ITEM 1. Business - -------
General
The Company was founded in 1899 to provide business information reports to the insurance industry. During its first 70 years, the Company established a nationwide network of branch offices through which it successfully developed relationships with most of the leading insurance companies in the United States. In the early 1970's, to meet the increasingly sophisticated needs of its insurance industry clients, the Company began using nurses and other skilled professionals to provide physical examinations and health profiles for persons applying for life and health insurance. By the early 1980's, the Company had developed an extensive branch office network and had gained experience in providing health-related services. These factors, coupled with favorable demographic and health care cost containment trends, led the Company to expand into the health care field by providing home health care services to individuals, and nurses and other personnel for supplemental staffing to health care facilities. To focus on its growing health information examination services and health care operations, the Company sold most of its original business information operation in 1988, sold its direct marketing services business in 1992, and sold the majority of its facilities for servicing medically fragile children in 1994. In 1995, the Company sold its Nurse's House Call home healthcare segment and, as part of that transaction, acquired a major competitor in the health information segment, American Service Bureau, Inc., d/b/a ASB Meditest ("ASB Meditest") of Framingham, Mass. In 1998, the Company acquired a majority interest in Heritage Labs International, LLC.
Today, the Company is nationally recognized as the largest provider of health information services through a network of over 200 branch offices in 50 states. Through its alternate site health information operations the Company provides medical and paramedical examinations (which typically involve taking a medical history, recording physical information and obtaining specimens) and related services to life and health insurance companies.
Business Strategy
Management believes that the Company is well positioned to continue to capitalize on several favorable trends currently affecting the alternate site health information industry.
The alternate site health information services business which provides specialty underwriting information services to the country's life and health insurance industry, continues to show trends which indicate an increase in life and health insurance underwriting volume, stricter underwriting standards for life and health insurance and a basic consolidation of health information companies serving the industry.
The Company's commitment to automation has placed it in the position of being the leading nationwide automated provider of health information services. Development of electronic exam technology via laptops has led to the introduction of our "Teledex" automated exam and application services. These services have been widely accepted as a solution to many clients' needs for accurate and timely health information. The formation in 1996 and 1997 of partnerships with new clients which utilize direct response to sell policies, exemplify the result of our investment in technology in the past three years. As more insurance is being sold to applicants through direct response, where there is no agent to gather the pertinent underwriting information, the need for "Teledex" becomes more critical. Consequently, the value of our direct contact services to assess risk classification increases in this agentless environment, thereby increasing the demand. It is management's objective to expand the Company's capabilities to provide additional database services to the insurance industry as it faces new challenges in its changing market.
Over the past several years, the Company's health information services have grown through internal development of branch offices and acquisitions of strategically located similar businesses. The acquisition of ASB Meditest in 1995 and Heritage Labs in 1998, underscored management's intention to continue to expand its health information services business through internal growth and strategic acquisitions.
The Company's ongoing strategy is to combine these positive industry trends, increased market presence, entrance into related markets and our superior technology to become the leading health information services provider in the life and health insurance industry.
Health Information Services
Industry Overview
Management believes that continued growth in the health information business results from an increase in the number of medical and paramedical examinations ordered and from additional testing procedures and new services required by insurance companies. Additionally, several important trends in the insurance industry point to increased demand for the Company's health information services:
Stricter Underwriting Standards. Many life and health insurance companies have been lowering the thresholds of insurance coverage requiring pre-insurance examinations, due in part to growing concern over substance abuse, AIDS and other illnesses and to the improved ability to identify AIDS and other life-threatening diseases through laboratory testing. As technological advances enable home detection of additional risks, the Company anticipates an increased demand for such procedures as part of the examination process.
Consolidation. To improve quality control and reduce administrative costs, life and health insurance companies are reducing the number of health information providers approved for use by local agents. Management believes that the Company has benefited and will continue to benefit from these consolidation efforts because of its reputation for providing prompt, high quality service and its well established relationships with most of the major insurance companies at both national and local levels. The acquisition of ASB Meditest has further enhanced both our ability and standing among our client base.
Restructuring. Costs and competitive pressures are forcing many of our clients in the life and health industry to change their methods of doing business. Procedures for completing applications, processing and even the underwriting of risks are being outsourced from what were traditionally in-house operations to more efficient, cost effective third parties. This is a rapidly growing area of new services.
Nontraditional distribution outlets. Consolidation in the banking, investment banking and securities industries have resulted in the defacto formation of new life insurance distribution channels. Commercial banks, large discount brokerage businesses and investment houses are all combining with a primary focus of offering financial products for retirement and estate planning, which frequently include life insurance policies, through these recently developed channels.
The Company believes that it is well positioned to capitalize on these trends for several reasons. The Company's network of highly automated branch offices enables it to provide services nationwide in all urban and rural locations. On-site branch office management is accountable for local operations which enhances the Company's ability to establish and maintain relationships with local insurance agents. The 1993 acquisition of Lifedata Medical Services, Inc., a company with a large number of rural examiners, enhanced this long term objective. The 1995 acquisition of ASB Meditest added additional locations rounding our total nationwide to over 200. Also, the Company is committed to providing superior quality service and has established and implemented a strict set of quality assurance standards. Because the Company owns most of its branch offices and does not rely on franchisees to provide medical and paramedical examinations, it is able to maintain consistent enforcement of these Company-wide standards. Finally, the Company provides accurate and complete
examination results to insurance clients, in most cases within three to five days of receiving the initial request for an examination. The Company's ability to process examinations rapidly is due, in part, to the proximity of its branch offices to the homes and workplaces of insurance applicants, ongoing improvements in data processing and management information systems, and the use of medically trained personnel who promptly evaluate insurance applicants and efficiently process examination results. The Company has increased resources in its quality assurance review system to make the quality of its health information services among the best in the life and health insurance industry.
Services
Portamedic(R) -- Medical and Paramedical Examinations
Management believes that the Company is the leader of the five largest national providers of medical and paramedical examinations for applicants seeking insurance coverage from life and health insurers. Examinations are provided nationwide under the Portamedic trade name through over 200 branch locations in 50 states. During 1998, the Company performed over 2.5 million paramedical examinations, covering all 50 states, Guam and Puerto Rico.
Each branch office is staffed with a branch manager, who is responsible for local business development and general oversight of the local health information operation, and a support staff responsible for coordinating examination and reporting procedures. Each branch office typically uses full-time and part-time employees, and contract personnel to perform examinations, including registered nurses, licensed practical nurses, physicians, and medical and paramedical technicians. The Company's examiners provide examinations at the request of insurance agents at times and locations convenient to applicants, including the applicants' home or place of business. Each office is automated via a computer network using Novell networking software. The application software is written and maintained by in-house personnel. The Company has 14 "contract affiliates" from the acquisition of ASB Meditest, which the Company feels complements its own branch network in many geographical areas.
Since almost all of the Company's examiners are nurses and other medically trained professionals, the Company is able to provide its clients with a full range of medical and paramedical examination services. These services primarily involve recording an applicant's medical history, height and weight, measuring blood pressure, and collecting urine specimens. In addition, examiners increasingly perform more sophisticated procedures requested by insurance underwriters, including electro-cardiograms, lung capacity measurements and blood sample collections which are sent to independent laboratories for testing for AIDS and other life-threatening diseases. Both written and electronic reports of examination results are provided to insurance clients typically within three to five days of the initial request for an examination.
Infolink(TM) Services Group
Under the Infolink name, the Company offers comprehensive life and health inspection reports and Attending Physician Statements to its insurance clients. During 1998, the Company provided over 303,000 Infolink reports, a decrease from 1997. This volume decrease was due to the Company selectively eliminating marginally profitable business. The ASB Meditest acquisition provided a substantial complementary operation in Chicago and we have focused new product development in this Chicago office. These reports, available in varying degrees of detail pursuant to a client's request, assist insurance underwriters in developing a more comprehensive profile of an insurance applicant. A life and health inspection report includes information relating to an insurance applicant's lifestyle, employment history and financial status. A member of the branch office staff prepares the Infolink report primarily based upon telephone interviews with the applicant, his or her employer, his or her business and personal associates, and electronically transmits the report to the insurance underwriter. An Attending Physician Statement provides details of an applicant's medical history and is
obtained, with the insurance applicant's consent, from notes and records maintained by the physician responsible for administering treatment. Our new Teledex service offers sophisticated electronically produced exams to our clients and was developed for what we see as a natural fit with the trends for "smart underwriting" (electronic) now emerging within the life and health insurance industry. Management expects that Infolink reports will become increasingly important to insurance underwriters as insurance companies continue to tighten underwriting standards.
The Company is a leader in applying technology to facilitate the gathering and distribution of health information to the life and health industry. In 1995, the Company developed an automated pen-based laptop computer that permits the immediate input of data into the Company's computer network by examiners at the examination site. This same technology was utilized in the development of our Teledex services which we feel will both replace and enhance the laptop technology initiated by the Company. Management intends to continue to integrate computer technology into its health information services business to provide additional data needed by insurance companies to make underwriting decisions. In 1995, we added the ability to complete and transmit ECG's in the same fashion.
From time to time, the Company performs other services such as wellness health screening for corporations and other organizations outside of the insurance industry. These other services presently do not constitute a significant portion of the Company's health information business.
Total Company revenues follow:
-- 1998 -- --1997 -- % of % of Amount Total Revenues Amount Total Revenue ------ -------------- ------ ------------- Portamedic $170.7 92.2% $150.9 91.2% Infolink 14.5 7.8% 14.5 8.8% ------ --------- ------ --------- $185.2 100.0% $165.4 100.0%
Quality Assurance and Training
The quality and reputation of personnel and operations are critical to the continued success of the Company's business. Management believes that its insurance clients view the Company as a leader in terms of overall quality of services. The Company's commitment to the highest quality standards is supported by its quality assurance and training program.
In 1995 the Company developed the ability to monitor all health services via an automated statistical quality control program. As a result of this advanced capability, it has greater control over the quality of services performed and as a result, 1996, 1997 and 1998 were years of unequaled quality performance. At present, the Company is initiating an even more precise quality assurance system geared towards an enhanced statistical system. At the branch office level, local management is accountable for maintaining quality controls. In each branch office, examiners are reviewed for proper examination procedures and reporting requirements. Quality assurance specialists monitor examiners' performances through detailed analyses of examinations, provide examiners with periodic evaluations and conduct regular audits of branch office quality controls to assist examiners and branch managers in continually improving the quality of services performed.
At the corporate headquarters level, quality assurance personnel use a comprehensive management information system to compile and review Company-wide information regarding the accuracy and timeliness of examinations and reports. These personnel regularly evaluate the Company's examination procedures and communicate with insurance company clients to address any specific evaluation results and, where appropriate, suggest revisions to improve the format of clients' examination procedures and reports.
Marketing and Sales
The Company markets 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. The Company serves approximately 900 active life and health underwriting clients, including their extensive network of agency, district, and brokerage offices. National sales representatives promote the Company's consistently high quality of service and rapid response time to examination requests and are responsible for maintaining the Company's position on each insurance company's approved list of examination providers. The Company regularly attends and occasionally sponsors client conferences to provide national sales representatives with opportunities to further develop key relationships. In 1996, the Company launched its Healthdex services which provide a variety of services to the wellness and pharmaceutical sectors outside our core markets. We began new initiatives in this product line, which we felt would have a substantial impact on our new service offerings. This initiative has been slow in realizing meaningful revenues, but the company still expects a significant contribution in future periods.
At the local level, branch managers, and in certain offices, additional marketing personnel, market the Company's services directly to the local insurance agents and local managers, who have the authority to select examination providers from the list approved by the insurance companies' home offices. These local marketing efforts highlight the quality of the Company's examiners and the speed and accuracy of its services, including the ability of each branch to quickly ascertain the status of each service request through the Company's automated branch management information system.
The Company has developed a comprehensive automated branch management information system which is now "on-line" in all branch offices. A key benefit of the system is that it permits each branch office to instantly and regularly monitor the status of a particular examination request, which results in more responsive client service. The Company has been making its "status" information available to its clients on a dial in electronic basis. Management believes that the Company is the sole provider within the industry to offer this improved service. The system also enables personnel at the Company's corporate headquarters to compile company-wide information regarding quality assurance standards as well as other administrative and accounting information.
Competition
The health information business is highly competitive, and certain of the Company's competitors in this business have greater resources than the Company, and offer services not offered by the Company or offer similar services at prices lower than those charged by the Company.
The industry consists of five major competitors. One of the competitors was part of a spin-off in 1997 and then sold by the new company to a home healthcare company providing pediatric homecare services.
Management believes that the Company is the leader of five firms operating nationally to provide health information services to insurance companies. A large, though decreasing number of regional and local firms also offer these services. In management's opinion, the principal competitive factors in the health information services market are speed of response, delivery of complete and accurate information, and price. Most recently, technological capabilities have taken the forefront in our clients needs. The Company, through its nationwide branch office network and highly qualified examiners, provides accurate and reliable health information reports at competitive prices to its insurance clients promptly, and generally within three to five days of receiving a request for an examination.
Personnel
At December 31, 1998, the Company employed approximately 1091 full-time and 647 part-time employees, none of whom is represented by a collective bargaining agreement. The Company also contracts
with over 8,700 medically trained examiners. The Company's ability to recruit skilled personnel is essential to its continued growth and success. Management attributes the Company's success in recruiting skilled personnel in its health information business to the flexible work schedules and varied work assignments it offers to its examiners. Management believes that these factors will enable the Company to continue to attract and retain qualified personnel.
Regulation
Various aspects of the Company's business are regulated by the federal government and the states in which the Company currently operates.
Although the Company has been able to comply with applicable regulations to date, there can be no assurance that it will continue to be able to comply with specific requirements of certain states. States periodically change the regulations and licensing requirements that apply to the Company. If such changes occur, or if the Company expands its operations into new jurisdictions or services, there can be no assurance that the Company will be able to comply with regulations and licensing requirements, although the Company will be required to do so before providing service.
Management is not aware of any pending federal or state environmental laws or regulations that would have a material adverse effect on the Company's business or competitive position or that would require material capital expenditures on the part of the Company to effect compliance.
Insurance and Litigation
The Company's health-information business involves a minimal risk of liability. To date, claims made against the Company arising in the course of providing health information services have not resulted in any material liability to the Company. The Company carries liability insurance in coverage amounts that management believes are customary in its business and sufficient to cover most claims. There can be no assurance, however, that such coverage will be sufficient to cover claims made against the Company, that adequate insurance coverage will continue to be available to the Company in the future, or that insurance coverage will be available on terms favorable to the Company. The Company's 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.
The Company is a party to a number of legal actions arising in the ordinary course of business, none of which, in management's view, will have a material adverse effect on the Company.
ITEM 2.
ITEM 2. Properties
The Company owns a five-building complex located at 170 Mt. Airy Road, Basking Ridge, New Jersey. Of approximately 53,000 total square feet of office space, the Company maintains its operations in approximately 42,000 square feet and the balance is leased or available for lease to several tenants. Management believes that this arrangement provides for the Company's foreseeable expansion needs.
The Company leases its branch offices under a number of operating leases with varying terms and expirations. See Note 7 to the Company's Consolidated Financial Statements.
ITEM 3.
ITEM 3. Legal Proceedings
Information contained in Note 8 to the Company's consolidated financial statements contained in the annual report to shareholders is incorporated herein by reference.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of securities holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The common equity and related shareholder information presented under the caption "Quarterly Common Stock Price Ranges and Dividends" and "Shareholder Information -- Stock Listing" is incorporated by reference from the Company's 1998 Annual Report to Shareholders which is Exhibit 13 to this report. As of February 12, 1999, there were 850 shareholders of record.
ITEM 6.
ITEM 6. Selected Financial Data
The financial data included under the caption "Selected Financial Data" is incorporated by reference from the Company's 1998 Annual Report to Shareholders which is Exhibit 13 to this report.
ITEM 7.
ITEM 7. Management Discussion and Analysis of Financial Condition and Results of Operations
The discussion included under the caption "Management's Discussion and Analysis of Financial Conditions and Results of Operations", which is incorporated by reference to the Company's 1998 Annual Report to Shareholders which is Exhibit 13 to this report.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
None
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Financial statements and supplementary data are included in the Company's 1998 Annual Report to Shareholders which is Exhibit 13 to this report.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Information contained under the captions "Nominees for Directors", "Directors Continuing in Office" and "Executive Officers" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 1999 is incorporated herein by reference.
ITEM 11.
ITEM 11. Executive Compensation
Information contained under the captions "Compensation of Executive Officers," "Compensation of
Directors", "Option Grants in Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Report of the Executive Compensation Committee" and "Employment Contracts and Change-in-Control Arrangements" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 1999 is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information contained under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the Annual Meeting of shareholders to be held on May 25, 1999 is incorporated herein by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
Information contained under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 1999 is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) The following financial statements and independent auditors' report are included in the Registrant's 1998 Annual Report to Shareholders. Independent Auditors' Report Consolidated Balance Sheets -- December 31, 1998 and 1997 Consolidated Statements of Income -- Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements
(2) Schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the financial statements or notes thereto.
(3) Exhibits included herein
----------------------- (1) Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (2) Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (3) Incorporated by reference to Exhibit 4(a) of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1991.
Reports on Form 8-K No report on Form 8-K has been filed during the fourth quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOOPER HOLMES, INC. (Registrant)
/s/ James M. McNamee --------------------- By: James M. McNamee President & CEO
Date: March 30,1999 ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ James M. McNamee Date: March 30, 1999 ________________________________________________ ---------------------- James M. McNamee Director President & CEO
Date: March 30, 1999 ________________________________________________ --------------------- *Benjamin A. Currier Director
Date: March 30, 1999 ________________________________________________ --------------------- *Quentin J. Kennedy Director
Date: March 30 ,1999 ________________________________________________ --------------------- *Kenneth R. Rossano Director
Date: March 30, 1999 ________________________________________________ -------------------- Elaine Rigolosi Director
Date: March 30, 1999 ________________________________________________ --------------------- *John E. Nolan Director
Date: March 30, 1999 ________________________________________________ --------------------- *G. Earle Wight Director
/s/ Fred Lash Date: March 30, 1990 ________________________________________________ --------------------- Fred Lash Senior V.P., Treasurer and Chief Financial and Accounting Officer
*James M. McNamee, by signing his name hereto, does hereby sign this report for the persons before whose printed name an asterisk appears, pursuant to the power of attorney duly executed by such person and filed as Exhibit 24 hereto with the Securities and Exchange Commission.
/s/ James M. McNamee ----------------------------- James M. McNamee