $ 26,716 $197,646
======== ======= ======== ======== ======== ======== ========
</TABLE>
- --------
Acquisition Adjustments:
(1) To eliminate all assets and liabilities of PSA not purchased by Hooper
Holmes.
(2) To record cash paid of $15,030 and debt incurred of $65,000 to fund the
acquisition of PSA. Deferred financing costs relating to such borrowings
were immaterial.
(3) To adjust property, plant and equipment to fair market value.
(4) To record acquired goodwill.
(5) To record acquired intangible assets. These adjustments are based on the
results of third-party appraisals already completed and the results of
other analyses. We do not expect changes to these estimates based on our
final analysis to be material.
(6) To accrue certain PSA facility exit costs and certain other legal,
accounting, and other acquisition costs.
(7) To eliminate historical PSA equity.
Offering Adjustment:
(8) To reflect proceeds from the sale of 3.25 million shares of our common
stock in this offering, less estimated expenses of the offering and the
utilization of $50 million to repay term debt incurred to finance the PSA
acquisition.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Hooper Holmes was founded in 1899 to provide business information reports to
the insurance industry. In recent years, we have:
. successfully developed relationships with the leading life insurance
companies in the United States;
. established an extensive branch office network staffed with experienced,
medically trained personnel; and
. gained significant experience in providing health information services
to the life insurance industry.
In 1980, we entered the home healthcare field. In September 1995, we sold
our home healthcare business and related health care facilities which had
unaudited revenues of approximately $159.3 million and unaudited income from
operations of approximately $1.2 million in 1994. In connection with this sale,
we acquired American Service Bureau, Inc., also known as ASB Meditest, a major
competitor in the health information services business, which had approximately
$81.8 in revenues in 1994. In December 1998, we acquired a 55% interest in
Heritage Labs International LLC, a clinical reference laboratory servicing the
life insurance industry.
As of November 1, 1999, we purchased the assets and business of PSA for a
purchase price of approximately $80 million. We accounted for the acquisition
using the purchase method of accounting and have allocated the purchase price
to the net assets acquired, based upon the fair value of the acquired assets
and assumed liabilities as of November 1, 1999.
Revenue and Cost Recognition
Revenues and costs of services rendered, including paramedical and medical
examinations, personal health interviews and record collections, and laboratory
testing, are recognized when services are performed. Cost of operations include
primarily direct examiner fees, physicians' fees, branch office costs,
laboratory testing kits, and operating costs of Heritage Labs. Selling, general
and administrative expenses include primarily home office costs such as
management information systems, employee benefits, depreciation, amortization,
and senior executive, regional management and national sales costs.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues of certain line items included in our statement of income data:
<TABLE>
<CAPTION>
Nine months
ended
September 30, Years ended December 31,
-------------- ----------------------------
1999 1998 1998 1997 1996
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations............. 69.0 69.5 69.8 72.1 75.5
------ ------ -------- -------- --------
Gross profit................. 31.0 30.5 30.2 27.9 24.5
Selling, general and
administrative expenses....... 15.3 17.0 16.4 18.0 19.0
------ ------ -------- -------- --------
Operating income............. 15.7% 13.5% 13.8% 9.9% 5.5%
</TABLE>
22
<PAGE>
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenues for the nine months ended September 30, 1999 increased 17.6% to
$161.2 million from $137.1 million for the nine months ended September 30,
1998. This growth resulted from a 7.3% increase in the number of Portamedic
examinations performed to 1,999,000 from 1,863,000, a 16.6% increase in
Infolink reports to 260,000 from 223,000, an increase in the services
performed per examination, along with a modest price increase and the addition
of Heritage Labs revenues. The increase in Infolink reports resulted from
management reemphasizing branch generation of Infolink reports.
Our cost of operations for the nine months ended September 30, 1999 totaled
$111.2 million, compared to $95.2 million for the nine months ended September
30, 1998. Cost of operations as a percentage of revenues decreased from 69.5%
for the nine months ended September 30, 1998 to 69.0% for the nine months
ended September 30, 1999. This decrease was due to declining direct production
costs and branch operating costs as a percentage of revenues.
Selling, general and administrative expenses totaled $24.8 million as
compared to $23.3 million for the nine months ended September 30, 1999 and
1998, respectively, and as a percentage of revenues totaled 15.3% compared to
17.0%. As a percentage of revenues, the decrease was due to ongoing efforts to
closely monitor and control corporate level expenses.
Accordingly, our operating income improved to $25.2 million from $18.5
million and as a percentage of revenues increased to 15.7% from 13.5% for the
nine months ended September 30, 1999, and 1998, respectively.
We had no revolving loan borrowings as of September 30, 1999. Interest
income increased to $.7 million due to a higher average invested funds amount
of $35.4 million for 1999 over $21.0 million for 1998.
The effective tax rates were 44.2% and 46.5% for the nine-month periods
ended September 30, 1999 and 1998, respectively. The decrease was the result
of increased profitability, which lessened the impact of nondeductible
goodwill amortization.
As a result of the foregoing, net income and net income per share for the
nine months ended September 30, 1999 were $14.6 million or $.48 per share, on
a diluted basis, versus $10.1 million or $.34 per share for the nine months
ended September 30, 1998.
Inflation did not have a significant effect on our operations in the nine
months ended September 30, 1999.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Revenues for 1998 increased 12.0% to $185.2 million from $165.4 million for
1997. This growth resulted from an 8.3% increase in the number of Portamedic
examinations performed to 2,515,000 from 2,323,000, an increase in the
services performed per examination, and a modest price increase and was offset
by a 10.1% decrease in Infolink reports to 303,000 from 337,000. The decrease
in Infolink reports resulted from a management decision to reduce the volume
of the less profitable portions of this business.
Our cost of operations in 1998 totaled $129.3 million compared to $119.2
million for 1997. Cost of operations as a percentage of revenues decreased
from 72.1% for 1997 versus 69.8% for 1998. This decrease was due to declining
direct production costs and branch operating costs as a percentage of
revenues.
Selling, general and administrative expenses totaled $30.4 million as
compared to $29.8 million for 1998 and 1997, respectively, and as a percentage
of revenues totaled 16.4% as compared to 18.0%. As a percentage of revenues,
this reduction was the result of management's continued success in controlling
personnel and related corporate expenses.
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Accordingly, our operating income improved to $25.6 million from $16.3
million and as a percentage of revenues increased to 13.8% from 9.9% for 1998
and 1997, respectively.
Other income items in 1998 were primarily interest earned on invested funds,
the average balance of which was $22.7 million for 1998 over $8.2 million for
1997.
The effective tax rates were 46.0% and 48.1% for 1998 and 1997,
respectively. The decrease was 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 $.48 per diluted share, compared to $8.8 million or
$.31 for 1997.
The net loss from discontinued operations totaled $1.5 million or $.05 per
diluted share in 1998. The charge evolved from residual workers' compensation
charges and certain reimbursement issues associated with the divestiture of
Nurse's House Call in 1995. Net income for 1998 totaled $12.7 million or $.43
per diluted share, compared to $8.8 million or $.31 per diluted share for 1997.
Net income in 1998 included a $1.5 million, or $.05 per share charge from
discontinued operations, as previously noted.
Inflation did not have a significant effect on our operations in 1998.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Revenues for 1997 increased 5.8% to $165.4 million from $156.3 million for
1996. This growth resulted from a 1.8% increase in the number of Portamedic
examinations performed to 2,323,000 from 2,281,000, and a modest price increase
and was offset by a 17.6% decrease in Infolink reports to 337,000 from 409,000.
The decrease in Infolink reports resulted from a management decision to reduce
the volume of the less profitable portions of this business.
Our cost of operations in 1997 totaled $119.2 million compared to $118.0
million for 1996. Cost of operations as a percentage of revenues decreased from
75.5% for 1996 to 72.1% for 1997. This decrease was due to declining direct
production costs and branch operating costs as a percentage of revenues.
Selling, general and administrative expenses totaled $29.8 million as
compared to $29.7 million for the years ended December 31, 1997 and 1996,
respectively, and as a percentage of revenues, totaled 18.0% compared to 19.0%.
As a percentage of revenues, the decrease was due to a success in controlling
personnel and related corporate expenses.
Accordingly, our operating income improved to $16.3 million from $8.6
million and as a percentage of revenues increased to 9.9% from 5.5% for 1997
and 1996, respectively.
Interest expense decreased in 1997 to $.2 million compared to $1.4 million
in 1996 due to our average debt decreasing from $16.4 million to $2.0 million.
Other income items in 1997 were primarily interest earned on invested funds and
certain deferred payments received from the sale of our Direct Marketing
business in 1992.
The effective tax rate for 1997 was 48.1% and the effective tax rate for
1996 was 48.0%.
As a result of the foregoing, net income in 1997 totaled $8.8 million or
$.31 per diluted share compared to $4.1 million or $.15 per diluted share for
1996.
Inflation did not have a significant effect on our operations in 1997.
Liquidity and Financial Resources
Our primary sources of cash are internally generated funds and our senior
credit facility.
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Net cash provided by operating activities for the nine months ended
September 30, 1999 was $10.7 million compared to $13.8 million for nine months
ended September 30, 1998. The significant sources were net income of $14.6
million and $3.2 million of depreciation and amortization, and were offset by
an increase in accounts receivable of $6.3 million. The increase in accounts
receivable was due primarily to revenue growth of $24.2 million during the nine
months ended September 30, 1999. Days sales outstanding was 43 days at
September 30, 1999, compared to 41 days at the end of the third quarter 1998.
Our current ratio as of the end of September 1999 was 4.5 to 1, compared to
2.7 to 1 at December 31, 1998. Also, inflation has not had, nor is it expected
to have, a material impact on our consolidated financial results in 1999, and
we currently have no material commitments for capital expenditures. Dividends
paid in February, May, August and November 1999 were $.0125 per share.
We had no borrowings against our previous revolving loan facility at
September 30, 1999 and as of that date, a total amount of $18.6 million was
available under the revolver and $1.4 million was committed to outstanding
letters of credit. The note payable of $450,000 is an obligation of our
majority-owned subsidiary. On October 29, 1999, we replaced our previous
revolving loan facility and entered into a credit agreement with three banks
that included a $65 million, six-year term loan, and a $35 million dollar,
three-year revolving loan. The loans bear interest at either the prime rate
minus 1/2% to plus 1/4% or LIBOR plus 3/4% to 1 3/4%, depending on our
consolidated funded debt to EBITDA ratio. Interest is currently payable at an
effective interest rate of 7.305% per annum. No principal payments are due on
the term loan for the first eighteen months. As of November 1, 1999, we
borrowed the entire amount of the term loan to finance a portion of the
purchase price of PSA. The remainder of the approximately $80 million purchase
price was financed with existing cash of approximately $15 million. There are
no borrowings against the revolving loan. See "Description of the Senior Credit
Facility."
Management believes that, after this offering, the combination of cash and
cash equivalents, other working capital sources, and available borrowings under
our senior credit facility, along with anticipated cash flows from continuing
operations, will provide sufficient capital resources to satisfy both our
short-term and foreseeable long-term needs.
PSA Acquisition
At the time we acquired PSA, it maintained approximately 110 branch offices,
90 contract affiliates and 3,000 examiners who did not also perform
examinations for us. Prior to completing the PSA acquisition, we expected to
close and consolidate a number of branch offices and terminate a number of
PSA's contract affiliates. We were also aware that some of PSA's contract
affiliates had either terminated their relationships with PSA or planned not to
continue as our contract affiliates after the acquisition was completed. As an
incentive to those PSA contract affiliates which we want to retain, cash
bonuses, partially funded from amounts escrowed at closing, have been offered
to those who remain with us until June 1, 2000. We have substantially completed
our planned branch office closings and consolidations, and contract affiliate
terminations, which has resulted in the addition of approximately 30 branch
offices and 60 contract affiliates to our network, which is consistent with our
expectations at the time of the acquisition. Assuming the acquisition, branch
office closings and consolidations, and contract affiliate terminations had
been completed on October 1, 1998, we believe approximately $21 million of
PSA's reported $83 million in revenue for fiscal year 1999 would not have been
achieved.
Immediately upon closing, we began implementing a detailed integration plan,
which, in addition to branch office closings and consolidations, and contract
affiliate terminations described above, includes the following key tasks
relating to the PSA business:
. consolidating and relocating branch office personnel;
. reducing selling, general and administrative expenses, including
terminating PSA sales personnel;
. updating system hardware and software;
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. transferring billing and collection systems;
. implementing our quality assurance program; and
. marketing to newly acquired customers.
We believe that our integration efforts will improve the operating margin of
the PSA business, which has historically been significantly less than ours.
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, 2001. SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and measure them at fair value. We do not expect the adoption of this
Statement to have a material impact on our consolidated financial statements.
Year 2000 Compliance
We recognize the need to insure that our operations and relationships with
our customers, suppliers and other third parties will not be adversely impacted
by the Year 2000 software issue. Our Year 2000 compliance efforts were
completed and we have experienced no problems to date with our internal
automated systems as a result of Year 2000. In or before 1999, many of our
critical suppliers and vendors indicated that they were, or would be, Year 2000
compliant during 1999. We have not experienced, and are not aware of, any Year
2000 problems affecting our critical suppliers and vendors. We cannot guarantee
that our efforts will prevent a material adverse impact on our results of
operations, financial condition or cash flow that might result from the failure
of any key third party systems to accommodate the Year 2000 problem. 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
consolidated results of operations, financial condition and cash flows if we
are unable to substantially conduct our business in the ordinary course. We
believe our efforts to address the Year 2000 issue will minimize possible
negative consequences to Hooper Holmes.
Quantitative and Qualitative Disclosures About Market Risk
Our holdings of financial instruments are comprised of cash equivalents,
primarily funds with municipal securities and government obligations. We do not
invest in portfolio equity securities or commodities or use financial
derivatives for trading purposes. We seek reasonable assuredness of the safety
of principal and market liquidity by investing in municipal and government
securities while at the same time seeking to achieve a favorable rate of
return. Our market risk exposure consists principally of exposure to changes in
interest rates. We are also exposed to other fluctuations in interest rates,
primarily as a result of the financing entered into on October 29, 1999 to fund
the PSA acquisition. We do not use derivative instruments or hedging to manage
our exposures. As our debt has adjustable interest rates (currently at 7.305%)
and was issued in October 1999, its fair value approximates its carrying value.
The term loan of $65 million requires interest payments only during the first
18 months, five principal payments each on April 30, 2001 through 2005 and a
final payment of $15 million on January 31, 2006.
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INDUSTRY BACKGROUND
Industry Overview
The health information services industry provides outsourced health and
other information about applicants for life insurance policies to help
insurance companies evaluate the risks associated with underwriting these
policies. The services provided by this industry include:
. paramedical and medical examinations;
. personal health interviews and record collection; and
. laboratory testing.
Management believes that virtually all U.S. life insurance companies currently
outsource these services. According to A.M. Best, U.S. life insurance companies
spent approximately $600 million on examinations and approximately $70 million
on personal health interviews and record collection in 1998. Additionally,
management believes that insurance companies spent over $100 million in 1998
for laboratory testing.
The demand for these services primarily depends upon:
. the number of applications for life insurance;
. the percentage of applications for which any health information services
are required; and
. the types of services that insurance companies require in the
application process.
Insurance companies generally require more examinations and other services for
higher face amount life insurance applications and for older applicants. We are
not aware of any published data on the number of life insurance applications.
While the American Council of Life Insurance estimates that approximately 11.56
million individual insurance policies were issued in 1998, a decrease of 3.8%
from approximately 12.02 million sold in 1996, the aggregate face amount of
individual life insurance policies purchased increased 21.1% to $1.32 trillion
from $1.09 trillion during the same time period.
Paramedical and Medical Examinations
A paramedical examination may include any of the following:
. the collection of an insurance applicant's medical history, age, height,
weight, blood pressure, and pulse;
. blood, urine and saliva collection; and
. resting EKG.
Registered nurses, licensed practical nurses, physicians, phlebotomists and
medical and EKG technicians may perform paramedical examinations. These
examinations often are performed in the applicant's home or office and may take
approximately 30 minutes to complete. A medical examination may include a
complete physical examination performed by a physician, as well as a stress EKG
and chest x-ray.
Each insurance company issues its own examination requirements. Generally,
the older the applicant and the larger the policy amount, the more likely an
examination will be required, the more likely a physician must perform the
examination and the more types of procedures that must be performed. Other
determining factors might also include the lifestyle and medical history of the
applicant.
Personal Health Interviews and Record Collection
Personal health interviews and record collection provide information about
the applicant's medical and employment history, financial status, lifestyle and
other personal information. This information is primarily obtained from
telephone interviews with the applicant, his or her employer, and his or her
business and personal associates. An attending physician statement, providing
details of an applicant's medical history, may also be requested. These
statements are obtained from the applicant's physician, clinic or hospital
medical records. Insurance companies typically use this information either as a
substitute for a paramedical or medical
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examination in relatively small face-amount policies or as a complement to an
examination in the case of relatively large face-amount policies.
Laboratory Testing
If urine, blood or saliva samples are collected during an examination, they
are delivered to a laboratory selected by the insurance company. These samples
are screened for various illnesses and substances, such as HIV, cholesterol,
nicotine and triglycerides. Most of this testing is performed by independent
laboratories, although some health information service providers have their own
in-house laboratories. Most insurance companies work with only one or two
laboratories.
Industry Trends
The life insurance industry is experiencing a number of key trends that we
believe will affect our business.
Alternate Distribution Channels
New distribution channels have emerged as alternatives to traditional
insurance agent and broker sales. As a result of reduced regulation imposed
upon the financial services industry and the growth of Internet-based commerce,
a variety of entities have begun marketing life insurance in recent years,
including commercial banks, credit card companies, securities firms, direct
marketers and online insurance benefits companies. These entities, as well as
traditional insurance companies, are increasingly using a variety of marketing
techniques that include the Internet, direct mail, mass media and
telemarketing. In particular, a number of Internet sites now allow applicants
to solicit quotes and apply for life insurance policies online. We believe the
number of applications per policy issued will increase due to a simplified
shopping and application process.
Alternate distribution channels allow sellers of insurance to sell policies
without face-to-face contact with the applicant. Companies using these channels
have been outsourcing services not traditionally included in a paramedical or
medical examination. Since the examination process requires face-to-face
contact with applicants, health information service providers are now
performing more routine, administrative tasks of the application process.
Reduction of Approved Health Information Service Providers
To improve quality control and reduce administrative costs, life insurance
companies are reducing the number of approved health information service
providers. This trend is strengthened by the decrease in the number of life
insurance companies in the United States, which has declined 33% from 1988 to
1998 according to the American Council of Life Insurance. As a result, we
expect insurance companies will increasingly emphasize geographic coverage and
automation when choosing health information service providers. Geographic
coverage and automation are particularly important for entities using alternate
distribution channels as such insurers often serve applicants nationwide. We
believe these trends will benefit providers that offer a national network and
meet insurers' technological and quality needs.
Favorable Insurance Applicant Trends
The following statistics from the American Council of Life Insurance
indicate favorable trends for our industry:
. from 1996 to 1998, the average newly purchased individual life insurance
policy grew 26% from $90,606 to $114,601;
. in 1987, 27% of life insurance policies purchased were greater or equal
to $100,000 in face amount; in 1997, 43% were within this range; and
. in 1987, purchasers of life insurance over age 35 accounted for 53% of
the total face amount and 40% of the number of policies purchased; in
1997, they accounted for 60% and 46%, respectively.
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BUSINESS
Hooper Holmes is the nation's leading provider of health information
services to the life insurance industry. We provide paramedical and medical
examinations, personal health interviews and record collection, and laboratory
testing, which help life insurance companies evaluate the risks associated with
underwriting policies. We serve our customers through our network of over 8,700
registered nurses, licensed practical nurses, physicians, phlebotomists and
medical and EKG technicians, of which approximately 1,300 are employees and
7,400 are active independent contractors. We operate through approximately 230
branch offices and 75 contract affiliate offices located in 50 states, Guam and
Puerto Rico. We have over 700 life insurance company customers, including the
50 largest in the United States.
Growth Strategy
Our growth strategy is to enhance our industry leadership position by
capitalizing on the industry trends and providing the most comprehensive array
of health information services to the life insurance industry. We will pursue
this strategy by:
. Continuing our commitment to industry leadership through
automation. Insurance companies and insurance agents are demanding faster,
more user-friendly services. In response, we have made a substantial
investment in technology and we believe we have the most automated branch
network and operating system in the industry. Today, customers can handle
several aspects of their business with us electronically, such as placing
examination orders, monitoring order status, communicating with our customer
service and branch locations, and receiving results of personal health
interviews. From January through November 1999, we received approximately
39% of all orders electronically. We intend to continue investing in the
latest technology to further enhance our services and provide expanded
electronic access over the Internet.
. Increasing our focus on alternate distribution channels. Alternate
distribution channels represent a rapidly growing segment of the life
insurance industry. For the nine months ended September 30, 1999, alternate
distribution channel customers accounted for approximately $27 million or
17% of our revenues, up approximately 59% from $17 million for the same
period in 1998. We believe that our geographic coverage and level of
automation position us to provide the level of support that alternate
distribution channels require. We have aggressively pursued sales to
entities using these channels and are currently establishing alliances that
in many cases have resulted in exclusive relationships with them.
. Leveraging our national branch network. Our national branch network provides
us with a broad geographical coverage capable of providing local service for
insurance companies, agents and brokers across the entire United States.
This coverage positions us to become the preferred provider of health
information services to a consolidating life insurance industry. We believe
that our branch network and technological infrastructure enable us to
significantly increase the volume of our services with only a marginal
increase in our branch operating costs.
. Continuing to pursue strategic acquisitions. We intend to continue pursuing
strategic acquisitions that complement existing services and leverage our
existing capabilities. Two recent acquisitions have increased our market
share and enhanced our service offerings: PSA, the second largest provider
of medical and paramedical examinations in the U.S., in November 1999 and
Heritage Labs, a provider of laboratory testing services for life insurers,
in December 1998.
. Expanding into related lines of business. We are exploring means to enter
new lines of business which leverage our existing branch network, service
capabilities or customer base. For example, we continue to develop services
for pharmaceutical companies engaged in the clinical trials process,
including specimen collection and data management. We also intend to explore
adding other services, including offerings for the long-term care insurance
market and workers' compensation case management.
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Services
Portamedic -- Paramedical and Medical Examinations
We perform paramedical and medical examinations of insurance policy
applicants under the Portamedic trade name and provide the results to insurance
companies, agents and other non-traditional insurance marketers in connection
with issuance of primarily life insurance policies. We are the leading
paramedical and medical examination company in the U.S., having performed
approximately 2.0 million exams in the nine months ended September 30, 1999.
Since an insurance applicant may reconsider his or her purchase in the time
it takes to deliver examination results, our system is designed to timely
deliver applicant information to the insurance company. We strive to schedule
an appointment within 24 to 30 hours of receiving the request and to complete
the entire examination process in three to five days, unless the applicant
desires a later appointment. Our examiners perform examinations at times and
locations convenient to applicants, primarily at the applicant's home or place
of business.
Since almost all of our examiners are nurses and other medically trained
professionals, we are able to provide our customers with a full range of
paramedical and medical examinations. Our examiners also perform other
ancillary services including helping applicants understand and complete forms
and obtaining consent signatures. In addition, we have dedicated customer
service employees in Chicago, who help complete applications based on telephone
interviews with applicants, and additional customer service employees located
in service centers in Minneapolis, Dallas and Kansas City, who provide general
customer service support.
Each insurance company has separate guidelines for determining whether an
examination is required and the type of services required. The following chart
illustrates what a typical insurance company's guidelines might look like for
determining the types of examinations and samples collected when our services
are required. Our computer system contains more than 1,600 of these charts for
various insurance companies.
<TABLE>
<C> <S> <C> <C> <C> <C>
Age of Applicant
-----------------------------------------------------------
<CAPTION>
18-40 41-50 51-60 61-70
<C> <S> <C> <C> <C> <C>
$100,000 Urine, Blood Paramedical, Paramedical, Paramedical,
and under Urine, Blood Urine, Blood Urine, Blood,
Resting EKG
-----------------------------------------------------------
$100,001- Paramedical, Paramedical, Paramedical, Paramedical,
$350,000 Urine, Blood Urine, Blood Urine, Blood, Urine, Blood,
Resting EKG Resting EKG
-----------------------------------------------------------
Policy $350,001- Paramedical, Paramedical, Paramedical, Medical Exam,
Amount $500,000 Urine, Blood Urine, Blood Urine, Blood, Urine, Blood,
Resting EKG Stress EKG Stress EKG
-----------------------------------------------------------
$500,001- Paramedical, Paramedical, Medical Exam, Medical Exam,
$1,000,000 Urine, Blood Urine, Blood, Urine, Blood, Urine, Blood,
Resting EKG Stress EKG Stress EKG
-----------------------------------------------------------
$1,000,001 Paramedical, Medical Exam, Medical Exam, Medical Exam,
and up Urine, Blood, Urine, Blood, Urine, Blood, Urine, Blood,
Resting EKG Stress EKG Stress EKG Stress EKG
</TABLE>
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Infolink Services Group -- Personal Health Interviews and Medical Record
Collection
Under the Infolink name, we offer personal health interviews and medical
record collection, including attending physician statements, to our customers.
Infolink reports are completed through highly automated, centrally located
offices. During the first three quarters of 1999, we provided approximately
260,000 Infolink reports.
Infolink reports can be ordered electronically, by fax or by phone.
Approximately 50 full-time employees prepare all of the Infolink reports
ordered by our customers from call centers in Austin, Texas; Philadelphia,
Pennsylvania; and Louisville, Kentucky. These employees interview the
applicant, his or her employer, and his or her business and personal
associates. The report is then electronically transmitted or faxed to the
insurance underwriter at its request. Our information systems allow us to
tailor reports for each client's needs and reduce paperwork and turnaround time
for our clients. We strive to deliver our Infolink reports back to the
insurance company within two to three days from the time of request.
In addition, life insurance companies may also require attending physician
statements. In such cases, either a branch office or our central attending
physician statement office in Chicago will contact the applicant's physician,
clinic or hospital to request medical records, send a written request with
payment and follow-up to confirm delivery of the information.
Heritage Labs
In December 1998, we acquired a 55% interest in Heritage Labs, a laboratory
providing testing services for the life insurance industry. Heritage Labs
processes lab tests both for our customers and third-party health information
service providers. This acquisition has enabled us to internalize the
laboratory testing process and to offer our life insurance customers a one-stop
source for their health information service needs. Combined with our existing
automation, we believe Heritage Labs allows us to provide a seamless service of
processing, gathering and testing health information for our life insurance
customers.
Insurance companies determine which laboratory will process the samples
collected from their respective applicants. Since December 1998, we have added
over 85 new customers for our Heritage Labs testing services bringing the total
number of customers to over 130. The number of samples tested in December 1999
doubled to approximately 33,500 from 16,600 in December 1998.
Other Services
Under the Healthdex tradename, we are developing services for pharmaceutical
and biotechnology companies. Our goal is to leverage our health information
expertise and branch network to provide outsourced information services to
support clinical trials and data analysis. Currently our business in this area
consists of performing chart review and monitoring clinical trials processes.
Chart review entails collecting patient information from physician records and
transmitting it to customers in formats requested by them. Clinical trials
monitoring entails verifying investigator credentials and site locations, as
well as assuring that proper informed consent processes are followed. In
addition, we perform some ancillary services such as occupational health
screening and substance abuse testing for corporations and other organizations
outside of the insurance industry.
Our Network
We believe our network of branch offices and contract affiliates is the most
extensive in our industry. We can provide an examination to any applicant in
any location in the United States.
Our branch managers are responsible for the supervision of the local health
information operations. Support staff coordinate examinations and reporting
procedures and perform quality assurance functions. Branch sales personnel
perform marketing and sales activities. Each branch office is automated with
direct
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electronic connections to our home office in Basking Ridge, New Jersey. Orders
are received by both branch offices and our corporate home office. Those orders
received by our home office are electronically processed and routed to the
appropriate branch. The branch office is responsible for scheduling the
examination and assigning an examiner. The status of the examination is entered
into the branch office system, then is retrieved and processed by the home
office and made available to the customer. Once examination results are
complete, they are faxed or mailed directly to the customer.
We have 75 independent contract affiliates, 60 of which we added in the
acquisition of PSA. Contract affiliates perform many of the same functions as
our branch offices, but are independently owned and operated. Our contract
affiliates provide our Portamedic services in assigned geographical areas
throughout the United States and receive orders directly from our customers.
Three of our contract affiliates have exclusive rights to provide examination
services in areas that are not served by our branch offices. Each contract
affiliate is responsible for compensating, training, hiring and supervising all
of its personnel and must meet the same quality assurance standards of our
branches, including necessary credentialing of its examiners. Our contract
affiliates use a version of our system software that allows them to bill
customers and obtain examination status reports.
Our Automation Systems
As technology continues to advance the underwriting process, life insurance
companies are demanding timely delivery of information from health information
service providers. Our automation systems are designed to meet these demands by
providing the following benefits.
Electronic Networking Capabilities Between Branch Offices
We have developed a comprehensive, automated management information system,
designed by our field personnel, that is now online in all branch offices. The
system connects each branch and the home office, allowing us to send and
receive orders, schedule examinations, and instantly and regularly monitor
examination request status. The system enables personnel at our corporate
headquarters to compile company-wide information regarding quality assurance
standards, in addition to administrative, accounting and other management
information.
Direct Electronic Links with our Customers
Many of our customers communicate with us electronically through our Win
Remote APS Paramedical Inspection Data (R.A.P.I.D.) system. Customers
electronically place orders with us and receive personal interview reports
through this system, reducing the turnaround time and cost associated with each
order.
We provide additional automation services to our customers through our
Teledex service. Teledex is an automated service providing applicant
information to our insurance customers on an expedited basis. When an insurance
customer transmits an order through Teledex, a staff member pulls up a
customer-specific underwriting questionnaire on his or her computer terminal
and begins collecting applicant information, which includes a telephone
interview with the applicant. Teledex has over 1,600 different, customer-
specific underwriting questionnaires in its system, which enables us to provide
customized reports for each customer in a matter of hours. This process is
valuable to our customers because it allows them to begin the underwriting
process upon receipt of our Teledex report, rather than waiting for an examiner
to perform the examination, collect the data and then return the report and
examination results. Teledex additionally receives and handles orders for
attending physician statements.
These customer links are designed to reduce paperwork, turnaround time and
the chance that the insurance applicant will reconsider his or her buying
decision by the time results are gathered.
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Internet-based Ordering and Monitoring
In addition to accessing Win R.A.P.I.D., customers can conduct business with
us online through the Internet. Our online service enables customers to place
orders and instantly and regularly monitor the status of a particular
examination request. The benefits of this service to the customer are faster
processing, 24-hour access, and easy order tracking. Customers gain access to
our Portamedic Web site using a secure password. The status of exams is updated
at the close of each business day and made available to the customer at the
beginning of the next business day. The Internet has improved our customer
service and has also lowered our processing costs by reducing the human
interaction in the ordering process. This service is intended to complement
telephone contact between our branches and insurance customers, and it provides
an additional level of service that many of our customers desire. Management
believes that we are the only health information services provider to offer
this online service. Non-traditional insurance marketers, who employ a direct
response approach to selling insurance products, particularly depend upon our
ability to expedite their requests for service. Approximately 10% of our
alternate distribution channel orders were placed through the Internet during
the third quarter of 1999.
Quality Assurance Program
The quality and reputation of personnel and operations are critical to the
continued success of our business. Our successful implementation of quality
assurance depends on our ability to recognize problems and solve them within a
relatively short time period. To help do this, we employ a statistical quality
control program, which allows us to monitor quality at many different levels of
operation.
At the branch office level, quality assurance specialists monitor examiner
performance. Each examiner undergoes periodic evaluations to provide feedback
and ensure that any recurring mistakes are remedied. Specialists also conduct
regular audits of branch office quality controls to assist branch managers in
improving their performance and the quality of services examiners perform.
At the corporate headquarters level, quality assurance specialists monitor
examiner performance twice each year through detailed statistical analyses of
examination accuracy and reporting methodology. A quality assurance log created
monthly by the corporate office tracks errors and problems with examinations
and examiners, including lab errors, omissions on forms and misdirected
transmission of results. The quality assurance specialists regularly evaluate
examination procedures and consult with our insurance customers to address any
specific problems and, where appropriate, suggest revisions to improve
examination procedures and reports.
We hire and contract with properly trained, experienced examiners. In
addition, we have developed a database of over 1,000 credentialed physicians
who are approved to perform medical examinations for our customers.
Sales and Marketing
We market Portamedic and Infolink health information services on a national
level through seven full-time sales representatives who call on senior
underwriting executives at the home offices of insurance companies. Two of
these sales representatives call exclusively on entities that distribute
through alternate distribution channels. We serve approximately 700 life
insurance companies, including their extensive network of agency, district, and
brokerage offices. National sales representatives promote our consistently high
quality of service and rapid response time to examination requests and are
responsible for maintaining our position on each insurance company's approved
list of examination providers. We regularly attend and occasionally sponsor
customer conferences to provide national sales representatives with
opportunities to further develop key relationships.
At the local level, branch managers, and in certain offices, additional
marketing personnel, market our services directly to the local insurance agents
and managers, who have the authority to select examination
33
<PAGE>
providers from the list approved by the insurance companies' home offices.
These local marketing efforts highlight the quality of our examiners and the
speed and accuracy of our services, including the ability of each branch to
quickly ascertain the status of each service request through our automated
branch management information system.
Competition
Management believes that we are the largest of the three national firms that
focus primarily on providing paramedical and medical examinations, personal
interviews and record collection to the life insurance industry. Our two
largest competitors are Examination Management Services, Inc. and American Para
Professional Systems. A significant number of regional and local firms also
compete in our industry. Through our Heritage Labs subsidiary we also compete
with laboratory testing providers, who typically do not provide other health
information services such as paramedical and medical examinations, personal
interviews and record collection.
Although we have exclusive relationships with a small number of our
customers, companies traditionally use two or more health information services
providers. This means we face direct competition from our competitors who have
existing relationships with many of our customers. Our ability to retain
customers will depend on our continued ability to serve their needs and
distinguish ourselves from our competitors. In management's opinion, the
principal competitive factors in our market are:
. quality of service and examinations;
. timeliness of examination process and communication of results;
. geographic breadth of coverage;
. automation and connectivity between health information providers and
insurers; and
. price.
More recently, technological capabilities have become much more important to
meeting our customers' needs. We are continually enhancing and expanding our
technology and network infrastructure to accommodate our customers' changing
needs, including the electronic ordering of our services and online status
checks. We are also adapting to the technological needs of insurance companies
which are beginning to rely more on alternate distribution channels, including
the Internet, to sell their products.
Service Marks and Trademarks
We have registered several service marks, including "Portamedic(R),"
"Healthdex(R)" and "Teledex(R)," and have filed applications to register
"Infolink" and the Hooper Holmes logo with the United States Patent and
Trademark Office. Our rights to these marks will continue as long as we comply
with the usage, renewal filing and other legal requirements relating to the
renewal of service marks. We also have a non-exclusive license to use the name
"PSA" solely in connection with the business we acquired from PSA, for one year
after the closing. We intend to use the "PSA" name to facilitate the
integration of PSA's business into ours.
Personnel
With the acquisition of PSA, we employ approximately 1,500 full-time and
1,500 part-time employees, including 1,300 examiners, none of whom is
represented by a collective bargaining agreement. We also contract with over
7,400 medically trained examiners, and utilize the services of 75 contract
affiliates. We hire and contract with properly trained, experienced and, when
required, licensed or certified examiners. Our ability to recruit skilled
personnel is essential to our continued growth and success. Management
attributes our success in recruiting skilled personnel in our health
information services business to the flexible work schedules and varied work
assignments we offer our examiners. Management believes that these factors will
enable us to continue to attract and retain qualified personnel.
34
<PAGE>
Government Regulation
Certain aspects of our business are regulated by the states in which we
operate and, to a lesser extent, by the federal government. In addition to
licensing and certification requirements for our examiners, we are subject to
regulations governing various aspects of our services, including needle
disposal and specimen handling procedures, and licensing and FDA requirements
governing Heritage Labs and our examination kits. Management is not aware of
any pending federal or state environmental laws or regulations that would have
a material adverse effect on our business or competitive position or that would
require material capital expenditures on our part to effect compliance.
Insurance and Legal Proceedings
Claims made against us arising in the course of providing health information
services have not resulted in any material liability to date. We carry
liability insurance in coverage amounts that we believe is customary in our
business. There can be no assurance, however, that such coverage will be
sufficient to cover claims made against us, that adequate insurance coverage
will continue to be available to us, or that insurance coverage will be
available on favorable terms. Our insurance coverage includes occurrence-based
medical professional liability insurance and claims-made non-medical
professional liability insurance, a property insurance policy, a general
liability policy, and an umbrella insurance policy.
We are a party to a number of legal actions arising in the ordinary course
of business. In the opinion of management, we have adequate legal defense
and/or insurance coverage respecting each of these actions and do not believe
their ultimate disposition will materially affect our consolidated results of
operations or financial position.
In the past, some state agencies have claimed that we improperly classified
our examiners as independent contractors for purposes of state unemployment tax
laws and that we were therefore liable for arrears of taxes, or for penalties
for failure to comply with these laws. We have recently received an adverse
determination in California on an unemployment tax issue and are currently
appealing that decision. Other similar state claims are also pending or have
been resolved. We have prevailed in four of these states, and we have re-
classified our independent contractors as employees in two states. We also
recently settled with another state and intend to remit unemployment taxes for
certain types of independent contractors in that state. These adverse
determinations have not had a material adverse effect on our business.
Description of Property
We own a five-building complex located at 170 Mt. Airy Road, Basking Ridge,
New Jersey. Of approximately 53,000 total square feet of office space, we
maintain our operations in approximately 43,500 square feet and the balance is
leased or available for lease to several tenants. Management believes that this
arrangement provides for our foreseeable expansion needs.
We lease our field offices under a number of operating leases with varying
terms and expirations.
35
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the directors and executive officers of
Hooper Holmes are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
James M. McNamee 55 Chairman of the Board, President and Chief
Executive Officer
Paul W. Kolacki 57 Executive Vice President and Chief Operating
Officer
Fred Lash 54 Senior Vice President, Chief Financial Officer and
Treasurer
Robert William Jewett 47 Senior Vice President, General Counsel and
Secretary
G. Earle Wight 66 Senior Vice President and Director
Benjamin A. Currier 66 Director
Quentin J. Kennedy 66 Director
John E. Nolan 72 Director
Elaine L. Rigolosi 55 Director
Kenneth R. Rossano 65 Director
</TABLE>
James M. McNamee. Mr. McNamee, age 55, has served as Chairman of the Board
of Directors of Hooper Holmes since 1996 and as our President and Chief
Executive Officer since 1984. He has been an employee of Hooper Holmes since
1968, an officer since 1979 and a director since 1984. Mr. McNamee is a member
of our Executive Committee and our Nominating Committee.
Paul W. Kolacki. Mr. Kolacki, age 57, has served as Executive Vice
President and Chief Operating Officer of Hooper Holmes since 1998. He has been
Executive Vice President of our Portamedic Health Information Services
Division since 1991, and has been an employee of Hooper Holmes since 1964. Mr.
Kolacki has recently announced his retirement effective March 31, 2000. It is
anticipated that he will continue to serve the Company as a consultant
following his retirement.
Fred Lash. Mr. Lash, age 54, has served as Senior Vice President of Hooper
Holmes since 1993, as Chief Financial Officer since 1989 and as Treasurer
since 1987. Mr. Lash was previously employed by Wallace and Tiernan Division
of Pennwalt Corporation as Manager of Accounting, and then as Financial
Manager of the Division from 1972-1987, and served in the U.S. Air Force from
1968-1972.
Robert William Jewett. Mr. Jewett, age 47, has served as Senior Vice
President and General Counsel of Hooper Holmes since 1991 and as Secretary
since 1983. He has been an employee of Hooper Holmes since 1981. Prior to
joining Hooper Holmes, Mr. Jewett served as a corporate attorney at The
Hanover Insurance Company from 1979-1981, and as an associate at the law firm
of Reardon & Reardon from 1978-1979.
G. Earle Wight. Mr. Wight, age 66, has served as Senior Vice President of
Hooper Holmes since 1985 and has been a director since 1966. He joined Hooper
Holmes as an inspector in 1952, and has been performing various sales and
marketing functions since then. Mr. Wight is a member of our Nominating
Committee.
Benjamin A. Currier. Mr. Currier, age 66, was Senior Vice President of
Operations for Security Life of Denver Insurance Company, a subsidiary of
ING/Barings, in Denver, Colorado prior to his retirement in 1997. Mr. Currier
was Vice President, Allstate Life Insurance Company from 1978 to 1995. He has
been a director of Hooper Holmes since 1996, and is a member of our Audit
Committee and the Executive Compensation Committee.
Quentin J. Kennedy. Mr. Kennedy, age 66, was Executive Vice President,
Secretary, Treasurer and Director of Federal Paper Board Company in Montvale,
New Jersey until his retirement in 1996. He had served in various executive
positions with Federal Paper Board since 1960. Mr. Kennedy has been a director
of Hooper Holmes since 1991. He is a member of our Executive Committee and our
Executive Compensation Committee.
36
<PAGE>
John E. Nolan. Mr. Nolan, age 72, is a partner in the law firm of Steptoe &
Johnson LLP, Washington, D.C. and has been engaged in the practice of law since
1956. He has been a director of Hooper Holmes since 1971, and is a member of
our Audit Committee and the Executive Committee. Mr. Nolan also serves on the
Board of Directors of Iomega Corporation.
Elaine L. Rigolosi. Dr. Rigolosi, Ed.D, J.D., age 55, is Professor,
Department of Organization and Leadership, Teachers College, Columbia
University. She has been associated with Columbia University since 1976, and
has maintained a private consulting practice in management for health care
organizations since 1974. Dr. Rigolosi has been a director of Hooper Holmes
since 1989, and is a member of our Audit Committee and our Executive
Compensation Committee.
Kenneth R. Rossano. Mr. Rossano, age 65, is a private investor. From 1992 to
1999, he was Senior Vice President of Cassidy & Associates in Boston,
Massachusetts. From 1991 to 1992, he was Vice President, Development,
Massachusetts Higher Education Assistance Corporation in Boston, Massachusetts.
He has been a director of Hooper Holmes since 1967, and is a member of our
Executive Committee and our Nominating Committee. Mr. Rossano is also a
director of Psy-Ed Corporation and QuickBuy, Inc.
Messrs. Wight and Rossano are brothers-in-law.
Upon Mr. Kolacki's retirement, overall field operating responsibilities will
be assumed by Mr. Mario Cavezza as Senior Vice President and General Manager of
Branch and Affiliate Operations effective April 1, 2000. Mr. Cavezza, age 52,
has been Senior Vice President and Regional Manager of the Northern Region
since 1997, and has been in various field supervisory positions since 1977. He
has been an employee of Hooper Holmes since 1968.
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following tables provide certain information with respect to the
beneficial ownership of our common stock as of December 31, 1999, both before
and after giving effect to the sale of shares of common stock in this offering,
excluding over-allotment options, if any, for the following:
. all of Hooper Holmes' directors and executive officers;
. all directors and executive officers of Hooper Holmes as a group; and
. all those known by us to be beneficial owners of more than 5% of our
common stock.
The table below has been prepared on the assumption that the underwriters do
not exercise their over-allotment option in full or in part. If the
underwriters exercise their over-allotment option in full, then Mr. Kolacki,
our Executive Vice President and Chief Operating Officer, will exercise options
to obtain 62,500 shares to sell in the offering.
<TABLE>
<CAPTION>
Name of Number of Shares Percentage Owned Percentage Owned
Beneficial Owner Beneficially Owned (1) Before Offering After Offering
- ---------------- ---------------------- ---------------- ----------------
<S> <C> <C> <C>
James M. McNamee........ 1,714,908(2) 5.63% 5.09%
Kenneth R. Rossano...... 696,376(3) 2.39% 2.15%
G. Earle Wight.......... 500,124(4) 1.72% 1.55%
Fred Lash............... 208,068(5) * *
Paul W. Kolacki......... 196,948(6) * *
John E. Nolan........... 80,000(7) * *
Quentin J. Kennedy...... 74,000(7) * *
Elaine L. Rigolosi...... 54,200(8) * *
Robert William Jewett... 49,200(9) * *
Benjamin A. Currier..... 30,760(10) * *
All executive officers
and directors
as a group (10
persons)............... 3,604,584(11) 11.58% 10.48%
Lord Abbett & Company... 1,737,000 5.97% 5.37%
</TABLE>
- --------
* Less than 1%
(1) Includes shares, if any, held by or for a spouse or minor children or as
a trustee. Unless otherwise indicated, the director or 5% stockholder
possesses sole investment and voting power in respect of these shares.
(2) Includes 249,604 shares held by Mr. McNamee and his spouse Patricia as
joint tenants, 52,240 shares held by Mr. McNamee's spouse, Patricia, and
7,064 shares held by Mr. McNamee's spouse Patricia as custodian for Sean
McNamee, their minor child. Also includes 36,000 shares held by the Trust
under the will of Eileen Rooney FBO Kevin Rooney, of which Mr. McNamee is
Trustee with sole voting and dispositive power. Also includes 1,367,000
shares underlying options that are currently exercisable or which will
become exercisable within 60 days.
(3) Includes 256,726 shares held by Mr. Rossano's spouse, Cynthia, and
338,602 shares held by The Cynthia W. Rossano 1991 Trust, of which Mr.
and Mrs. Rossano are trustees with sole voting and dispositive power.
Also includes 60,000 shares underlying options that are currently
exercisable or which will become exercisable within 60 days.
38
<PAGE>
(4) Includes 304,172 shares held by the Lucile K. Wight Trust, of which Mr.
Wight is trustee with sole voting and dispositive power, and 177,180
shares held by 874367 Ontario, Inc., a corporation of which Mr. Wight and
his spouse Sonia are sole shareholders.
(5) Includes 1,200 shares held by Mr. Lash and his spouse, Suzanne, as joint
tenants. Also includes 199,200 shares underlying options that are
currently exercisable or which will become exercisable within 60 days.
(6) Includes 1,600 shares held by Mr. Kolacki and his spouse, Sandra, as
joint tenants. Also includes 184,000 shares underlying options that are
currently exercisable or which will become exercisable within 60 days.
Assuming exercise of the over-allotment option in full, Mr. Kolacki will
exercise options for 62,500 shares to sell in this offering and will
beneficially own 134,448 shares after the offering.
(7) Includes 60,000 shares underlying options that are currently exercisable
or which will become exercisable within 60 days.
(8) Includes 1,800 shares held by Ms. Rigolosi's spouse, Robert. Also
includes 50,000 shares underlying options that are currently exercisable
or which will become exercisable within 60 days.
(9) Includes 48,700 shares underlying options that are currently exercisable
or which will become exercisable within 60 days.
(10) Includes 20,000 shares underlying options that are currently exercisable
or which will become exercisable within 60 days.
(11) Includes shares owned individually by each officer and director in the
group as well as shares indirectly owned by such persons as trustee of
various trusts; however, where more than one officer or director is a
trustee of the same trust, the total number of shares owned by such trust
is counted only once in determining the amount owned by all officers and
directors as a group. Also includes 2,048,900 shares underlying options
that are currently exercisable or which will become exercisable within 60
days.
39
<PAGE>
DESCRIPTION OF THE SENIOR CREDIT FACILITY
On October 29, 1999, we entered into a $100 million Amended and Restated
Revolving Credit and Term Loan Agreement with a group of bank lenders, with
First Union National Bank serving as the lead arranger and administrative
agent.
The $65 million term loan was used solely in connection with the purchase of
the assets of PSA. The term loan requires interest payments only during the
first 18 months, five principal payments of $10 million each on April 30, 2001
through 2005 and a final payment of $15 million on January 31, 2006. The term
loan also requires a mandatory prepayment equal to 33% of the net cash proceeds
from public or private sales of our equity or debt securities. The $35 million
revolving loan matures on October 31, 2002. We have not borrowed any funds
under the revolving loan.
Both the term loan and the revolving loan bear interest at either the prime
rate minus 1/2% to plus 1/4% or LIBOR plus 3/4% to 1 3/4%, depending on the
ratio of our consolidated funded debt (as defined in the senior credit
facility) to our earnings before interest, taxes, depreciation and
amortization. Interest is currently payable on the term loan at an effective
annual interest rate of 7.305%. We can prepay either loan without penalty at
any time.
The loan agreement contains customary affirmative and negative covenants,
including limitations on indebtedness, liens, investments, dividends, stock
repurchases and other specified transactions and payments. These covenants also
include a specified minimum interest coverage ratio, a maximum ratio of total
debt to EBITDA, as defined in the senior credit facility, and a minimum fixed
charge coverage ratio.
The loan agreement also specifies various customary events of default
including nonpayment of principal, interest or fees, violation of covenants,
incorrectness of representations and warranties and events such as a change of
control or bankruptcy.
40
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among
Hooper Holmes, the selling stockholder and the representatives on behalf of the
underwriters, the underwriters have agreed severally to purchase from Hooper
Holmes the following number of shares of common stock at the offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
A.G. Edwards & Sons, Inc.............................................. 576,875
Dain Rauscher Incorporated............................................ 576,875
The Robinson-Humphrey Company, LLC.................................... 576,875
SG Cowen Securities Corporation....................................... 576,875
CIBC World Markets Corp. ............................................. 65,000
Credit Lyonnais Securities (USA) Inc. ................................ 65,000
First Union Securities, Inc. ......................................... 65,000
ING Barings LLC....................................................... 65,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 65,000
Morgan Keegan & Company Inc. ......................................... 65,000
PaineWebber Incorporated.............................................. 65,000
Prudential Securities Incorporated.................................... 65,000
Warburg Dillon Read LLC............................................... 65,000
Cruttenden Roth Incorporated.......................................... 32,500
Ferris, Baker Watts Inc. ............................................. 32,500
Jefferies & Company, Inc. ............................................ 32,500
C.L. King & Associates, Inc. ......................................... 32,500
Ladenburg Thalmann & Co. Inc. ........................................ 32,500
Legg Mason Wood Walker, Incorporated.................................. 32,500
McDonald Investments Inc., a Key Corp Company......................... 32,500
Raymond James & Associates Inc. ...................................... 32,500
Sanders Morris Harris................................................. 32,500
Suntrust Equitable Securities Corporation............................. 32,500
Tucker Anthony Cleary Gull............................................ 32,500
---------
Total............................................................... 3,250,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will
purchase all such shares of the common stock if any of such shares are
purchased. The underwriters are obligated to take and pay for all of the shares
of common stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
The representatives of the underwriters have advised Hooper Holmes that they
propose to offer such shares of common stock to the public at the offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession not in excess of $.75 per share. The underwriters
may allow, and such dealers may re-allow, a concession not in excess of $.10
per share to certain other dealers. After the offering, the offering price and
other selling terms may be changed by the underwriters.
Pursuant to the underwriting agreement, Hooper Holmes and the selling
stockholder have granted to the underwriters an option, exercisable for thirty
(30) days after the date of this prospectus, to purchase up to 487,500
additional shares of common stock at the offering price, less the underwriting
discounts and commissions set forth on the cover page of this prospectus,
solely to cover over-allotments.
To the extent that the underwriters exercise such option, the underwriters
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set
41
<PAGE>
forth next to such underwriter's name in the preceding table bears to the total
number of shares in such table, and Hooper Holmes and the selling stockholder
will be obligated, pursuant to the option, to sell such shares, on a pro rata
basis, to the underwriters.
Hooper Holmes and each of its directors and executive officers, the related
interests of such directors and executive officers and the selling stockholder
have agreed not to sell or otherwise dispose of any shares of common stock for
a period of 90 days after the date of this prospectus without the prior written
consent of A.G. Edwards & Sons, Inc. A.G. Edwards may, in its sole discretion,
allow any of these parties to dispose of common stock or other securities prior
to the expiration of such 90-day period. There are, however, no agreements
between A.G. Edwards and these parties that would allow them to do so as of the
date of this prospectus.
The following table summarizes the discounts and commissions that Hooper
Holmes and, if the over-allotment option is exercised, the selling stockholder
will pay to the underwriters in the offering. These amounts assume both no
exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
Paid by Paid by Selling
Hooper Holmes Stockholder
--------------------- -----------------
No Full No Full
Exercise Exercise Exercise Exercise
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Per Share............................... $ 1.32 $ 1.32 $ -- $ 1.32
Total................................... $4,290,000 $4,851,000 $ -- $82,500
</TABLE>
Hooper Holmes expects to incur expenses of approximately $650,000 in
connection with this offering. Other than the discounts and commissions payable
to the underwriters, Hooper Holmes will pay all expenses incurred by the
selling stockholder in connection with the offering.
Hooper Holmes and the selling stockholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act.
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize,
maintain or otherwise affect the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell a greater aggregate number of
shares of common stock than is set forth on the cover page of this prospectus,
the underwriters may reduce the short position by purchasing shares of common
stock in the open market. This is known as a "syndicate covering transaction".
The underwriters may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
The underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase common stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the common stock, it may reclaim the amount of the selling concession
from the selling group members who sold those shares of common stock as part of
the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither Hooper Holmes nor the representatives make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
Hooper Holmes nor the representatives make any representation that the
underwriters will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
42
<PAGE>
Each of A.G. Edwards & Sons, Inc. and Dain Rauscher Incorporated has
provided, and may in the future provide, financial advisory and investment
banking services to Hooper Holmes from time to time.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for us by Steptoe & Johnson LLP, Washington, D.C., and for the underwriters by
Bryan Cave LLP, St. Louis, Missouri. Mr. John E. Nolan, a director of the
Company, is a member of the law firm of Steptoe & Johnson LLP, which performs
legal services for us.
EXPERTS
The consolidated financial statements of Hooper Holmes, Inc. and
subsidiaries as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The statement of
direct revenues and direct operating expenses for the paramedical exam business
of ChoicePoint Inc. for the year ended December 31, 1997, incorporated by
reference in this prospectus, have been so included from our current report on
Form 8-K/A filed with the SEC on January 14, 2000 in reliance upon the report
of KPMG LLP, independent certified public accountants, incorporated by
reference herein, and upon authority of said firm as experts in accounting and
auditing.
The financial statements of PSA appearing in Hooper Holmes Inc.'s Current
Report on Form 8-K/A filed with the SEC on January 14, 2000, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements which involve risks and
uncertainties. Such forward looking statements include:
. our belief that we will successfully integrate PSA's business;
. our belief that trends in the life insurance industry will positively
affect our business;
. our belief that our branch network and technological infrastructure will
enable us to significantly increase the volume of our services with only
a marginal increase in our branch operating costs;
. our belief that we will be able to continue to attract and retain
qualified personnel;
. our belief that the ultimate disposition of the legal actions pending
against us will not materially affect our consolidated results of
operations or financial position;
. how we will pursue our growth strategy;
. our dividend policy; and
. other statements preceded by, followed by or that include the words
"believe," "expect," "intend," "anticipate," "potential," "may," "will,"
"estimate," "goal," "plan" and other similar expressions.
We claim the protection of the safe harbor for forward looking statements
contained in the Private Securities Litigation Reform Act of 1995 for the
foregoing statements. The following important factors, in
43
<PAGE>
addition to those discussed elsewhere in this prospectus, could affect our
future results and could cause those results to differ materially from those
expressed in the forward looking statements:
. our ability to successfully integrate the assets we purchased from PSA;
. the uncertainty of future profits;
. the uncertainty of insurance applicants' acceptance of alternate
distribution channels;
. our lack of long-term and exclusive contracts with our customers;
. obsolescence of our computer systems;
. a decrease in the number of life insurance applications;
. our dependence on the life insurance industry;
. changes in pricing by the life insurance industry;
. competition in the health information services industry;
. our ability to safeguard confidential data of our customers and life
insurance applicants;
. risks associated with compliance with applicable federal and state laws,
including those concerning independent contractors and employees;
. risks associated with technological change;
. our dependence on key personnel and successful management transition;
. risks associated with intellectual property and proprietary technology;
and
. other risks described in "Risk Factors."
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. With respect to this offering of common
stock, we have filed with the SEC a registration statement on Form S-3 under
the Securities Act of 1933. This prospectus is one part of that registration
statement. You may read and copy the registration statement and the reports,
proxy statements and other information concerning Hooper Holmes at the Public
Reference Room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. You can obtain information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site that contains reports, proxy and information statements, and other
information that companies, such as Hooper Holmes, file electronically with the
SEC. The address of this Internet site is: http://www.sec.gov.
We will furnish without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any and all of the information that has been incorporated by reference
in this prospectus, except for exhibits to the information incorporated by
reference unless those exhibits are specifically incorporated by reference
herein. You can request this information by writing or calling us at: 170 Mt.
Airy Road, Basking Ridge, New Jersey 07920; telephone (908) 766-5000,
Attention: Robert William Jewett, Secretary, Hooper Holmes, Inc.
44
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered part of this prospectus, and information that we file later with the
SEC will automatically update and supersede the information in this prospectus.
The following documents, previously filed by us with the SEC (File No. 1-9972)
pursuant to the Exchange Act, are hereby incorporated by reference:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1998.
(2) Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30, andSeptember 30, 1999.
(3) Our Current Report on Form 8-K filed with the SEC on September 17,
1999.
(4) Our Current Report on Form 8-K filed with the SEC on November 12, 1999.
(5) An amendment to our Current Report on Form 8-K/A filed with the SEC on
January 14, 2000.
(6) The description of our common stock contained in the Registration
Statement on Form 8-A filed by us with the SEC on July 1, 1988, as updated
in our Prospectus dated September 19, 1991, together with all amendments or
reports filed for the purpose of updating such description.
In addition, all documents filed by us with the SEC pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
prospectus and prior to the filing of a post-effective amendment which
indicates that all of the shares offered hereby have been sold or which
deregisters all shares remaining unsold shall be deemed to be incorporated
herein by reference and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be supplemented, modified
or superseded for purposes of this prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein supplements, modifies or
supersedes such statement. Any such statement so supplemented, modified or
superseded shall not be deemed to constitute a part of this prospectus.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Audited Consolidated Financial Statements
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997......... F-3
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997
and 1996............................................................ F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................. F-6
Notes to Consolidated Financial Statements........................... F-7-F-14
Unaudited Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 1999.................. F-15
Consolidated Statements of Income for the nine months ended September
30, 1999 and 1998................................................... F-16
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998......................................... F-17
Notes to Unaudited Consolidated Financial Statements................. F-18
</TABLE>
F-1
<PAGE>
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.
Short Hills, New Jersey /s/ KPMG LLP
February 18, 1999
F-2
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
</TABLE>
Per share calculations are adjusted to reflect the two-for-one stock splits
effective August 22, 1997 and January 8, 1999.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional
Number of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 option
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
========== ========== =========== =========== ========= ===========
</TABLE>
Per share amounts are adjusted to reflect the two-for-one stock splits
effective August 22, 1997 and January 8, 1999.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Hooper Holmes,
Inc. and its majority owned subsidiaries (the "Company"). All significant
intercompany balances and transactions are eliminated in consolidation.
Description of the Business
The Company provides health information services to the life insurance
industry. The Company's network of experienced medical professionals conduct
physical examinations, testing, and personal health interviews, primarily for
the life 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 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 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").
F-7
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-8
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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:
<TABLE>
<CAPTION>
Estimated
December 31, December 31, Useful Life
1998 1997 In Years
------------ ------------ -----------
<S> <C> <C> <C>
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
============ ============
</TABLE>
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 unsecured. 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.
F-9
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
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
===========
</TABLE>
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.
Note 9 -- Income Taxes
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(in thousands)
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
F-10
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following reconciles the "statutory" federal income tax rates to the
effective income tax rates:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
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)
======= =======
</TABLE>
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).
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.
F-11
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 $.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 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.
F-12
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Under Option
-----------------------------------------
Shares Weighted
Available for Average Exercise
Grant Shares Price Per Share
------------- --------- ----------------
<S> <C> <C> <C>
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:
<CAPTION>
1998 1997 1996
------------- --------- ----------------
<S> <C> <C> <C>
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 --
</TABLE>
F-13
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(thousands of
dollars, except per
share data)
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
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
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$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 -- --
</TABLE>
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 1998, 1997, and 1996, were $300,000,
$251,000, and $228,000, respectively.
F-14
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September
30, 1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 40,547,401
Accounts receivable, net.......................................... 23,719,228
Other current assets.............................................. 6,626,153
------------
Total current assets............................................. 70,892,782
Property, plant and equipment:
Land and land improvements........................................ 618,972
Building.......................................................... 4,497,789
Furniture, fixtures and equipment................................. 18,216,421
Leasehold improvements............................................ 319,323
------------
Total property, plant and equipment.............................. 23,652,505
Less: Accumulated depreciation and amortization.................. 15,457,649
------------
Net property, plant and equipment................................ 8,194,856
Goodwill, net...................................................... 15,912,310
Intangible assets, net............................................. 5,621,295
Other assets....................................................... 944,329
------------
$101,565,572
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable...................................................... $ 450,000
Accounts payable.................................................. 7,242,071
Accrued expenses:
Insurance benefits............................................... 1,225,138
Salaries, wages and fees......................................... 1,221,358
Payroll and other taxes.......................................... 246,780
Income taxes payable............................................. 2,386,658
Discontinued operations.......................................... 1,577,633
Other............................................................ 1,368,252
------------
Total current liabilities........................................ 15,717,890
Deferred income taxes.............................................. 2,012,602
Minority interest.................................................. 202,761
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.04 per share; authorized 240,000,000
shares issued 29,180,426 in 1999................................. 1,167,217
Additional paid-in capital........................................ 37,334,444
Retained earnings................................................. 46,103,298
------------
84,604,959
Less: Treasury stock at cost, 104,332 shares in 1999 ............. 972,640
------------
Total stockholders' equity....................................... 83,632,319
------------
$101,565,572
============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-15
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues............................................ $161,241,344 $137,062,694
Cost of operations.................................. 111,183,059 95,192,090
------------ ------------
Gross profit...................................... 50,058,285 41,870,604
Selling, general and administrative expenses........ 24,821,945 23,348,308
------------ ------------
Operating income................................... 25,236,340 18,522,296
Other income (expense):
Interest expense................................... (29,947) --
Interest income.................................... 748,719 522,278
Other.............................................. 145,363 (142,667)
------------ ------------
864,135 379,611
------------ ------------
Income before income taxes.......................... 26,100,475 18,901,907
Income taxes....................................... 11,539,000 8,785,000
------------ ------------
Net income........................................ $ 14,561,475 $ 10,116,907
============ ============
Net income per common share:
Basic.............................................. $ .51 $ .36
Diluted............................................ $ .48 $ .34
============ ============
Weighted average number of shares: (1)
Basic.............................................. 28,678,459 28,095,907
Diluted............................................ 30,641,601 29,783,122
</TABLE>
- --------
(1) Adjusted to reflect a two-for-one stock split effective January 8, 1999.
See accompanying notes to unaudited consolidated financial statements.
F-16
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $14,561,475 $10,116,907
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 3,228,746 3,697,390
Provision for bad debt expense...................... -- 360,000
Minority interest................................... (182,680) --
Deferred tax benefit................................ (505,885) (505,885)
Issuance of stock awards............................ 64,050 38,250
Loss on sale of fixed assets........................ -- 44,924
Change in assets and liabilities:
Accounts receivable................................. (6,278,378) (1,227,378)
Other assets........................................ (1,130,073) (243,227)
Accounts payable and accrued expenses............... 926,792 1,527,391
----------- -----------
Net cash provided by operating activities............ 10,684,047 13,808,372
----------- -----------
Cash flows from investing activities:
Business acquisition, net of cash acquired........... (384,197) (765,747)
Capital expenditures................................. (1,197,652) (1,067,257)
----------- -----------
Net cash used in investing activities................ (1,581,849) (1,833,004)
----------- -----------
</TABLE>
<TABLE>
<S> <C> <C>
Cash flows from financing activities:
Issuance of long term debt........................... 100,000 --
Principal payments on long term debt................. (100,000) --
Proceeds from employee stock purchase plan........... 551,718 324,248
Proceeds related to the exercise of stock options.... 2,215,595 926,277
Treasury stock acquired.............................. -- (954,138)
Dividends paid....................................... (1,074,471) (703,296)
----------- -----------
Net cash provided by financing activities............ 1,692,842 (406,909)
----------- -----------
Net increase in cash and cash equivalents............. 10,795,040 11,568,459
Cash and cash equivalents at beginning of year........ 29,752,361 13,159,431
----------- -----------
Cash and cash equivalents at end of period............ $40,547,401 $24,727,890
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest............................................. $ 29,947 $ --
Income taxes......................................... $ 8,525,170 $ 5,284,879
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-17
<PAGE>
HOOPER HOLMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1: Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The interim financial statements should be read in conjunction with the
financial statements and notes thereto included elsewhere in this prospectus.
The results of operations for the nine month period ended September 30, 1999
are not necessarily indicative of the results to be expected for the full year.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
Note 2: Earnings Per 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 (1,963,142 and 1,711,705 for September 30, 1999 and 1998,
respectively) are shares assumed to be issued if outstanding stock options were
exercised. All appropriate share and per share amounts have been restated for
the January 8, 1999 stock split.
Note 3: Capital Stock
The Company declared a two-for-one stock split in the form of a 100% stock
dividend to all stockholders effective January 8, 1999.
The net tax benefit derived from the exercise of stock options was $5.0
million for the nine months ended September 30, 1999.
Note 4: Subsequent Events
On November 1, 1999, the Company purchased certain assets of Paramedical
Services of America, Inc., (PSA), a national health information services
subsidiary of Pediatric Services of America, Inc., headquartered in Atlanta,
Georgia.
The purchase price was approximately $80 million and was financed with
existing cash of approximately $15 million and bank borrowings of $65 million.
The acquisition will be accounted for using the purchase method of accounting.
The purchase price will be assigned to the net assets based on the fair value
of such assets and liabilities at the date of acquisition.
On October 29, 1999, the Company replaced its three-year $20 million
revolving loan facility and entered into a credit agreement with three banks
that included a $65 million, six-year term loan, and a $35 million dollar,
three-year revolving loan. The loans bear interest at rates up to prime plus
1/4% or Libor plus 1 3/4%, depending on the Company's Consolidated Funded Debt
to EBITDA Ratio (as such term is defined in the loan agreement). Interest
payments only are due against the term loan for the first eighteen months. On
November 1, 1999, in conjunction with the PSA acquisition, the Company borrowed
the entire amount of the term loan. There are no borrowings against the
revolver loan.
F-18
<PAGE>
This page contains the following photos:
1. An examiner performing an examination with the caption: "With the
acquisition of PSA, our Portamedic examiners perform over 300,000
examinations per month."
2. An employee working in the laboratory with the caption: "Heritage Labs was
acquired in 1998 to better serve our customers in testing blood, saliva and
urine samples."
3. A stethoscope with no caption.
4. An employee wearing headphones sitting at a computer terminal with the
caption: "Customer service centers support customer needs, assist in
document completion and secure records."
5. A laptop computer showing a page from our Web site with the caption: "Our
Portamedic Web site allows Internet ordering and information exchange."
<PAGE>
- -------------------------------------------------------------------------------
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You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct after the date
of this prospectus. This prospectus is not an offer to sell or solicitation of
an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 11
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Selected Consolidated Financial and Operating Data....................... 14
Unaudited Pro Forma Condensed Consolidated Financial Information......... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Industry Background...................................................... 27
Business................................................................. 29
Directors and Executive Officers......................................... 36
Principal and Selling Stockholders....................................... 38
Description of the Senior Credit Facility................................ 40
Underwriting............................................................. 41
Legal Matters............................................................ 43
Experts.................................................................. 43
Forward Looking Statements............................................... 43
Where You Can Find More Information...................................... 44
Information Incorporated by Reference.................................... 45
Index to Financial Statements ........................................... F-1
</TABLE>
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3,250,000 Shares
[LOGO] HOOPER HOLMES(TM)
Common Stock
----------------
PROSPECTUS
----------------
A.G. Edwards & Sons, Inc.
Dain Rauscher Wessels
The Robinson-Humphrey Company
SG Cowen
February 23, 2000
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