form10-q.htm

The Loan and Security Agreement provides the Company with a revolving line of credit, the proceeds of which are to be used for general working capital purposes. Under the terms of the Loan and Security Agreement, TD Bank has agreed to make revolving credit loans to the Company in an aggregate principal amount at any one time outstanding which, when combined with the aggregate undrawn amount of all unexpired letters of credit, does not exceed 85% of “Eligible Receivables” (as that term is defined in the Loan and Security Agreement), provided that in no event can the aggregate amount of the revolving credit loans and letters of credit outstanding at any time exceed $15 million. The maximum aggregate face amount of letters of credit that may be outstanding at any time may not exceed $1.5 million.< /div>

Borrowings of revolving credit loans shall take the form of LIBOR rate advances with the applicable interest rate being the greater of 1% per annum or the LIBOR rate, plus 3.5%.

In connection with the Loan and Security Agreement, the Company paid closing fees of $0.2 million to the lender. The Company is also obligated to pay, on a monthly basis in arrears, an unused line fee (usage fee) equal to 1% per annum on the difference between $15 million and the average outstanding principal balance of cash advances under the revolving credit line plus the average daily aggregate undrawn portion of all outstanding letters of credit for the preceding month. In addition, the Company is required to pay an annual loan fee of $0.1 million. During the three months ended March 31, 2010, the Company incurred unused fees of $0.04 million.

As security for the Company’s full and timely payment and other obligations under the Loan and Security Agreement, the Company has granted TD Bank a security interest in all existing and after-acquired property of the Company and its subsidiary guarantors, including its receivables (which are subject to a lockbox account arrangement), inventory and equipment. As further security, the Company has granted TD Bank a mortgage lien encumbering the Company’s corporate headquarters. In addition, the obligations are secured under the terms of security agreements and guarantees provided by all of the Company’s subsidiaries. The aforementioned security interest and mortgage lien are referred to herein as the “Collateral”.

TD Bank, in its sole discretion based upon its reasonable credit judgment, may (A) establish and change reserves required against Eligible Receivables, (B) change the advance rate against Eligible Receivables or the fair market value of the Company’s corporate headquarters, and (C) impose additional restrictions on the standards of eligibility for Eligible Receivables, any of which could reduce the aggregate amount of indebtedness that may be incurred under the Loan and Security Agreement.

The Loan and Security Agreement contains covenants that, among other things, restrict the Company’s ability, and that of its subsidiaries, to:

·	pay any dividends or distributions on, or purchase, redeem or retire any shares of any class of its capital stock or other equity interests;

·	incur additional indebtedness;

·	sell or otherwise dispose of any of its assets, other than in the ordinary course of business;

·	create liens on its assets;

·	enter into any sale and leaseback transactions; and

·	enter into transactions with any of its affiliates on other than an arm’s-length or no less favorable basis.

The Loan and Security Agreement contains a financial covenant, which requires the Company to maintain a fixed charge coverage ratio (as defined in the Loan and Security Agreement), measured on a trailing 12-month basis, of no less than 1.1 to 1.0 as of January 31, 2010, and as of the end of each of the Company’s fiscal quarters thereafter. The fixed charge coverage ratio allows for the exclusion of capital expenditures in excess of one dollar from the denominator of the calculation, provided the Company maintains pre-defined minimum cash balances at TD Bank on average for the 90 days ended as of the measurement date. The Company’s average cash balances at TD Bank for the 90 days ended March 31, 2010 exceeded the pre-defined cash balance requirement under the fixed charge coverage ratio, thereby allowi ng all capital expenditures in excess of one dollar to be excluded from the denominator of the fixed charge coverage ratio calculation. As of March 31, 2010, the Company’s fixed charge coverage ratio measured on a trailing 12-month period and excluding capital expenditures in excess of one dollar was 12.5 to 1.0 and, as such, the Company satisfied the financial covenant. However, there is no assurance that the Company will satisfy this financial covenant as of each fiscal quarter thereafter.

On April 22, 2009, the Company obtained from TD Bank and issued a letter of credit under the Loan and Security Agreement in the amount of $0.5 million to the landlord of the Company’s Heritage Labs facility as security for performance of the Company’s obligations under the lease. The letter of credit will automatically extend for additional periods of one year, unless notice is given to terminate the letter of credit 60 days prior to its expiration date. In no event shall the letter of credit be renewed beyond December 31, 2011. Also, in December 2009, the Company opened a $0.1 million TD VISA credit card account to be used by Hooper Holmes Services medical records retrieval service line. The letter of credit and the credit card reduced the Company’s borrowing capacity under its revol ving line of credit. As of March 31, 2010, the Company’s borrowing capacity under the revolving line of credit totals $14.4 million.

The failure of the Company or any subsidiary guarantor to comply with any of the covenants or the breach of any of its or their representations and warranties, contained in the Loan and Security Agreement, constitutes an event of default under the Loan and Security Agreement. In addition, the Loan and Security Agreement provides that “Events of Default” include the occurrence or failure of any event or condition that, in TD Bank’s sole judgment, could have a material adverse effect (i) on the business, operations, assets, management, liabilities or condition of the Company, (ii) on the value of or the perfection or priority of TD Bank’s lien upon the Collateral, or (iii) on the ability of the Company and its subsidiary guarantors to perform under the Lo an and Security Agreement.

The revolving credit loans are payable in full, together with all accrued and unpaid interest, on the earlier of March 8, 2012 or the date of termination of the loan commitments, termination being one of the actions TD Bank may take upon the occurrence of an event of default. The Company may prepay any revolving credit loan, in whole or in part without penalty. The Company may also terminate the Loan and Security Agreement, provided that on the date of such termination all of its obligations are paid in full. The Company will be required to pay an early termination fee equal $0.2 million if termination occurs after the first anniversary but prior to the second anniversary and $0.1 million if termination occurs after the second anniversary, but prior to th e Loan and Security Agreement expiration date.

Note 11: Commitments and Contingencies

The Company has employment retention or change in control agreements with the executive officers of the Company for one or two year periods from the date a change in control occurs as further defined in the agreements.

In the third quarter of 2007, the Company became aware that it did not file with the SEC a registration statement on Form S-8 to register the shares of its common stock issuable under either the Hooper Holmes, Inc. 2002 Stock Option Plan (the "2002 Stock Option Plan") or the Hooper Holmes, Inc. Stock Purchase Plan (2004) (the "2004 Employee Stock Purchase Plan") at the time such plans were approved by the Company’s shareholders in May 2002 and May 2003, respectively. To address this oversight, in 2007 the Company filed with the SEC a registration statement on Form S-8 (the "2007 Registration Statement") covering shares that remain issuable under these plans.

The terms of the 2002 Stock Option Plan provide that a total of 3,000,000 shares of common stock may be issued in connection with grants under the plan. Options exercisable for an aggregate of 2,197,900 shares were granted under the plan and are currently outstanding. Upon adoption of the 2008 Plan, no further grants could be made under the 2002 Stock Option Plan. The options granted under the 2002 Stock Option Plan were granted to employees of the Company, primarily members of the Company’s senior management. Option exercises occurred in May 2007 (45,000 shares purchased at an exercise price of $3.46 per share) and between June 2003 and January 2004 (3,200 shares purchased at an exercise price of $6.18 per share). The Company believes that the acquisition of the shares upon exercise of these options was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).

The terms of the 2004 Employee Stock Purchase Plan provide that a total of 2,000,000 shares of common stock may be issued under the 2004 Employee Stock Purchase Plan. In March 2007, prior to the filing of the 2007 Registration Statement, participants in the 2004 Employee Stock Purchase Plan purchased an aggregate of 81,508 shares under the 2004 Employee Stock Purchase Plan at a per share purchase price of $2.70. The aggregate purchase price of these shares was approximately $0.2 million.

The issuances of shares upon exercise of purchase rights granted under the 2004 Employee Stock Purchase Plan prior to the filing of the 2007 Registration Statement, may not have been exempt from registration under the Securities Act and applicable state securities laws and regulations. As a result, the Company may have potential liability to those employees (and, in some cases, now former employees) to whom the Company issued its shares upon the exercise of purchase rights granted under the plan. The Company may also have potential liability with respect to shares issued under the 2002 Stock Option Plan if the acquisition of shares under the plan is not exempt from registration under Section 4(2) of the Securities Act. However, based on the number of shar es at issue and taking into consideration the current price of the Company’s common stock, as reported on the NYSE Amex, the Company believes that its current potential liability for rescission claims is not material to its consolidated financial condition, results of operations or cash flows.

On July 11, 2003, the Company received a determination from the Internal Revenue Service that one individual the Company contracted with as an independent contractor, should have been classified as an employee in 2002. This ruling also applies to any other individuals engaged by the Company under similar circumstances. The ruling stated that the Company may not be subject to adverse consequences as the Company may be entitled to relief under applicable tax laws (Section 530 of the Revenue Act of 1978). Management believes that the Company qualifies for relief under Section 530. To date, the Company has not received any further communication from the Internal Revenue Service.

In the past, some state agencies have claimed that the Company improperly classified its examiners as independent contractors for purposes of state unemployment and/or worker’s compensation tax laws and that the Company was therefore liable for taxes in arrears, or for penalties for failure to comply with their interpretation of the laws. There are no assurances that the Company will not be subject to similar claims in other states in the future.

By letter dated November 19, 2009, the Company was informed by a life insurance company client of its belief that a number of reports prepared by the Company in connection with telephone interviews with insurance applicants contained inaccuracies that affected the rating or issuance of insurance policies written by the client. The client claims that it has sustained losses as a result of this incident, and is seeking reimbursement from the Company. The Company has notified its insurance carrier of the claim and is currently in discussions with the client and with the Company’s insurance carrier about a potential resolution. In 2009, the Company recorded a reserve and a corresponding insurance receivable in connection with this claim.

Note 12: Litigation

On February 28, 2008, a physician, John McGee, M.D., filed suit in the United States District Court for the Eastern District of New York in which he alleged, among other things, that an insurance company and numerous other named and unnamed defendants including Hooper Evaluations, Inc. (which was part of the CED the Company sold in June 2008), violated various laws, including the Racketeer Influenced Corrupt Organization Act (“RICO”), in connection with the arranging of independent medical examinations. The substance of the claim appears to be that the plaintiff physician was denied compensation for medical services allegedly rendered to persons claiming to have been injured in automobile accidents, after independent medical examinations arranged by the defendant i nsurance company indicated no basis for those services. It is not yet possible to estimate the size of the alleged claim against the defendants as a whole, or the CED in particular. The Company believes the plaintiff’s claims are without merit and intends to defend itself vigorously in this matter. The Company, along with the other defendants, have moved to dismiss the case, and these motions are pending. The motions are based on grounds similar to those asserted in the motion to dismiss filed in the Sundahl matter, described below. On July 31, 2009, plaintiffs filed an amended complaint which modifies the claims for relief, primarily against a defendant insurance company. On February 11, 2010, based on the fact that the amended complaint appears to allege claims only against the insurance company, the court dismissed the case as against all other defendants including Hooper Evaluations, Inc., without prejudice to plaintiffs seeking to further amend the complaint. The Company has retained liability for this litigation following the sale of substantially all of the assets of the CED.

On April 3, 2008, Gregory Sundahl and Jesse Sundahl, individually and on behalf of all others similarly situated, filed suit in the United States District Court for the Eastern District of New York in which they alleged, among other things, that an insurance company and numerous other named and unnamed defendants including Hooper Evaluations, Inc. (which was part of the CED the Company sold in June 2008), violated various laws, including RICO, in connection with the arranging of independent medical examinations. This suit was filed by the same lawyer that filed the McGee case described above, and contains similar allegations, but on behalf of the patients who were allegedly injured in automobile accidents whose medical services were not paid for based on the results of indepen dent medical examinations. It is not yet possible to estimate the size of the alleged claim against the defendants as a whole, or CED in particular. The Company believes the plaintiff’s claims are without merit and intends to defend itself vigorously in this matter. The Company, along with the other defendants, moved to dismiss the case, and this motion was granted on March 31, 2009. The alleged claims under federal law have been dismissed with prejudice; the alleged claims under state law were dismissed without prejudice to plaintiffs re-filing them in state court. On April 22, 2009, plaintiffs moved for reconsideration of the dismissal order; the Company’s opposition to that motion was filed May 4, 2009. Plaintiffs also filed, on May 8, 2009, a notice of appeal from the dismissal order. The Company has retained liability for this litigation following the sale of substantially all of the assets of the CED.< /div>

On July 22, 2009, an individual named Nicolo Genovese filed suit in the Supreme Court of the State of New York, County of Suffolk in which he alleged, among other things, that an insurance company and numerous other corporate and individual defendants, including Hooper Evaluations, Inc. (which was part of the CED the Company sold in June 2008) and Hooper Holmes, Inc. violated various state laws in connection with the arranging of independent medical exams. With respect to Hooper Evaluations, Inc. and certain other named defendants who were part of the CED, the Company has retained liability for this litigation following the sale of substantially all of the assets of the CED. It is not yet possible to estimate the size of the alleged claim against the defendants as a whole, or the Company or the former CED entities in particular. On October 26, 2009, a motion to dismiss the complaint was filed on behalf of the Company and the former CED entities. The Company believes the plaintiff’s claims are without merit and intends to defend itself vigorously in this matter. The Company has also initiated steps to invoke insurance coverage that may apply to some or all of the potential liability and/or costs of suit.

The Company is a party to a number of other legal actions arising in the ordinary course of its business. In the opinion of management, the Company has substantial legal defenses and/or insurance coverage with respect to all of its pending legal actions. Accordingly, none of these actions is expected to have a material adverse effect on the Company’s liquidity, its consolidated results of operations or its consolidated financial position.

Note 13: Income Taxes

The Company recorded a net tax expense of $0.01 million and $0.02 million for the three month periods ended March 31, 2010 and 2009, respectively. The tax expense recorded in the three month periods ended March 31, 2010 and 2009 reflects certain state tax liabilities. No federal tax benefit was recorded relating to the current year losses, as the Company continues to believe that a full valuation allowance is required on its net deferred tax assets. No amounts were recorded for unrecognized tax benefits or for the payment of interest or penalties during the three month periods ended March 31, 2010 and 2009.

In July 2008, the Company received notification from the Internal Revenue Service (the “IRS”) that it had completed its audits of the Company’s tax returns for the years 2001 through 2006 with no adjustments. State income tax returns for the year 2005 and forward are subject to examination.

As of March 31, 2010 the Company has U.S. federal and state net operating loss carryforwards of approximately $80.2 million and $99.9 million, respectively. The net operating loss carryforwards, if unutilized, will expire in the years 2011 through 2029.

Prior to the passage of the “Worker, Homeownership and Business Assistance Act of 2009” (the 2009 Act), signed into law in the fourth quarter of 2009, corporations were allowed to carryback net operating losses two years and forward 20 years to offset taxable income. Under the 2009 Act, corporations can elect to carryback net operating losses incurred in either 2008 or 2009 to a profitable fifth year preceding the loss year. The net operating loss carried back is limited to 50% of the available taxable income for that year. The Company was able to carryback approximately $4.3 million of federal net operating losses incurred in 2008 to tax year 2003 and in the fourth quarter of 2009, the Company filed an amended tax return to recover approximat ely $1.5 million of federal income tax previously paid. In February 2010, the Company received $1.5 million of cash related to the carryback claim, which included $0.02 million of interest.

Note 14: Recently Issued Accounting Standards

Multiple Element Arrangements – In September 2009, new authoritative accounting literature became effective requiring that revenue be allocated to each unit of accounting in many multiple deliverable arrangements based on the relative selling price of each deliverable. The literature also changed the level of evidence of standalone selling price required to separate deliverables by allowing a “best estimate” of the standalone selling price of deliverables when more objective evidence of selling price is not available. This accounting principle is effective for the Company as of June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of this a ccounting principle to have a material impact on the Company’s consolidated financial statements.

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this report, the terms “Hooper Holmes,” “Company,” “we,” “us” and “our” refer to Hooper Holmes, Inc. and its subsidiaries.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including, but not limited to, statements about our plans, strategies and prospects. When used in this Report, the words “expects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “could,” “will,” “may” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements as to our operating results, revenues, sources of revenues, cost of revenues, gross margins, net and o perating losses, our new IT system, our expansion of managed scheduling, and the expansion of certain business units. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to risks related to customer concerns about our financial health, our liquidity, future claims arising from the sale of our business, declines in our business, our competitive disadvantage, and our ability to successfully implement cost reduction initiatives. The section of our 2009 annual report on Form 10-K entitled “Risk Factors” and similar discussions in our other filings with the Security and Exchange Commission (“SEC”) discuss these and other important risks that may affect our business, results of operations, cash flows and financial condi tion. Investors should consider these factors before deciding to make or maintain an investment in our securities. The forward-looking statements included in this quarterly report are based on information available to us as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements including, without limitation, to reflect subsequent events or circumstances.

Overview

We currently engage in several service lines that are managed as one division: the Health Information Division.

Our Health Information Division (HID) consists of the following service lines:

Portamedic – performs paramedical and medical examinations of individuals, primarily on behalf of insurance companies in connection with the offering or rating of insurance coverage (mainly life insurance), along with medical examinations of health plan participants in order to provide medical information on plan members to the plan sponsors;

·	Heritage Labs – performs tests of blood, urine and/or oral fluid specimens, primarily generated in connection with the paramedical exams and wellness screenings performed by our Portamedic and Health & Wellness service lines, and assembles and sells specimen collection kits;

·	Health & Wellness – collects health information via onsite biometric screenings, self-collection laboratory test kits and health risk assessments for health management companies, including wellness companies, disease management organizations and health plans; and

·	Hooper Holmes Services – provides telephone interviews of insurance candidates, retrieval of medical records and inspections, risk management solutions and underwriting services for simplified issue products and products requiring full underwriting.

Our core Portamedic paramedical examination services accounted for 74.2% and 73.8% of revenues for the three month periods ended March 31, 2010 and 2009, respectively. As a provider of health risk assessment services to the insurance industry, our business is subject to seasonality, with third quarter sales typically dropping below the other quarters due to the decline in activity typically experienced by the insurance industry during the summer months.

Highlights for the Three Month Period Ended March 31, 2010

Financial Results for the Three Month Period Ended March 31, 2010

For the three month period ended March 31, 2010, consolidated revenues totaled $41.9 million, an 11.6% decline from the corresponding prior year period. Our revenue decline in the first quarter of 2010 is primarily attributable to the economy and its negative impact on the customers we serve (i.e. life insurance industry), and to a lesser extent, poor weather in certain regions of the U.S. limiting our ability to deliver services. While the general economy may start to improve in 2010, we are unsure if the demand for our customers’ life insurance products will experience a rebound in 2010. As a result, we plan to continue to take actions to decrease our cost structure and plan to continue to closely monitor capital expenditures in 2010.

Although revenues declined in the first quarter of 2010, our gross margin has continued to improve. Gross margin for the first quarter of 2010 was 26.6%, an improvement of 50 basis points over the comparable prior year period, resulting primarily from productivity gains and cost reductions. In addition, we reduced our selling, general and administrative expenses to $11.7 million, representing a reduction of $2.1 million, or approximately 15.3% from the prior year period. As detailed in the Portamedic highlights, included in S,G&A expense is increased depreciation expense of approximately $0.5 million and $0.8 million for the first quarter of 2010 and 2009, respectively, related to the reduction of the estimated useful life of our current customer serv ice order tracking information technology (“IT”) systems.

For the first quarter of 2010, we incurred a loss from continuing operations of $0.7 million, or $(0.01) per share, which included restructuring charges of approximately $0.1 million. This represents an improvement from the first quarter of 2009 loss from continuing operations of $1.8 million, which included restructuring charges of approximately $0.2 million.

Portamedic

In the quarter ended March 31, 2010, Portamedic revenues decreased approximately 11.2% in comparison to the prior year period. We continue to believe that achieving acceptable profitability levels will require top-line revenue growth, including the reversal of past revenue declines. Although we have approvals from over 90% of the insurance carriers in the marketplace, the number of paramedical examinations we complete on life insurance applicants continues to decline.

The rate of decline in completed examinations in the first quarter 2010 was 10.3% compared to the first quarter of 2009. The rate of decline in completed examinations for the full year 2009 was 8.3% compared to 2008. In order to reverse our decline in completed examinations, we must achieve greater success in turning carrier approvals into unit sales at the local agent, corporate and brokerage levels. We continue to take steps to strengthen our local sales force, including hiring more sales representatives, streamlining our sales tracking systems, improving sales training, and focusing sales incentives on increases in paramedical exams completed (i.e, unit goals).

The market for our Portamedic services has steadily declined. For example, according to the MIB Life Index, in 2009 there were approximately nine million applications for life insurance completed in the United States, compared to approximately 17 million applications in 1985. Notwithstanding the rate of decline in applications submitted, we believe that the market continues to offer attractive opportunities to a company that can sell its services effectively and distinguish itself from its competitors.

We have taken (or are in the process of taking) the following steps to increase our market share and improve top-line revenue:

In the third quarter of 2009, we introduced a new appointment scheduling option called Instant Scheduling. It allows insurance agents, while completing the policy application with the applicant, to immediately schedule the examination utilizing our centralized scheduling center. The new process significantly reduces the cycle time of policy application to policy issuance, which benefits the applicant, agent/broker and insurance carrier.

In April 2010, we began deploying a new electronic system for capturing paramedical exam information which will utilize wireless electronic devices, linked to secure corporate servers. This new “iParamed e-Exam” service will provide our customers with real-time quality assurance at the time of exam. The cycle time required for insurance carriers to process applications is also expected to be reduced.

We introduced our National Broker & General Agency service program which includes specialized training of our field sales representatives to market to this specific distribution channel. To serve these customers, we have implemented new case management services which link our ordering and imaging systems to many agency management tools.

In the fourth quarter of 2009, we expanded our service offering of providing medical exam assessments to senior individuals who are enrolled in Medicare Advantage healthcare plans. We provide these services utilizing our network of licensed and trained physicians, nurse practitioners and physician assistants. The purpose of these medical assessments is to provide health insurance payors with health information on their plan members to assist in validating pricing/reimbursement information, and to provide information used in quality improvement and disease management initiatives.

·	All of our Portamedic branch offices are now utilizing managed scheduling. As a result of implementing managed scheduling, the time required to schedule an examination has been reduced significantly relative to past procedures where examiners scheduled their own appointments with applicants.

In an effort to improve the speed, accuracy and consistency of services provided to our Portamedic customers, we decided in December 2008 to begin the development of a new customer service order tracking IT system. In utilizing our current IT system, we license the software and, as such, have difficulties in quickly implementing improvements and enhancements to the software. Our new IT system is expected to eliminate these difficulties and is expected to operate at a significantly lower cost and cash outlay in the future relative to our existing system. Our new customer service system is expected to cost approximately $1.4 million and is scheduled for completion in mid-2010. As a result of the development of this new system, we have reduced the estimated useful life of our current IT system to terminate in t he third quarter of 2010. This reduction in useful life increased depreciation expense (non-cash charge) by approximately $0.5 million and $0.8 million in the first quarter of 2010 and 2009, respectively. We believe that our investment in this new customer service system will enhance the quality of service to our customers, while improving productivity and decreasing future cash outlay.

·	We continue to take steps to strengthen our local sales force including hiring additional sales representatives, streamlining our sales tracking systems, improving sales training, and focusing sales incentives on increases in paramedical exams completed (i.e. unit goals).

Although the number of paramedical examinations Portamedic performs continues to decline, we believe that we are a market leader in the industry. We also believe that the steps we are taking to improve our selling ability and the quality of our services will enable us to reduce the decline experienced in the last several years. However, in 2010 market conditions are expected to remain difficult for our Portamedic service line, particularly in light of the weak U.S. economy and its negative impact on the market for life insurance, along with the related impact on our customers.

Heritage Labs

Heritage Labs services consist principally of performing tests of blood, urine and/or oral fluid specimens; and the assembly and sale of kits used in the collection and transportation of such specimens to its lab facility. In the first quarter of 2010, approximately 59% of Heritage Labs revenue came from lab testing and 41% came from the sale of specimen kits.

Most of Heritage Labs revenue originates from paramedical exam companies (including Portamedic), and therefore Heritage Labs is affected by the same negative market trends affecting Portamedic, namely the decline in the number of life insurance applications. In response, Heritage Labs has taken the following steps to expand its market share and increase revenues:

In December 2009, we hired a new Chief Operating Officer to oversee the operations of our Heritage Labs and Health & Wellness service lines. This individual has over 15 years of financial and operations experience in manufacturing and distribution businesses and will assist Heritage Labs and Health & Wellness to streamline and improve distribution processes and operations, while reducing operating costs.

·	In early 2009, Heritage Labs moved its lab facilities to a new, larger location which is expected to increase productivity and enable new service/product offerings, including offerings focusing outside the paramedical exam marketplace.

Heritage Labs hired a medical director in 2008 to help improve the value added services provided to customers and to aid in gaining new business. The main focus of the medical director has been to use sophisticated data modeling to gain a better understanding of the true mortality consequences of the laboratory tests that we provide to the insurance industry. Our objective has been to assist our clients in their ability to develop new insurance products and establish more accurate premium rating or pricing techniques using the lab mortality data that we have developed. We have also begun to develop risk scores to help our insurance clients better understand the mortality implications between and among interactions of multiple tests related to specific disease states. We believe that the mortality data we are providing is unique and more complex than the data being provided by our competitors. We believe we will be able to leverage the value of the data we supply to gain new business in 2010.

·	Heritage Labs continues to expand its kit assembly products and services. Heritage Labs is an FDA-registered Class I and Class II medical device assembler. Of the three laboratories providing testing services to the insurance industry, only Heritage Labs is licensed to assemble kits.

Heritage Labs is marketing a line of self-collected finger stick test kits directly to customers, under the trade name “Appraise.” These kits test hemoglobin A1c. The hemoglobin A1c test is particularly important for diabetics, who must regularly monitor their hemoglobin A1c levels. Heritage Labs uses two blood testing methods for hemoglobin A1c, one for testing whole blood specimens and the other for testing dried blood spots. The test kits are currently available in retail locations including Wal-Mart, Rite Aid, Walgreens and other locations nationwide.

While we intend for these measures to increase our market share and revenues, there can be no assurance we will achieve those results. Heritage Labs revenues in the first quarter of 2010 of $3.4 million decreased 13.9% in comparison to the prior year period. We believe that, through increased test kit sales and Portamedic revenue improvements, we may achieve future growth at Heritage Labs.

Health & Wellness

Our Health and Wellness service line, established in 2007, recorded revenues of approximately $2.5 million in the first quarter of 2010, an increase of $0.1 million, or approximately 5.9%, from the prior year period. In the first quarter of 2010, we completed approximately 53,000 health screenings compared to 52,000 screenings in the first quarter of 2009. We currently provide our services to 54 health management companies, up from 34 health management companies in the first quarter of 2009. We have conducted screening events in every state in the U.S. as well as the District of Columbia and Puerto Rico. To date, we have certified approximately 2,900 of the examiners in our network to be “wellness certified” examiners.

Health and Wellness services include event scheduling, provision and fulfillment of all supplies (e.g., examination kits, blood pressure cuffs, stadiometers, scales, centrifuges, lab coats, bandages, etc.) at screening events, event management, biometric screenings (height, weight, body mass index, hip, waist, neck, pulse, blood pressure), blood draws via venipuncture or finger stick, lab testing, participant and aggregate reporting, data processing and data transmission. Heritage Labs does all of the testing on the samples we collect at health and wellness screenings. Our key market advantages are our ability to screen both individuals and groups in every jurisdiction in the U.S. using a variety of screening methods.

In 2009, we expanded the services we offer at our biometric screening events to include influenza immunization and health counseling. We provided influenza immunizations at select biometric screening events held in late 2009 and early 2010. Our health counseling services are offered in conjunction with biometric screening events and are intended to assist our customers in engaging participants in the on-going health management programs they offer.

We believe that we are well-positioned to capture a significant share of the health and care management market, given our Company’s unique set of assets, including our own laboratory (Heritage Labs), systems and personnel and access to our network of paramedical examiners.

Hooper Holmes Services

For the first quarter 2010, Hooper Holmes Services revenues decreased 19.7% in comparison to the prior year period. A significant contributing factor to this decrease was reduced underwriting service revenues from several of our largest insurance company customers. These customers experienced a substantial slowdown in their business (reduced insurance applications) which resulted in a significant amount of underwriting services previously outsourced to us being greatly reduced or taken back in-house by customers.

Also significantly contributing to the decrease in Hooper Holmes Services revenue is a 14.3% decline in our first quarter 2010 attending physician statement (APS) retrieval revenue as compared to the first quarter of 2009; and a 26.9% decline in first quarter 2010 revenues from our tele-underwriting/interviewing services compared to the prior year period. These revenue declines are attributable to the overall decrease in life insurance application activity

In 2009, we implemented cost reduction actions in an attempt to bring expenses in-line with our reduced revenues. These actions included a significant reduction of staff, along with several office closures. Additional cost reduction activities occurred during the first quarter of 2010.

Key Financial and Other Metrics Monitored by Management

In our periodic reports filed with the SEC, we provide certain financial information and metrics about our service lines, and information that our management uses in evaluating our performance and financial condition. Our objective in providing this information is to help our shareholders and investors generally understand our overall performance and assess the profitability of our service lines, and our prospects for future net cash flows.

In the first quarter of 2010, we monitored the following metrics:

the number of paramedical examinations performed by Portamedic;

the average revenue per paramedical examination;

time service performance, from examination order to completion;

the MIB Life Index data, which represents an indicator of the level of life insurance application activity;

the number of health screenings completed by Health & Wellness;

the number of tele-interviewing/underwriting reports we generate;

the number of specimens tested by Heritage Labs;

the average revenue per specimen tested;

budget to actual performance at the branch level as well as in the aggregate; and

customer and product line profitability.

Certain of the above-cited metrics are discussed in the comparative discussion and analysis of our results of operations that follows.

Results of Operations

Comparative Discussion and Analysis of Results of Operations for the three month periods ended March 31, 2010 and 2009

The table below sets forth our revenue by service line for the periods indicated.

	For the Three Months Ended March 31,
(in thousands)	2010			2009			% Change

Portamedic	$	31,114		$	35,024			-11.2	%
Heritage Labs		3,417			3,970			-13.9	%
Health and Wellness		2,515			2,374			5.9	%
Hooper Holmes Services		5,442			6,777			-19.7	%
Subtotal		42,488			48,145			-
Intercompany eliminations(a)		(570	)		(710	)		-
Total	$	41,918		$	47,435			-11.6	%

(a) represents intercompany sales from Heritage Labs to Portamedic

Revenues

Consolidated revenues for the three month period ended March 31, 2010 were $41.9 million, a decline of $5.5 million or 11.6% from the prior year period. As explained in greater detail below, similar market forces influenced the revenues and operating results of our service lines throughout the three month period ended March 31, 2010.

Portamedic

Portamedic revenues in the first quarter of 2010 were $31.1 million, a decrease of $3.9 million, or 11.2%, compared to the prior year period. The decline in Portamedic revenues reflects the net impact of:

·	decreased paramedical examinations performed in the first quarter of 2010 of approximately 10.4% (355,000 in the first quarter of 2010, or 5,636 per day vs. 396,000 in the first quarter of 2009, or 6,281 per day);

·	lower average revenue per paramedical examination in the first quarter of 2010 of approximately 1.6% as compared to the first quarter of 2009 ($88.49 in the first quarter of 2010 vs. $89.94 in the first quarter of 2009).

We attribute the reduction in the number of paramedical examinations and related services performed in the first three months of 2010 to a decline in life insurance application activity at several of our large customers, poor weather in certain regions of the U. S. which limited our ability to deliver services, and the continued weakness of the U.S. economy.

Heritage Labs

Heritage Labs revenues in the first quarter of 2010 were $3.4 million, a decrease of $0.6 million, or 13.9%, compared to the prior year period. This decrease is attributable to a decline in specimen kit revenue and insurance specimen revenue.

Revenue from Heritage Labs specimen kits in the first quarter of 2010 were $1.4 million, a decrease of $0.4 million, or 20%, compared to the prior year period and is primarily attributable to reduced demand from one large customer.

During the first quarter of 2010, Heritage Labs tested 5.0% less insurance specimens compared to the prior year period (134,000 in the first quarter of 2010 vs. 141,000 in the first quarter of 2009). Heritage Labs average revenue per insurance specimen tested decreased in the first quarter of 2010 compared to the prior year period ($15.26 in the first quarter of 2010 vs. $15.72 in the first quarter of 2009).

The decline in Heritage Labs revenue for the three months ended March 31, 2010 as compared to the prior year period was primarily due to reduced demand for lab testing services resulting from fewer insurance applications processed by Heritage Labs customers and in the number of paramedical examinations completed by Portamedic. Approximately 75-80% of total specimens tested by Heritage Labs originate from a Portamedic paramedical exam or a Health and Wellness screening. The decreased average revenue per specimen experienced in the first quarter of 2010 is primarily due to a reduction in the amount we charged our customers resulting from a reduction in overnight delivery costs incurred by us and passed on to our customers. To a lesser extent, product mix al so contributed to the decrease in average revenue per specimen for the first quarter of 2010 as compared to the first quarter of 2009.

Health and Wellness

Health and Wellness revenues in the first quarter of 2010 were $2.5 million, an increase of $0.1 million, or 5.9%, compared to the prior year period. Health and Wellness, established in 2007, completed approximately 53,000 health screenings in the first quarter of 2010, compared to approximately 52,000 screenings completed in the prior year period. We currently provide services to 54 health management companies, up from 34 in the first quarter of 2009. We have conducted screening events in every state in the U.S. as well as The District of Columbia and Puerto Rico. To date, we have certified approximately 2,900 of the examiners in our network to be “wellness certified” examiners. Our revenue increase in the fi rst quarter of 2010 compared to the first quarter of 2009 is primarily due to our sales and marketing efforts, as we continue to grow and develop this business.

Hooper Holmes Services

Hooper Holmes Services revenues for the first quarter of 2010 were $5.4 million, a decline of $1.3 million, or 19.7% from the prior year period.

Our Health Information Services, which includes attending physician statement (“APS”) retrieval and physicians information line (“PIL”), is the largest revenue component within Hooper Holmes Services. Revenues from Health Information Services decreased 14.8% to $3.3 million for the first quarter of 2010 versus the prior year period. The decrease in revenues is primarily due to a reduction in the number of APS units of approximately 16.6% as compared to the first quarter of 2009, attributable to the overall decline in life insurance activity. The average price per unit of an APS in the first quarter of 2010 was consistent with the prior year period.

Consumer Services includes our tele-underwriting/interviewing services. Revenue from Consumer Services for the first quarter of 2010 decreased 26.9% to $1.3 million, as compared to the prior year period. The decrease in revenue is primarily due to a decline of 27.6% in the number of tele-underwriting/interviewing units completed. The average price per unit in the first quarter of 2010 was consistent with the prior year period.

Health Risk Analytics includes our risk management and underwriting services. Revenues declined 24.6% in the first quarter of 2010 to $0.9 million compared to the prior year period. The decrease is primarily due to the overall decline in life insurance application activity, which resulted in a significant amount of underwriting services previously outsourced to us being greatly reduced or taken back in-house by customers.

Cost of Operations

Consolidated cost of operations amounted to $30.7 million for the first quarter of 2010, compared to $35.0 million for the prior year period. The following table shows cost of operations as a percentage of revenues for the corresponding service lines.

(in thousands)	For the three months ended March 31,
				As a % of						As a % of
	2010			Revenues			2009			Revenues
Portamedic/Health & Wellness	$	24,379			72.5	%	$	27,509			73.6	%
Heritage Labs		2,244			65.7	%		2,490			62.7	%
Hooper Holmes Services		4,591			84.4	%		5,750			84.8	%
Subtotal		31,214			-			35,749			-
Intercompany eliminations (a)		(465	)		-			(710	)		-
Total	$	30,749			73.4	%	$	35,039			73.9	%

(a) represents intercompany cost of operations pertaining to sales from Heritage Labs to Portamedic

The decrease in the consolidated cost of operations for the first quarter of 2010 compared to the first quarter of 2009 was primarily attributable to lower cost of operations in our Portamedic and Hooper Holmes Services service lines attributable to reduced revenue levels and cost reduction initiatives implemented as revenues declined. Also, a lower overall cost structure was achieved by our July 2009 integration of our Underwriting Solutions and Infolink service lines into our Hooper Holmes Services service line.

Selling, General and Administrative Expenses

(in thousands)	For the three months ended March 31,				Decrease
	2010		2009		2010 vs. 2009
Selling, general and administrative expenses	$	11,710	$	13,832	$	(2,122	)

Consolidated selling, general and administrative (“SG&A”) expenses for the three month period ended March 31, 2010 decreased $2.1 million, compared to the corresponding prior year period.

The decrease in SG&A expenses for the three month period ended March 31, 2010 compared to the prior year period is primarily due to:

reduced incentive compensation expense totaling $0.2 million;

reduced Portamedic regional and administrative salaries and related expenses totaling $0.2 million;

reduced 401k employer match relating to the elimination of the 401k Company match totaling $0.2 million;

reduced audit and general business taxes totaling $0.2 million;

reduced health insurance costs totaling $0.5 million;

reduced consulting costs associated with a strategic advisor retained in 2009 and totaling $0.3 million; and

reduced accelerated depreciation expense related to the reduction of the estimated useful life of our current customer service order tracking information technology (“IT”) systems totaling $0.3 million.

Restructuring Charges

For the three month period ended March 31, 2010 and 2009, we recorded restructuring charges of approximately $0.1 million and $0.2 million, respectively. The charges are attributable to employee severance costs related to cost reduction actions related to our core Portamedic and Hooper Holmes Services service lines.

Operating Loss from Continuing Operations

Our consolidated operating loss from continuing operations for the three month period ended March 31, 2010 was $(0.6) million, or (1.6%) of consolidated revenues compared to a consolidated operating loss from continuing operations for the three month period ended March 31, 2009 of $(1.6) million, or (3.4%) of consolidated revenues.

Other income/expense

Interest income for the three month period ended March 31, 2010 was $0.05 million compared to $0.02 million for the prior year period. The increase for the three month period ended March 31, 2010 is due to higher cash balances.

Other expenses, net for the three month period ended March 31, 2010 and 2009 was $0.1 and $0.1 million, respectively.

Income Taxes

For the three month period ended March 31, 2010 and 2009, we recorded $0.01 million and $0.02 million, respectively, in state income tax expense resulting from certain state tax liabilities. No federal tax benefit was recorded relating to the current year losses, as we continue to believe that a full valuation allowance is required on our net deferred tax assets.

Loss from Continuing Operations

Loss from continuing operations for the three month period ended March 31, 2010 was $(0.7) million, or $(0.01) per share, compared to $(1.8) million, or $(0.03) per share, in the same period of the prior year.

Discontinued Operations

As previously disclosed, on October 9, 2007, we completed the sale of our U.K subsidiary, Medicals Direct Group (“MDG”). In connection with the sale of MDG, we agreed to indemnify the purchaser for certain pre-closing tax liabilities. As of December 31, 2008, we had a liability totaling $1.4 million relating to these pre-closing tax obligations of MDG. In the first quarter of 2009, we recorded an additional reserve of $0.04 million in loss on sale of subsidiaries.

On May 7, 2009, we reached a settlement agreement with Medicals Direct Holding Limited (“MD”) (successor-in-interest to the purchaser of MDG) whereby the Company and MD agreed to fully release and discharge each other from any and all claims known or unknown under the MDG Stock Purchase Agreement and the Tax Deed executed on October 9, 2007. On May 8, 2009, we paid MD the sum of $0.3 million, and further released MD from the additional purchase price payments due us, totaling $1.2 million.

Liquidity and Capital Resources

As of March 31, 2010, our primary sources of liquidity are our holdings of cash and cash equivalents and our revolving line of credit. At March 31, 2010 and December 31, 2009, our working capital was $30.7 million and $30.1 million, respectively. Our current ratio as of March 31, 2010 and December 31, 2009 was 3.2 to 1. Significant uses and sources affecting our cash flows for the three month period ended March 31, 2010 include:

·	an increase in accounts receivable of $1.4 million:

·	restructuring payments related to employee severance totaling $0.1 million; and

·	capital expenditures of $0.6 million.

These uses of cash were partially offset by:

·	a decrease in other assets of $0.4 million;

·	receipt of a $1.5 million income tax refund; and

·	an increase in accounts payable, accrued expense and other long-term liabilities of $0.2 million.

For of the three month periods ended March 31, 2010 and 2009, we incurred losses from continuing operations of $0.7 and $1.8 million, respectively, which includes losses from operations and restructuring charges. Included in these losses is depreciation and amortization expense of $1.6 million and $1.9 million for the three months ended March 31, 2010 and 2009, respectively. We have managed our liquidity through the sale of certain assets in 2008 and a series of cost reduction initiatives.

As of March 31, 2010, we had $17.7 million in cash and cash equivalents and no outstanding debt. Our net cash provided by operating activities of continuing operations for the three month periods ended March 31, 2010 and 2009 were $1.9 million and $0.2 million, respectively.

For the three months ended March 31, 2010, our consolidated revenues totaled $41.9 million, representing a decline of approximately 11.6% from the prior year period. In response to the declining revenues, we have taken, and continue to take actions to reduce our costs including headcount reductions, wage and hiring freezes, office closures and consolidations, and a reduction in general operating expenses. These actions are expected to further reduce expenses for the remainder of 2010 and thereafter.

Based on our anticipated level of future revenues, the cost reduction initiatives implemented to date, along with our existing cash, cash equivalents and borrowing capacity, we believe we have sufficient funds to meet our cash needs through at least March 31, 2011.

Uncertainties with respect to the current economic climate may lead to further reductions in revenues. If revenues continue to decline, operating losses will continue, and we will be required to take additional actions to further reduce costs, capital spending and restructure operations. This would also reduce our cash reserves and potentially require us to borrow under the Loan and Security Agreement with TD Bank. Furthermore, there is no guarantee that our cost reduction actions will generate the cost savings necessary to offset declining revenues and operating profits. If we are unsuccessful in implementing additional cost reduction initiatives and/or if revenues continue to decline at levels similar or worse than that experienced in the past two years, we may fail the financial covenant contained in the Loan and Security Agreement and therefore would be prohibited from borrowing and constitute an event of default under the Loan and Security Agreement. These and other factors would adversely affect our liquidity and our ability to generate profits in the future.

Cash Flows from Operating Activities

For the three month periods ended March 31, 2010 and 2009, net cash provided by operating activities of continuing operations was $1.9 million and $0.2 million, respectively.

The net cash provided by operating activities of continuing operations for the three month period ended March 31, 2010 of $1.9 million reflects a loss of $0.7 million from continuing operations, and includes non-cash charges of $1.6 million of depreciation and amortization and $0.2 million of share-based compensation expense. Net cash provided by operating activities also included the receipt of a $1.5 million federal tax refund. Changes in working capital also included:

an increase in accounts receivable of $1.4 million, primarily due to decreased Portamedic cash collections. Our consolidated days sales outstanding (DSO), measured on a rolling 90-day basis was 47 days at March 31, 2010, compared to 41 days at December 31, 2009 and 50 days at March 31, 2009. Historically, our accounts receivable balances and our DSO are at their lowest point in December as many of our customers utilize the remainder of their operating budgets before their year-end budget close-out. Historically, we experience an increase in DSO during the first quarter of each year, in comparison to the prior year-end DSO position. We believe our persistent collection efforts, along with our continued focus on electronic customer billing will reduce our DSO over the remainder of the year, as has historically been the case. Our consolidated allowance for doubtful accounts, which includes a reserve for revenue reductions, declined approximately $0.1 million since December 31, 2009, of which $0.1 million was reversed to revenue during the three month period ended March 31, 2010;

·	an increase in accounts payable, accrued expenses and other long-term liabilities of $0.2 million; and

·	a decrease in other assets of $0.4 million.

The net cash used in operating activities of continuing operations for the three month period ended March 31, 2009 of $0.2 million reflects a loss of $1.8 million from continuing operations, and includes a non-cash charge of $1.9 million of depreciation and amortization. Changes in working capital items included:

·	an increase in accounts receivable of $0.8 million, primarily due to a reduction in Portamedic cash collections during the first three months of 2009. Our DSO, measured on a rolling 90-day basis was 50 days at March 31, 2009, compared to 48 days at December 31, 2008; and

·	an increase in accounts payable, accrued expenses and other long-term liabilities of $0.7 million

Cash Flows used in Investing Activities

For the three month period ended March 31, 2010, we used $0.6 million in net cash for investing activities of continuing operations for capital expenditures.

For the three month period ended March 31, 2009, we used $1.4 million in net cash for investing activities of continuing operations for capital expenditures. Net cash provided by investing activities of discontinued operations during the three month period ended March 31, 2009 was $0.1 million primarily due to receipt of the final payment related to the sale of the CED.

Cash Flows used in Financing Activities

The net cash used in financing activities of continuing operations for the three month period ended March 31, 2010 of $0.03 million represents capital lease payments.

The net cash used in financing activities of continuing operations for the three month period ended March 31, 2009 of $0.2 million represents debt issuance costs associated with our Loan and Security Agreement with TD Bank and $0.3 million of capital lease payments.

Revolving Credit Facility

As of December 31, 2008 and for the majority of the first quarter of 2009, we had a three year Revolving Credit Facility (the “Credit Facility”) with CitiCapital Commercial Corporation (“CitiCapital”). The Credit Facility was due to expire on October 10, 2009. On March 9, 2009, we entered into a three year Loan and Security Agreement (the “Loan and Security Agreement”) with TD Bank, N.A. (“TD Bank”) which expires on March 8, 2012. In connection with entering into the Loan and Security Agreement with TD Bank, we terminated our Credit Facility with CitiCapital.

Loan and Security Agreement

The Loan and Security Agreement provides us with a revolving line of credit, the proceeds of which are to be used for general working capital purposes. Under the terms of the Loan and Security Agreement, TD Bank has agreed to make revolving credit loans to us in an aggregate principal amount at any one time outstanding which, when combined with the aggregate undrawn amount of all unexpired letters of credit, does not exceed 85% of “Eligible Receivables” (as that term is defined in the Loan and Security Agreement), provided that in no event can the aggregate amount of the revolving credit loans and letters of credit outstanding at any time exceed $15 million. The maximum aggregate face amount of letters of credit that may be outstanding at any time may not exceed $1.5 million.

Borrowings of revolving credit loans shall take the form of LIBOR rate advances with the applicable interest rate being the greater of 1% per annum or the LIBOR rate, plus 3.5%.

In connection with the Loan and Security Agreement, we paid closing fees of $0.2 million to the lender. We are also obligated to pay, on a monthly basis in arrears, an unused line fee (usage fee) equal to 1% per annum on the difference between $15 million and the average outstanding principal balance of cash advances under the revolving credit line plus the average daily aggregate undrawn portion of all outstanding letters of credit for the preceding month. In addition, we are required to pay an annual loan fee of $0.1 million. During the three months ended March 31, 2010, we incurred unused fees of $0.04 million.

As security for our full and timely payment and other obligations under the Loan and Security Agreement, we have granted TD Bank a security interest in all of our existing and after-acquired property and our subsidiary guarantors, including our receivables (which are subject to a lockbox account arrangement), inventory and equipment. As further security, we have granted TD Bank a mortgage lien encumbering our corporate headquarters. In addition, the obligations are secured under the terms of security agreements and guarantees provided by all of our subsidiaries. The aforementioned security interest and mortgage lien are referred to herein as the “Collateral”.

TD Bank, in its sole discretion based upon its reasonable credit judgment, may (A) establish and change reserves required against Eligible Receivables, (B) change the advance rate against Eligible Receivables or the fair market value of our corporate headquarters, and (C) impose additional restrictions on the standards of eligibility for Eligible Receivables, any of which could reduce the aggregate amount of indebtedness that may be incurred under the Loan and Security Agreement.

The Loan and Security Agreement contains covenants that, among other things, restrict our ability, and that of our subsidiaries, to:

·	pay any dividends or distributions on, or purchase, redeem or retire any shares of any class of our capital stock or other equity interests;

·	incur additional indebtedness;

·	sell or otherwise dispose of any of our assets, other than in the ordinary course of business;

·	create liens on our assets;

·	enter into any sale and leaseback transactions; and

·	enter into transactions with any of our affiliates on other than an arm’s-length or no less favorable basis.

The Loan and Security Agreement contains a financial covenant, which requires us to maintain a fixed charge coverage ratio (as defined in the Loan and Security Agreement), measured on a trailing 12-month basis, of no less than 1.1 to 1.0 as of January 31, 2010, and as of the end of each of our fiscal quarters thereafter. The fixed charge coverage ratio allows for the exclusion of capital expenditures in excess of one dollar from the denominator of the calculation, provided we maintain pre-defined minimum cash balances at TD Bank on average for the 90 days ended as of the measurement date. Our average cash balances at TD Bank for the 90 days ended March 31, 2010 exceeded the pre-defined cash balance requirement under the fixed charge coverage ratio, thereby allowing all capital expenditures in excess of one dollar to be excluded from the denominator of the fixed charge coverage ratio calculation. As of March 31, 2010, our fixed charge coverage ratio measured on a trailing 12-month period and excluding capital expenditures in excess of one dollar was 12.5 to 1.0 and, as such, we satisfied the financial covenant. However, there is no assurance that we will satisfy this financial covenant as of each fiscal quarter thereafter.

On April 22, 2009, we obtained from TD Bank and issued a letter of credit under the Loan and Security Agreement in the amount of $0.5 million to the landlord of our Heritage Labs facility as security for performance of our obligations under the lease. The letter of credit will automatically extend for additional periods of one year, unless notice is given to terminate the letter of credit 60 days prior to its expiration date. In no event shall the letter of credit be renewed beyond December 31, 2011. Also, in December 2009, we opened a $0.1 million TD VISA credit card account to be used by Hooper Holmes Services medical records retrieval service line. The letter of credit and the credit card reduced our borrowing capacity under our revolving line of credit. As of March 31, 2010, our borrowin g capacity under the revolving line of credit totals $14.4 million.

Our failure, or the failure of any of our subsidiary guarantors, to comply with any of the covenants or the breach of any of our or their representations and warranties, contained in the Loan and Security Agreement, constitutes an event of default under the agreement. In addition, the Loan and Security Agreement provides that “Events of Default” include the occurrence or failure of any event or condition that, in TD Bank’s sole judgment, could have a material adverse effect (i) on the business, operations, assets, management, liabilities or our condition, (ii) in the value of or the perfection or priority of TD Bank’s lien upon the Collateral, or (iii) in our ability and the ability of our subsidiary guarantors to perform under the Loan and Security Agr eement.

The revolving credit loans are payable in full, together with all accrued and unpaid interest, on the earlier of March 8, 2012 or the date of termination of the loan commitments, termination being one of the actions TD Bank may take upon the occurrence of an event of default. We may prepay any revolving credit loan, in whole or in part without penalty. We may also terminate the Loan and Security Agreement, provided that on the date of such termination all of its obligations are paid in full. We will be required to pay an early termination fee equal $0.2 million if termination occurs after the first anniversary but prior to the second anniversary and $0.1 million if termination occurs after the second anniversary, but prior to the Loan and Security Agreeme nt expiration date.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Share Repurchases

We did not purchase any shares of our common stock during the three month periods ended March 31, 2010 and 2009. Under the terms of the Loan and Security Agreement, we are precluded from purchasing any shares of our common stock.

Dividends

No dividends were paid in the three month periods ended March 31, 2010 and 2009. We are precluded from declaring or making any dividend payments or other distributions of assets with respect to any class of our equity securities under the terms of the Loan and Security Agreement with TD Bank.

Contractual Obligations

As of March 31, 2010, there have been no material changes in contractual obligations as disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, under the caption “Contractual Obligations”.

Inflation

Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results.

Critical Accounting Policies

There were no changes to our critical accounting policies during the three month period ended March 31, 2010. Such policies are described in our 2009 annual report on Form 10-K.

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk primarily through our borrowing activities, which are described in Note 10 to the unaudited interim consolidated financial statements included in this quarterly report. Our credit facility is based on variable rates and is therefore subject to interest rate fluctuations. Accordingly, our interest expense will vary as a result of interest rate changes and the level of any outstanding borrowings. As of March 31, 2010, there were no borrowings outstanding.

Based on our market risk sensitive instruments outstanding at March 31, 2010, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date.

ITEM 4

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of our disclosure committee, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2010. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company& #8217;s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving i ts stated goals under all potential future conditions. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended March 31, 2010 that has materially affected, or is reasonably like to materially affect, our internal control over financial reporting.

PART II – Other Information

ITEM 1

Legal Proceedings

ITEM 1A

Risk Factors

Readers should carefully consider, in connection with the other information in this Form 10-Q, the risk factors disclosed in Item 1A. “Risk Factors” in our 2009 annual report on Form 10-K.

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the fiscal quarter ended March 31, 2010.

ITEM 3

Defaults Upon Senior Securities

There were no defaults upon senior securities during the fiscal quarter ended March 31, 2010.

ITEM 4

Removed and Reserved

ITEM 5

Other Information

None

ITEM 6

Exhibits

Exhibit No.		Description of Exhibit



31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements 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.

Dated: May 7, 2010

		By: /s/ Roy H. Bubbs
		Roy H. Bubbs
		Chief Executive Officer and President



		By: /s/ Michael J. Shea
		Michael J. Shea
		Senior Vice President and Chief Financial Officer

EX-31.1 2 exhibit31-1.htm EXHIBIT 31.1 CERTIFICATION OF CEO exhibit31-1.htm

EXHIBIT 31.1 CERTIFICATIONS

I, Roy H. Bubbs, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hooper Holmes Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Roy H. Bubbs

---------------------------------------------

Roy H. Bubbs

Chief Executive Officer and President

May 7, 2010

EX-31.2 3 exhibit31-2.htm EXHIBIT 31.2 CERTIFICATION OF CFO exhibit31-2.htm

EXHIBIT 31.2 CERTIFICATIONS

I, Michael J. Shea, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hooper Holmes Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael J. Shea

---------------------------------------------

Michael J. Shea

Senior Vice-President, and Chief Financial and Accounting Officer

May 7, 2010

EX-32.1 4 exhibit32-1.htm EXHIBIT 32.1 CERTIFICATION OF CEO SECTION 1350 exhibit32-1.htm

EXHIBIT 32.1 CERTIFICATIONS

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Roy H. Bubbs, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report of Hooper Holmes, Inc., on Form 10-Q for the quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Hooper Holmes, Inc.

Dated: May 7, 2010

/s/ Roy H. Bubbs

__________________________

Roy H. Bubbs

Chief Executive Officer and President

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liability of Section 18 of the Exchange Act. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

A signed original of this written statement required by Section 906 has been provided to Hooper Holmes, Inc. and will be retained by Hooper Holmes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 5 exhibit32-2.htm EXHIBIT 32.2 CERTIFICATION OF CFO SECTION 1350 exhibit32-2.htm

EXHIBIT 32.2 CERTIFICATIONS

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Shea, Senior Vice-President and Chief Financial and Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, the Quarterly Report of Hooper Holmes, Inc., on Form 10-Q for the quarter ended March 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Hooper Holmes, Inc.

Dated: May 7, 2010

/s/ Michael J. Shea

__________________________

Michael J. Shea

Senior Vice President and Chief Financial and Accounting Officer

-----END PRIVACY-ENHANCED MESSAGE-----

New York	22-1659359
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

170 Mt. Airy Road, Basking Ridge, NJ	07920
(Address of principal executive offices)	(Zip code)

			Page No.
PART I –	Financial Information (unaudited)

	ITEM 1 –	Financial Statements

		Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009	1

		Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009	2

		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	3

		Notes to Unaudited Consolidated Financial Statements	4-14

	ITEM 2 –	Management's Discussion and Analysis of Financial Condition and Results of Operations	15-27

	ITEM 3 –	Quantitative and Qualitative Disclosures About Market Risk	27-28

	ITEM 4 –	Controls and Procedures	28

PART II –	Other Information

	ITEM 1 –	Legal Proceedings	28-29

	ITEM 1A –	Risk Factors	29

	ITEM 2 –	Unregistered Sales of Equity Securities and Use of Proceeds	29

	ITEM 3 –	Defaults upon Senior Securities	29

	ITEM 4 –	Removed and Reserved	29

	ITEM 5 –	Other Information	29

	ITEM 6 –	Exhibits	30

		Signatures	31


	March 31, 2010			December 31, 2009
ASSETS (Note 10)
Current assets:
Cash and cash equivalents	$	17,725		$	16,495
Accounts receivable, net of allowance for doubtful accounts of $1,157 and $1,237 at March 31, 2010 and December 31, 2009, respectively		21,750			20,365
Inventories		2,634			2,750
Income tax receivable		18			1,479
Other current assets		2,531			2,816
Total current assets		44,658			43,905

Property, plant and equipment at cost		46,316			45,739
Less: Accumulated depreciation and amortization		35,638			34,184
Property, plant and equipment, net		10,678			11,555

Intangible assets, net		828			932
Other assets		316			310
Total assets	$	56,480		$	56,702

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,626		$	5,167
Accrued expenses		8,379			8,636
Total current liabilities		14,005			13,803
Other long-term liabilities		1,411			1,473
Commitments and Contingencies (Note 11)

Stockholders’ Equity:
Common stock, par value $.04 per share; authorized 240,000,000 shares, issued 69,563,982 shares and 68,713,982 shares as of March 31, 2010 and December 31, 2009, respectively. Outstanding: 69,554,587 shares and 68,704,587 shares at March 31, 2010 and December 31, 2009, respectively.		2,783			2,748
Additional paid-in capital		147,814			147,507
Accumulated deficit		(109,462	)		(108,758	)
		41,135			41,497
Less: Treasury stock, at cost 9,395 shares as of March 31, 2010 and December 31, 2009		(71	)		(71	)
Total stockholders’ equity		41,064			41,426
Total liabilities and stockholders' equity	$	56,480		$	56,702

See accompanying notes to consolidated financial statements.

	Three Months ended March 31,
	2010			2009
Revenues	$	41,918		$	47,435
Cost of operations		30,749			35,039
Gross profit		11,169			12,396
Selling, general and administrative expenses		11,710			13,832
Restructuring charges		108			188
Operating loss from continuing operations		(649	)		(1,624	)
Other income (expense):
Interest expense		(3	)		-
Interest income		50			24
Other expenses, net		(88	)		(133	)
		(41	)		(109	)
Loss from continuing operations before income taxes		(690	)		(1,733	)

Income tax (benefit) expense		14			17

Loss from continuing operations		(704	)		(1,750	)

Discontinued operations:
Loss on sale of subsidiary		-			(41	)
		-			(41	)
Net loss	$	(704	)	$	(1,791	)
Basic and diluted loss per share:
Continuing operations
Basic	$	(0.01	)	$	(0.03	)
Diluted		(0.01	)		(0.03	)
Discontinued operations
Basic	$	-		$	-
Diluted		-			-
Net loss
Basic	$	(0.01	)	$	(0.03	)
Diluted		(0.01	)		(0.03	)

Weighted average number of shares:
Basic and diluted		68,997,365			68,674,587

See accompanying notes to consolidated financial statements.

	Three Months ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(704	)	$	(1,791	)
Loss from discontinued operations, net of income taxes		-			(41	)
Loss from continuing operations		(704	)		(1,750	)
Adjustments to reconcile loss from continuing operations to net cash provided by
operating activities of continuing operations:
Depreciation		1,471			1,755
Amortization		104			109
Provision for bad debt expense		31			17
Share-based compensation expense		189			155
Loss on disposal of fixed assets		5			66
Change in assets and liabilities, net of effect
from disposition of business:
Accounts receivable		(1,416	)		(790	)
Inventories		116			393
Other assets		433			(456	)
Income tax receivable		1,461			6
Accounts payable, accrued expenses and other long-term liabilities		193			681
Net cash provided by operating activities of continuing operations		1,883			184
Net cash (used in) provided by operating activities of discontinued operations		-			-
Net cash provided by operating activities		1,883			184

Cash flows from investing activities:
Capital expenditures		(620	)		(1,403	)
Net cash used in investing activities of continuing operations		(620	)		(1,403	)
Net cash provided by investing activities of discontinued operations		-			83
Net cash used in investing activities		(620	)		(1,320	)

Cash flows from financing activities:
Reduction in capital lease obligation		(33	)		(32	)
Debt financing fees		-			(178	)
Net cash used in financing activities of continuing operations		(33	)		(210	)
Net cash provided by (used in) financing activities of discontinued operations		-			-
Net cash used in financing activities		(33	)		(210	)

Net increase (decrease) in cash and cash equivalents		1,230			(1,345	)
Cash and cash equivalents at beginning of period		16,495			11,547
Cash and cash equivalents at end of period	$	17,725		$	10,202

Supplemental disclosure of non-cash investing activities:
Fixed assets vouchered but not paid	$	209		$	198
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	20		$	-


See accompanying notes to consolidated financial statements.


	Number of Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (in thousands)
Outstanding balance at December 31, 2009		5,782,100		$	2.54
Granted		135,000			0.97
Exercised		-			-
Cancelled		(39,900	)		6.10
Forfeitures		(37,500	)		1.77
Outstanding balance at March 31, 2010		5,839,700		$	2.49		6.7	$	402
Options exercisable at March 31, 2010		2,060,950		$	4.89		3.7	$	-

	Weighted
	Average		Gross
	Useful Life		Carrying		Accumulated		Net
(in thousands)	(years)		Amount		Amortization		Balance
At March 31, 2010:
Non-Competition agreements		4.7	$	8,738	$	8,738	$	-
Customer relationships		9.7		12,502		11,772		730
Trademarks and trade names		15.7		487		389		98
			$	21,727	$	20,899	$	828
At December 31, 2009:
Non-Competition agreements		4.7	$	8,738	$	8,738	$	-
Customer relationships		9.7		12,502		11,675		827
Trademarks and trade names		15.7		487		382		105
			$	21,727	$	20,795	$	932

	Balance at		2010			Balance at
(In millions)	December 31, 2009		Payments			March 31, 2010
Severance	$	-	$	-		$	-
Lease Obligations		0.3		(0.1	)		0.2
	$	0.3	$	(0.1	)	$	0.2