Loan and Security Agreement

On March 9, 2009, the Company entered into a three year Loan and Security Agreement (as amended, the “Loan and Security Agreement”) with TD Bank, N.A. (“TD Bank”).

On December 1, 2010, the Company entered into the First Amendment and Modification to Loan and Security Agreement (the "First Amendment") with TD Bank. Under the First Amendment, the Company has the ability, on or prior to the second anniversary of the First Amendment, and subject to a determination by the Company's Board of Directors authorizing such a transaction, to repurchase up to $5 million of its capital stock out of Qualified Cash (as such term is defined in the First Amendment), provided no Default or Event of Default (as such terms are defined in the Loan and Security Agreement) shall have otherwise occurred. In addition, under the First Amendment, the maturity date of the Loan and Security Agreement has been extended by one year (to March 8, 2013 from March 8, 2012) and, commencing March 8, 2012 and at all times thereafter, the unused line fee (usage fee) under the Loan and Security Agreement was reduced from one percent (1%) per annum to one-half of one percent (1/2%) per annum, in each case on the difference between $15 million and the sum of the average daily outstanding principal balance of cash advances under the revolving credit line and the average daily aggregate undrawn portion of all outstanding letters of credit for the preceding month.

On February 25, 2011, the Company entered into the Second Amendment and Modification to Loan and Security Agreement (the "Second Amendment"). Under the Second Amendment, the maximum aggregate future purchase money indebtedness and capitalized lease obligations of the Company in respect of specific items of equipment was increased to $2.0 million from $0.25 million effective December 31, 2010. The Second Amendment also contains other customary representations, warranties, covenants and terms and conditions.

On February 29, 2012, the Company entered into the Third Amendment and Modification to Loan and Security Agreement (the "Third Amendment"). Under the Third Amendment, the Company is obligated to maintain a Fixed Charge Coverage Ratio on a rolling 12 month basis of not less than 1.1 to 1.0 as of any fiscal quarter ending after September 30, 2011 if, for any one or more day(s) following any such fiscal quarter end, (a) the outstanding balance of cash advances under the Loan and Security Agreement is greater than $0 and (b) the amount of the Company's cash on deposit with TD Bank is less than $6 million. The Third Amendment also contains other customary representations, warranties, covenants and terms and conditions.

The Loan and Security Agreement (as amended) 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.

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

Through March 7, 2012, the Company was 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 daily 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. Effective March 8, 2012, the usage fee is one-half of one percent (1/2%) per annum. In addition, the Company is required to pay an annual loan fee of $0.1 million. During the three and six month periods ended June 30, 2012, the Company incurred unused line fees of $0.02 million and $0.06 million, respectively. During the three and six month periods ended June 30, 2011 the Company incurred unused line fees of $0.04 million and $0.07 million, respectively.

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 credit card reduced the Company’s borrowing capacity under its revolving line of credit. As of June 30, 2012, the Company’s borrowing capacity under the revolving line of credit totaled $12.9 million (which is 85% of Eligible Receivables) and there were no outstanding borrowings.

The revolving credit loans are payable in full, together with all accrued and unpaid interest, on the earlier of March 8, 2013 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, with the amount of such prepayment available to be reborrowed, subject to compliance with the terms and conditions of the Loan and Security Agreement (as amended). 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 is subject to a fee equal to $0.1 million upon early termination of the Loan and Security Agreement.

As security for the Company’s full and timely payment and other obligations under the Loan and Security Agreement, the Company 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 granted TD Bank a mortgage lien encumbering the Company’s corporate headquarters. The aforementioned security interest and mortgage lien are collectively referred to herein as the “Collateral”.

Pursuant to the terms of the Loan and Security Agreement, 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 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 that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Loan and Security Agreement), and as amended under the Third Amendment noted above, measured on a rolling 12 month basis of not less that 1.1 to 1.0 as of any fiscal quarter ending after September 30, 2011 if, for any one or more day(s) following any such fiscal quarter end, (a) the outstanding balance of cash advances under the Loan and Security Agreement is greater than $0 and (b) the amount of the Company's cash on deposit with TD Bank is less than $6 million. As of June 30, 2012, both because the Company's cash on deposit with TD Bank exceeded $6 million and the Company's outstanding balance of cash advances under the Loan and Security Agreement was $0, compliance with the Fixed Charge Coverage Ratio is not applicable. However, if this covenant did apply, the Fixed Charge Coverage Ratio measured as specified in the Loan and Security Agreement as of June 30, 2012 was (13.6) to 1. As such, the Company would fail this financial covenant and therefore would have no borrowing capability under the terms of its Loan and Security Agreement.

The failure of the Company or that of 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 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) in 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 Loan and Security Agreement.

If revenues continue to decline compared to the prior year, operating losses may continue to occur, the Company may be required to take additional actions to further reduce costs and capital spending, and restructure operations. This would also reduce the Company's cash reserves. Furthermore, there is no guarantee that the Company's current and future cost reduction actions will generate the cost savings necessary to offset declining revenues. During the second quarter of 2012, the Company restructured its Portamedic service line's delivery model. The restructure resulted in, among other things, the closure of branch offices, headcount reductions, the elimination of both fixed and variable costs and the consolidation of certain services into centralized customer service centers. If the Company does not achieve the cost reductions expected from this restructure and/or if revenues continue to decline at levels similar to or worse than that experienced in 2011, the Company may continue to fail to satisfy the financial covenant contained in the Loan and Security Agreement and therefore would be prohibited from borrowing under the Loan and Security Agreement. Further, as defined in the Loan and Security Agreement, TD Bank may at its sole discretion request additional security, reduce availability or determine if negative events are Events of Default. These and other factors would adversely affect the Company's liquidity and its ability to generate profits in the future.