Discontinued Operations

Sale of Assets - Heritage Labs and Hooper Holmes Services

On August 31, 2014, the Company completed the sale of certain assets comprising the Company’s Heritage Labs and Hooper Holmes Services business units (the "Business") to CRL pursuant to the terms of the Alliance Agreement. The purchase price, after inventory-related price adjustments, was $3.5 million, of which $0.25 million was deposited into an escrow account in accordance with the Alliance Agreement. The Alliance Agreement provided that certain lab assets were sold to CRL at a separate closing on October 31, 2014, at which time the remaining purchase price held in escrow was released to the Company.

The net book value of assets sold was approximately $1.0 million, consisting primarily of inventory of $0.3 million and certain property, plant and equipment of $0.7 million. After incurring $0.8 million in transaction costs associated with the sale to CRL, the Company recorded a gain on sale of $1.7 million during the year ended December 31, 2014, which is recorded as a component of discontinued operations. The assets sold to CRL are recorded in assets held for sale in the consolidated balance sheet as of December 31, 2013 and included inventory of $0.8 million and property, plant and equipment of $0.8 million.

The Company has retained certain aspects of its sample kit assembly operations (relating to the Health and Wellness segment) as well as certain other third party kit assembly and all other supply chain fulfillment capabilities, which continue to support Health and Wellness operations and other customers. The Company decided to sell the Business as the transaction provided the Company with additional capital to invest in the growing Health and Wellness operation.

The assets sold to CRL qualified as assets held for sale in April 2014. The sale of Heritage Labs and Hooper Holmes Services to CRL represents a strategic shift in the Company's ongoing operations. Accordingly, the operating results of Heritage Labs and Hooper Holmes Services are segregated and reported as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

The Company also entered into the Limited Laboratory and Administrative Services Agreement (the "LLASA"), as amended, with CRL pursuant to which, among other things, CRL is the Company’s exclusive provider, subject to certain exceptions, of laboratory testing and reporting services and provides administrative services in support of the Company’s Health and Wellness operations. The Company is a member of CRL’s preferred provider network for wellness programs during the term of the LLASA. The LLASA was effective as of August 31, 2014 upon the closing of the transaction contemplated by the Alliance Agreement and will continue for five years from such date and auto-renew for an additional five year renewal period unless sooner terminated by either party in accordance with the LLASA. CRL will be providing services to the Health and Wellness operations based on an arms' length pricing structure, and the Company will have not have the ability to exercise influence over the operations of either the Heritage Labs or the Hooper Holmes Services businesses.

Sale of Portamedic

The Company decided to sell its under-performing Portamedic service line and shift its focus towards the growth of its remaining health care segments. On September 30, 2013, the Company completed the sale of certain assets comprising the Portamedic service line to Piston Acquisition, Inc., a subsidiary of American Para Professional Systems, Inc. (“Piston”). Pursuant to the terms of the Asset Purchase Agreement, the Company sold assets associated with the Portamedic service line to Piston, including, among other things, fixed assets, inventory and intellectual property, and Piston assumed certain specified liabilities. The adjusted purchase price (the "Purchase Price") was approximately $8.1 million in cash, adjusted from $8.4 million at announcement due to changes in working capital. Approximately $2.0 million of the Purchase Price was held back (the "Holdback Amount") by Piston as security for the obligations under the Asset Purchase Agreement and certain other agreements between the Company and Piston. During the year ended December 31, 2013, the Company received $6.1 million of cash proceeds and incurred $1.0 million of financial advisory, legal and accounting fees in connection with the sale.

The Holdback Amount includes two components. The first holdback was $1.0 million, subject to adjustments, and was released in the first quarter of 2014 when final closing adjustments for inventory and other current assets were determined and paid (the "Closeout Date"). During the year ended December 31, 2014, the Company received $0.7 million as payment for the first Holdback Amount, after the closing adjustments. As a result, the amount remaining related to the first Holdback Amount was written off during the year ended December 31, 2014 as a charge to gain on sale of subsidiary in the consolidated statement of operations.

On January 28, 2015, the Company entered into a Settlement Agreement and Release, by and among the Company, Farmers New World Life Insurance Company and Portamedic, Inc., relating to a claim made by Farmers against each of Portamedic and the Company challenging the validity of charges for services billed to Farmers by certain examiners engaged by Portamedic and the Company dating back to 2010. Under the terms of the Asset Purchase Agreement, the Company agreed to indemnify Piston in connection with the subject matter of the claim. The Company agreed to deduct a total of $400,000 from the second Holdback Amount in exchange for a full release of obligation in connection with the matter and has reduced the remaining Holdback Amounts for the settlement of this claim. In addition, the Company has reduced the receivable related to the remaining Holdback Amounts to the amount it believes will be collected. There cannot be any assurance that any remaining Holdback Amounts will be collected by the Company, including the possibility that no further amounts may be collected. The Company anticipates finalization on the second Holdback Amount in the first half of 2015.

Prior to the fourth quarter of 2013, the Company has not historically tracked accounts receivable, accounts payable and other balance sheet accounts by segment. Following the sale of the Portamedic service line on September 30, 2013, the Company reassessed its segment reporting. Beginning in the fourth quarter of 2013, the Company began reporting financial results in three segments: Health and Wellness (health risk assessments including biometirc screenings), Heritage Labs (laboratory testing) and Hooper Holmes Services (health information services). Following the sale of Heritage Labs and Hooper Holmes Services in the third quarter of 2014, the Company reverted to one reporting segment, Health and Wellness. The continuing operations and the Portamedic, Heritage Labs and Hooper Holmes Services discontinued segments had customers and suppliers in common. The continuing and discontinued operations also shared certain selling, general and administrative services. As a result, the Company does not have reliable information for the historical impact of Portamedic, Heritage Labs and Hooper Holmes Services on our cash flows for the years ended December 31, 2013 and 2012 as well as certain statement of operations information for the Portamedic segment for the years ended December 31, 2013 and 2012.

The operating results of Portamedic, which are reported as a component of discontinued operations in the consolidated statements of operations, include revenue of $66.5 million and $100.4 million for the years ended December 31, 2013 and 2012, respectively. Income taxes relating to the operations of Portamedic were less than $0.1 million for the years ended December 31, 2013 and 2012. The following table summarizes the major classes of line items constituting the pretax results of operations of Heritage Labs and Hooper Holmes Services for the years ended December 31, 2014, 2013 and 2012, which are reported as a component of discontinued operations in the consolidated statement of operations. There was no income tax recorded in discontinued operations for Heritage Labs and Hooper Holmes Services for any period presented.




(in thousands)	2014			2013			2012
Revenues
Heritage Labs	$	4,393		$	10,367		$	12,367
Hooper Holmes Services	$	7,289		$	14,622		$	16,474
Total revenue	$	11,682		$	24,989		$	28,841
Cost of Sales
Heritage Labs	$	3,576		$	7,221		$	8,130
Hooper Holmes Services	$	6,254		$	12,629		$	14,349
Total cost of sales	$	9,830		$	19,850		$	22,479
Selling, General & Administrative Expenses
Heritage Labs	$	379		$	604		$	1,147
Hooper Holmes Services	$	1,625		$	2,110		$	2,518
Tail coverage insurance expense	$	1,390		$	—		$	—
Total selling, general & administrative expenses	$	3,394		$	2,714		$	3,665
(Loss) income from Discontinued Operations
Heritage Labs	$	438		$	2,542		$	3,090
Hooper Holmes Services	$	(590	)	$	(117	)	$	(393	)
Tail coverage insurance expense	$	(1,390	)	$	—		$	—
Total (loss) income from discontinued operations	$	(1,542	)	$	2,425		$	2,697

Reconciliation to statement of operations:
Portamedic discontinued operations and other (see below)	$	(1,759	)	$	(4,450	)	$	(10,586	)
Gain on sale of subsidiaries, net of adjustments	$	739		$	3,430		$	65
(Loss) income from discontinued operations	$	(2,562	)	$	1,405		$	(7,824	)

Operating cash flow from discontinued operations for the Heritage Labs and Hooper Holmes Services segments for the year ended December 31, 2014 was approximately $1.3 million. Changes in working capital for the Heritage Labs and Hooper Holmes Services segments for the year ended December 31, 2014 was approximately $1.2 million. The Company recorded non-cash operating charges for depreciation and bad debt expense of $0.2 million and a non-cash operating charge of $1.0 million for the remaining operating lease payments associated with the discontinued Hooper Holmes Services operations (refer to Note 10). Other than the sale of the discontinued Heritage Labs and Hooper Holmes Services operations to CRL, there were no significant investing or financing activities from discontinued operations for the year ended December 31, 2014. The determination of operating cash flow from discontinued operations for the year ended December 31, 2014 includes a degree of management judgment and estimates. The Company has not allocated any general corporate overhead to discontinued operations.

Included in discontinued operations for the year ended December 31, 2014 is expense of $1.4 million related to retroactive tail coverage insurance policies for the discontinued operations of Portamedic, Heritage Labs and Hooper Holmes Services. The tail coverage represents retroactive insurance policies for claims associated with these businesses incurred prior to the sale of the discontinued operations and were purchased by the Company during the year ended December 31, 2014. The Company made payments of $0.6 million during the year ended December 31, 2014 for the tail coverage insurance policies and has $0.8 million in the consolidated balance sheet as of December 31, 2014 for the remaining payments scheduled for 2015.

The Company also leases a facility used for the discontinued Hooper Holmes Services operations center through 2018. During the year ended December 31, 2014, the Company recorded charges of $1.0 million representing the fair value of the remaining contractual obligations under the lease reduced by an estimate of sublease income.

In connection with the 2008 sale of the Claims Evaluation Division ("CED"), the Company was released as the primary obligor for certain lease obligations acquired but remains secondarily liable in the event the buyer defaults through the lease term which expires in July 2015. During the years ended December 31, 2014, 2013 and 2012, the Company reduced liabilities related to CED by $0.06 million, $0.08 million and $0.07 million, respectively. The corresponding gains are reported in the consolidated statement of operations in discontinued operations for the years ended December 31, 2014, 2013 and 2012. The Company has no remaining obligation recorded in the consolidated balance sheet related to the leases as of December 31, 2014.