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Management's Discussion and Analysis of Financial Condition and ITEM 2 Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 (this "Report") contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 statements as to our operating results, revenues, sources of revenues, cost of revenues, gross margins, operating and net profits/losses, our new IT systems, for our new Portamedic delivery model and changes in certain service line offerings. 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, declines in our business, our competition, and our ability to successfully implement the restructure of our Portamedic operations and other cost reduction initiatives. The section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as amended, entitled "Risk Factors" and similar discussions in our other filings with the Securities and Exchange Commission ("SEC") discuss these and other important risks that may affect our business, results of operations, cash flows and financial condition. Investors should consider these factors before deciding to make or maintain an investment in our securities. The forward-looking statements included in this 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 to reflect subsequent events or circumstances. Overview Our Company was founded in 1899. We are a publicly-traded New York corporation whose shares of common stock are listed on the NYSE MKT Stock Exchange. Our corporate headquarters are located in Basking Ridge, New Jersey. Over the last 40 years, our business focus has been on providing health risk assessment services. We are currently engaged in 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 oral fluid specimens, primarily generated in connection with the paramedical exams and wellness screenings performed by our Portamedic and Health & Wellness service lines, respectively, and assembles and sells specimen collection kits; • Health & Wellness - performs risk assessment and risk management services, including biometric screenings, health risk assessments and onsite wellness coaching for health and care management companies, including wellness companies, disease management organizations, clinical research organizations, health plans and others; 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 Portamedic paramedical examination services accounted for 63.7% and 64.9% of revenues for the three month periods ended September 30, 2012 and 2011, respectively, and 67.2% and 68.7% of revenues for the nine month periods ended September 30, 2012 and 2011, 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. 12 --------------------------------------------------------------------------------Restructure of Portamedic Operations In January 2011, we began a business transformation of our Portamedic service line. The first phase of the transformation consisted of our capital investment of approximately $5.0 million in new systems and technology that served as the foundation for the second phase of Portamedic's transformation, a new model for delivering paramedical exams. These new systems, now deployed, include (i) a new workflow system for our Portamedic operations, known as Partnerlink; (ii) ePortamedic.com, a new ordering and status website for insurance agents that diagnoses service requirements based on insurance company rules; (iii) a new Life Application Processing Platform that makes it easier for financial advisors and brokers to sell life insurance; (iv) the latest version of our iParamed e-Exam, which allows electronic exams to be completed even in areas with poor wireless connections; and (v) a new direct-to-examiner inventory and tracking system for laboratory testing kits. In June 2012, we began the second phase of our Portamedic service line transformation, which includes the deployment of our new model for delivering paramedical exam services. The service model is a new optimized approach for ordering, scheduling and delivering paramedical exams in the applicant's home or office any time, anywhere in the U.S. Over 100 local administrative offices have been consolidated into 60 integrated customer service centers located across 14 Company-defined regions. These service centers are designed to take advantage of our existing call center capabilities and IT investments to enable us to provide better levels of service, which we expect will lead to improved sales of Portamedic exams. In addition, the new model for delivering exam services has enabled us to reduce our facilities footprint and reduce labor costs previously associated with performing certain administrative and management tasks in each of our over 100 offices. We expect that, on an annual basis, the changes we have implemented have reduced the Company's cost structure by approximately $8.0 million beginning in the third quarter of 2012, primarily attributable to a reduction in the number of local branch offices and the related lease expense, headcount reductions resulting from centralizing administrative functions such as imaging and billing, and reduced operating expenses, including lower shipping expenses resulting from our new direct-to-examiner inventory system. For the three and nine months ended September 30, 2012, the Company's consolidated revenues totaled $33.7 million and $107.9 million, respectively, representing declines of 11.8% and 7.5%, respectively, from the prior year periods which were primarily attributable to the Portamedic service line. Management is monitoring the impact of the new Portamedic delivery model and believes it is too soon to determine the model's long-term impact on revenues. Nonetheless, in response to the declining revenues, subsequent to September 30, 2012, the Company has taken additional actions to reduce its costs and cash outflows, including headcount reductions and a reduction in capital expenditures and operating expenses, and is evaluating additional cash flow measures, including alternative sources of financing. The actions taken are expected to reduce or delay expenses and uses of cash during the remainder of 2012 and thereafter. If the new Portamedic delivery model is not successful and revenues continue to decline, operating losses will continue, assets may become impaired and the Company will be required to take additional actions to further reduce or delay expenses and uses of cash. This would also reduce the Company's cash reserves and potentially require the Company to seek alternative sources of financing, including but not limited to new credit facilities and the sale of assets and service lines. There is no guarantee that the Portamedic delivery model will reverse the decline in revenues or that the Company's cost reduction actions will generate the savings necessary to offset revenues declines, operating losses and uses of cash. In connection with our Portamedic business transformation and deployment of the new service delivery model, we recorded restructuring charges totaling $0.02 million and $2.2 million (or $0.00 and $0.03 per share on both a basic and diluted basis) for the three and nine month periods periods ended September 30, 2012, respectively. The restructuring charges consist of employee severance and branch office closure costs. The restructuring charges for the three and nine month periods ended September 30, 2012 include $0.0 million and $0.2 million (or $0.00 and $0.00 per share on both a basic and diluted basis), respectively, related to the impairment of fixed assets for the closed branch offices. For the three and nine month periods ended September 30, 2012, employee severance totaled $0.01 million and $1.2 million (or $0.00 and $0.02 per share on both a basic and diluted basis), respectively, and branch office closure costs totaled $0.01 million and $0.8 million (or $0.00 and $0.01 per share on both a basic and diluted basis), respectively. At September 30, 2012, $0.4 million of restructuring charges are recorded in accrued expenses in the Company's consolidated balance sheet. Cash payments related to the above described restructuring charges are expected to be completed within the next twelve months, except for certain long-term branch office closure costs of $0.2 million, which are recorded in other long-term liabilities as of September 30, 2012. 13 -------------------------------------------------------------------------------- These changes comprise a large-scale operational transformation designed to give Hooper Holmes the competitive advantages of faster and more accurate service delivery and lower operating costs. We believe that this restructuring and capital investment will help us better meet the needs of customers in the paramed industry for consistent service, accurate scheduling, and timely completion of exams. Highlights for the Three and Nine Month Periods Ended September 30, 2012 The Company Financial Results for the Three Month Period Ended September 30, 2012 For the three month period ended September 30, 2012, consolidated revenues totaled $33.7 million, a 11.8% decline from the corresponding prior year period. Our gross profit totaled $7.1 million for the three month period ended September 30, 2012 versus $9.5 million in the comparable period of the prior year. Our gross profit percentage was 21.1% for the three month period ended September 30, 2012, representing a decline from the gross profit percentage of 24.8% for the three month period ended September 30, 2011, primarily attributable to gross profit declines in our Portamedic service line. Included in the results (cost of operations) for the three month period ended September 30, 2011, is a credit of $0.6 million relating to a refund received from a supplier pertaining to improperly charged sales tax on purchased materials. Had this credit not been recorded in the three month period ended September 30, 2011, our gross profit percentage would have been 23.2%. SG&A expenses were $9.2 million in the three month period ended September 30, 2012, a decrease of $1.8 million, or 16.3%, in comparison to the three month period ended September 30, 2011. Included in SG&A for the three month period ended September 30, 2011, is a charge of $0.2 million relating to the write-off of certain software that was under development. The Company determined that the development to date would not support the intended functionality of the Company's ordering processing applications. During the three month period ended September 30, 2012, restructuring charges totaled $0.02 million, primarily consisting of employee severance and branch office closure costs related to the restructuring of our Portamedic service line as discussed above. Results for the three month period ended September 30, 2011 included restructuring charges totaling $0.02 million, consisting primarily of severance costs. Our operating loss from continuing operations for the three month period ended September 30, 2012 was $2.1 million compared to a $1.5 million loss for the comparable prior year period. For the three month period ended September 30, 2012, we incurred a net loss of $2.2 million, or $0.03 per share on both a basic and diluted basis, compared to net loss of $1.3 million, or $0.02 per share on both a basic and diluted basis, for the comparable prior year period. Included in our results for the three month period ended September 30, 2011 is a $0.2 million gain in Other (expense) income, representing the reversal of a reserve previously established for interest and penalties associated with certain state unclaimed property matters. Financial Results for the Nine Month Period Ended September 30, 2012 For the nine month period ended September 30, 2012, consolidated revenues totaled $107.9 million, a 7.5% decline from the corresponding prior year period. Our gross profit totaled $23.2 million for the nine month period ended September 30, 2012 versus $29.5 million in the comparable period of the prior year. Our gross profit percentage was 21.5% for the nine month period ended September 30, 2012, representing a decline from the gross profit percentage of 25.3% for the nine month period ended September 30, 2011. Included in the results (cost of operations) for the nine month period ended September 30, 2011, is a credit of $0.5 million relating to a refund received from a supplier pertaining to improperly charged sales tax on purchased materials. Had this credit not been recorded in the nine month period ended September 30, 2011, our gross profit percentage would have been 24.8%. SG&A expenses were $31.7 million in the nine month period ended September 30, 2012, a decrease of $0.7 million, or 2.3%, in comparison to the nine month period ended September 30, 2011. Included in SG&A for the nine month period ended September 30, 2011, is a charge of $0.2 million relating to the write-off of certain software that was under development. The Company determined that the development to date would not support the intended functionality of the Company's ordering processing applications. During the nine month period ended September 30, 2012, restructuring charges totaled $2.2 million, primarily consisting of severance and branch closure costs related to the restructuring of our Portamedic service line as discussed above. Results for the nine month period ended September 30, 2011 included restructuring charges totaling $0.1 million, primarily consisting of severance and branch office closure costs. 14 -------------------------------------------------------------------------------- Our operating loss from continuing operations for the nine month period ended September 30, 2012 was $10.7 million compared to a $3.0 million loss for the comparable prior year period. For the nine month period ended September 30, 2012, we incurred a net loss of $10.9 million, or $0.16 per share on both a basic and diluted basis, compared to a net loss of $2.9 million, or $0.04 per share on both a basic and diluted basis, for the comparable prior year period. Included in our results for the nine month period ended September 30, 2011 is a $0.2 million gain in Other (expense) income, representing the reversal of a reserve previously established for interest and penalties associated with certain state unclaimed property matters. For the remainder of 2012, we expect to continue improving our processes and organization structure and focusing on customer channels including brokers, direct marketers, insurance agents and health care companies. We made significant capital investments and operating improvements that have transformed the way we deliver services, improving our competitive position and lowering our cost structure, which are expected to improve our financial results in future periods. Portamedic In the quarter ended September 30, 2012, Portamedic revenues decreased approximately 13.3% in comparison to the prior year period. The primary driver of our revenue decline is the decrease in completed examinations in the third quarter 2012 of 12.2%, compared to the third quarter of 2011. The average revenue per paramedical examination increased 0.5% in the quarter ended September 30, 2012, compared to the prior year period. The number of completed examinations in the second and third quarters of 2012 were negatively impacted by implementation issues (resolved during the third quarter of 2012) regarding our new IT system for processing Portamedic customer orders (implementation completed in the second quarter of 2012), along with the June 2012 deployment of our new Portamedic service delivery model and the related transitional/operational issues associated with the implementation of this new model. During the past several fiscal quarters, we have taken the following steps to increase our market share and improve top-line revenue: • In June 2012, we deployed our new Portamedic service delivery model. The introduction of this new program is expected to enhance our ability to provide faster and more accurate service delivery at lower operating costs. In the nine months ended September 30, 2012, we continued to make capital investments which will enable us to improve our current Portamedic service delivery model and provide greater operational performance and service quality, while reducing operating costs in our current branch office structure. • In June 2012, we created the position of Vice-President of Portamedic Provider Relations. This position will be dedicated to building our network of health professionals for not only our Portamedic service line, but also our Health and Wellness service line. • In June 2012, we reorganized our Portamedic service line into 14 regions, with a leader and customer service team assigned to each. We replaced over 100 local administrative offices with 60 integrated customer service centers strategically located across the 14 regions. Administrative functions such as imaging and billing have been centralized. In addition, every job in our Portamedic service line from senior management to customer service representative has a new position description tied to quality measures that we believe directly align with customer expectations. • In the second quarter of 2012, we established a team of 14 Health Professional Managers whose functions will be to recruit, educate and mentor our national health professional network. • In March 2012, we entered into an agreement with a national insurance brokerage firm to provide efficient data acquisition and processing solutions. Using the full breadth of our service capabilities, we expect to improve this brokerage's insurance e-application process. • We promoted and hired new field sales managers during the third quarter of 2012. We introduced new field sales and regional operations incentive compensation plans and performance measurement systems, while implementing a new Customer Relationship Management system for our sales teams. • We completed development of a new Portamedic web portal to make it easier for customers to order our services. • We implemented a new warehouse management and inventory control system to reduce costs and improve efficiencies in distributing lab kits to our health professionals. 15-------------------------------------------------------------------------------- • We expanded our iParamed e-Exam platform, deploying over 1,000 iParamed-equipped netbooks to health professionals in all 50 states and the District of Columbia. • In the second quarter of 2012, we completed the rollout of our new IT system for processing Portamedic customer orders (known as Partnerlink), which is expected to improve customer service, while lowering future operating costs. As of September 30, 2012, the total cost of the system, including implementation and training costs, totaled approximately $5.4 million of which $1.7 million was incurred in the nine month period ended September 30, 2012. During the remainder of 2012, we expect to spend an additional $0.1 million primarily for system enhancements. We believe that the steps we are taking to improve our selling ability, and the quality and speed of our services, will enable us to reduce the rate of decline in revenue experienced in the last several years. Heritage Labs Heritage Labs services consist principally of performing tests of blood, urine and oral fluid specimens and the assembly and sale of kits used in the collection and transportation of such specimens to its lab facility. Heritage Labs revenues in the third quarter of 2012 was $3.1 million, a decrease of 3.2% as compared to the prior year period due to decreased revenue from both lab testing and specimen kit assembly. In the third quarter of 2012, approximately 60% of Heritage Labs revenue came from lab testing and 40% 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. In response, Heritage Labs has taken the following steps to attempt to expand its market share and increase revenues: • We have developed a "risk score" methodology 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 are unique and more complex than the data being provided by our competitors. We have shared our risk score data set and design approach with major re-insurers to validate our methodology to risk scoring. 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 developed sales initiatives designed to increase the number of paramedical examinations completed by our Portamedic service line that generate lab testing orders for Heritage Labs. We have also developed sales initiatives designed to increase the volume of lab test orders for Heritage Labs that are not generated by Portamedic exams. While we intend for these measures to increase our market share and revenues, there can be no assurance we will achieve those results. We believe that, as a result of the initiatives noted above, along with Portamedic revenue improvements, we may achieve future growth at Heritage Labs. Health & Wellness Health & Wellness revenues in the third quarter of 2012 were $5.3 million, a decrease of $0.4 million, or 7.5%, from the prior year period. This decline in revenue is primarily attributable to an 8.1% decrease in the number of health screenings performed. In the third quarter of 2012, Health & Wellness performed approximately 102,000 health screenings, compared to 111,000 health screenings in the prior year period, partially attributable to the postponement of screening events by several sponsors from the third quarter to the fourth quarter of 2012. During the third quarter of 2012, we provided our services to 38 health management companies. 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 3,000 of the examiners in our network to be "wellness certified" examiners. Approximately 55% of these certified health professionals also perform services for our Portamedic service line. Health & 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 venipuncture samples we collect at health and wellness screenings. 16 -------------------------------------------------------------------------------- We believe the market for health and wellness is likely to grow over the next three to five years, and that we are well positioned to increase revenues from our biometric screening and coaching services. Several recent milestones expected to grow revenues include: • We announced that Hooper Holmes had been chosen to collect biological samples for the largest government study of tobacco use ever conducted in the United States. This five year study, which is scheduled to begin in late 2012, will draw upon our strengths, including our national network of local health professionals and Heritage Labs' kit manufacturing. We were chosen for this work by Westat, a leading research and statistical survey organization. • In the first half of 2012, we added three new sales positions, along with new operations and account manager positions. 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 Heritage Labs, our proprietary Health & Wellness IT system, and our network of certified health professionals. However, the success of Health & Wellness will depend in part upon the yet-to-be-proven benefits of health and care management initiatives to the employers and others who sponsor them. Hooper Holmes Services Hooper Holmes Services revenues for the third quarter 2012 were $4.3 million, a decrease of 12.7% in comparison to the prior year period. Hooper Holmes Services' three main sources of revenue are Health Information Services (which includes attending physician statement, "APS", retrieval and physicians information line, "PIL"), Consumer Services and Health Risk Analytics. APS retrieval and PIL revenues totaled $2.0 million in the third quarter of 2012, a decrease of 20.7% in comparison with the prior year period. This decrease in revenue is primarily due to a decline in the number of APS/PIL units performed during the third quarter of 2012 compared to the prior year period. Revenues from Consumer Services totaled $0.9 million in the third quarter of 2012, a decline of 10.4% as compared to the prior year period. Third quarter 2012 revenue from Health Risk Analytics (our risk management and underwriting services) increased 3.1%, as compared to the prior year period. 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 third quarter of 2012, the metrics which we monitored included: • the number of paramedical examinations performed by Portamedic; • the average revenue per paramedical examination; • time service performance by geographic territory, from examination order to completion; • the number of cases scheduled by our centralized Portamedic exam scheduling center; • 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 margins. 17 --------------------------------------------------------------------------------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 and nine month periods ended September 30, 2012 and 2011 The table below sets forth our revenue by service line for the periods indicated. For the Three Months Ended September 30, For the Nine Months Ended September 30, (in thousands) 2012 2011 % Change 2012 2011 % Change Portamedic $ 21,459 $ 24,762 (13.3 )% $ 72,473 $ 80,152 (9.6 )% Heritage Labs 3,062 3,164 (3.2 )% 10,052 10,331 (2.7 )% Health & Wellness 5,280 5,710 (7.5 )% 13,191 11,680 12.9 % Hooper Holmes Services 4,317 4,944 (12.7 )% 13,707 15,931 (14.0 )% Subtotal 34,118 38,580 109,423 118,094 Intercompany eliminations(a) (447 ) (423 ) (1,559 ) (1,432 ) Total $ 33,671 $ 38,157 (11.8 )% $ 107,864 $ 116,662 (7.5 )% (a) represents intercompany sales from Heritage Labs to Portamedic Revenues Consolidated revenues for the three month period ended September 30, 2012 were $33.7 million, a decline of $4.5 million, or 11.8%, from the prior year period. For the nine month period ended September 30, 2012, our consolidated revenues were $107.9 million compared to $116.7 million in the corresponding period of the prior year. Portamedic Portamedic revenues in the third quarter of 2012 were $21.5 million, a decrease of $3.3 million, or 13.3%, compared to the prior year period. For the nine month period ended September 30, 2012, revenue decreased to $72.5 million compared to $80.2 million for the same period of the prior year, or 9.6%. The decline in Portamedic revenues reflects the net impact of: • a decrease in paramedical examinations performed in the third quarter of 2012 of approximately 12.2% (251,000 in the third quarter of 2012, or 3,982 per day, vs. 286,000 in the third quarter of 2011, or 4,473 per day), and in the nine month period ended September 30, 2012 of approximately 8.2% (855,000 in the nine month period ended September 30, 2012, or 4,476 per day, vs. 931,000 in the nine month period ended September 30, 2011, or 4,850 per day); and • an increase in average revenue per paramedical examination in the third quarter of 2012 of approximately 0.5% as compared to the third quarter of 2011 ($86.77 in the third quarter of 2012 vs. $86.37 in the third quarter of 2011), and in the nine month period ended September 30, 2012, a decrease in average revenue per paramedical examination of approximately 1.3% ($84.97 in the nine month period ended September 30, 2012 vs. $86.07 in the nine month period ended September 30, 2011). 18-------------------------------------------------------------------------------- The reduction in Portamedic revenue in the third quarter 2012 and nine months ended September 30, 2012 was due to implementation issues (resolved during the third quarter of 2012) regarding our new IT system, implemented in the second quarter of 2012, for processing Portamedic customer orders, a continued weak economy, along with the June 2012 deployment of our new Portamedic service delivery model and the related transitional/operational issues associated with the implementation of this new model . The number of Portamedic examinations declined 12.2% in the third quarter of 2012 and 8.2% in the nine months ended September 30, 2012 compared to the comparable prior year periods. In the second quarter of 2012, we deployed our new Portamedic service delivery model for delivering paramedical examinations. The new model 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. We are monitoring the impact of the new Portamedic delivery model and believe it is too soon to determine the model's long-term impact on revenues. Heritage Labs Heritage Labs revenues in the third quarter of 2012 were $3.1 million, a decrease of $0.1 million, or 3.2%, compared to the prior year period. For the nine month period ended September 30, 2012, revenue decreased to $10.1 million compared to $10.3 million for the same period of the prior year, or 2.7%. During the third quarter of 2012, revenue from lab testing (approximately 60% of total Heritage Labs revenue in the third quarter of 2012) decreased 3.1% in comparison to the prior year period. For the nine month period ended September 30, 2012, revenue from lab testing decreased 2.4% in comparison to the prior year period. Heritage Labs tested 4.5% fewer specimens compared to the prior year period (107,000 in the third quarter of 2012 vs. 112,000 in the third quarter of 2011), and 5.9% fewer specimens in the first nine months of 2012 compared to the same period in 2011 (353,000 vs. 375,000). Heritage Labs average revenue per specimen tested increased in the third quarter of 2012 compared to the prior year period ($17.26 in the third quarter of 2012 vs. $16.92 in the third quarter of 2011) primarily due to increased shipping charges that are passed on to our customers. Average revenue per specimen tested increased in the first nine months of 2012 compared to the same period in 2011 ($16.92 in the nine month period ended September 30, 2012 vs. $16.31 in the nine month period ended September 30, 2011). Approximately 49% of this increase in average revenue per specimen tested was due to service price increases, and the remaining increase was the result of increased shipping costs passed on to our customers. During the third quarter of 2012, revenue from lab kit assembly (approximately 40% of Heritage Labs revenue in the third quarter of 2012) decreased 3.5% to $1.2 million, in comparison to the prior year period. For the nine month period ended September 30, 2012, lab kit revenue decreased 3.1% to $4.1 million, in comparison to the prior year. Approximately 65% of total specimens tested by Heritage Labs originate from a Portamedic paramedical exam or a Health & Wellness screening. Health & Wellness Health & Wellness revenues in the third quarter of 2012 were $5.3 million, a decrease of $0.4 million, or 7.5%, compared to the prior year period. This decline in revenue is primarily attributable to a decrease in the number of health screenings performed in the third quarter of 2012 as compared to the prior year period, partially attributable to the postponement of screening events by several sponsors from the third quarter to the fourth quarter of 2012. For the nine month periods ended September 30, 2012 and 2011, revenues totaled $13.2 million and $11.7 million, respectively. This increase in revenue is primarily attributable to the increased number of screenings performed by Health & Wellness in the nine month periods ended September 30, 2012, as compared to the prior year period. For the three months ended September 30, 2012, health screenings performed by Health & Wellness decreased 8.1% compared to the prior year period (102,000 in the third quarter of 2012 vs. 111,000 in the third quarter of 2011), and increased 11.8% during the nine month period ended September 30, 2012 compared to the prior year period (247,000 in the nine month period ended September 30, 2012 vs. 221,000 in the nine month period ended September 30, 2011). During the third quarter of 2012, we provided our services to 38 health management companies. To date, we have certified approximately 3,000 of the examiners in our network to be "wellness certified" examiners. 19 --------------------------------------------------------------------------------Hooper Holmes Services Hooper Holmes Services revenues for the third quarter of 2012 were $4.3 million, a decrease of 12.7% from the prior year period. For the nine month periods ended September 30, 2012 and 2011, revenues totaled $13.7 million and $15.9 million, respectively. Health Information Services revenue totaled $2.5 million in the third quarter of 2012, a decrease of $0.5 million, or 17.8%, compared to the prior year period, and decreased 16.6% to $7.9 million in the nine months ended September 30, 2012 as compared to the prior year period. Revenue from our APS retrieval and PIL decreased 20.7% to $2.0 million in the third quarter of 2012 as compared to the prior year period primarily due to a decrease of 21.9% in the number of APS/PIL units performed during the third quarter 2012 as compared to the prior year period. The decrease in revenue due to the decline in APS/PIL units was offset, to some extent, by a 1.6% increase in the average price per APS/PIL unit in the third quarter 2012 as compared to the prior year period. During the nine month period ended September 30, 2012, revenue from our APS retrieval and PIL totaled $6.2 million, a decrease of 19.4% in comparison to the prior year period. The decline in revenue is primarily due to a 20.8% decrease in the number of APS/PIL units performed during the nine months ended September 30, 2012. The decrease in revenue due to the decline in APS/PIL units was partially offset by a 1.8% increase in the average price per APS/PIL unit in the nine months ended September 30, 2012 as compared to the prior year period. Inspection and Motor Vehicle Report ("MVR") reporting revenue totaled $0.5 million in the third quarter of 2012, a decrease of 4.9% from the prior year period. For the nine month period ended September 30, 2012 inspection and MVR reporting revenue declined 4.5% to $1.7 million as compared to the prior year period. Consumer Services includes our tele-underwriting/interviewing services. Revenues from Consumer Services for the third quarter of 2012 decreased 10.4% to $0.9 million as compared to the prior year period. The decrease in revenue is primarily due to a decline in the number of tele-underwriting/interviewing units completed of 13.2% as compared to the third quarter 2011.The decrease in revenue due to the decline in units was offset, to some extent, by a 3.2% increase in the average price per unit in the third quarter 2012 as compared to the prior year period. For the nine month period ended September 30, 2012, revenues decreased 14.7% to $3.0 million as compared to the prior year period. The decrease in revenue is primarily due to a decline in the number of tele-underwriting/interviewing units completed of 16.2% as compared to the prior year period. The decrease in revenue due to the decline in units was offset, to some extent, by a 1.8% increase in the average price per unit in the nine month period ended September 30, 2012 as compared to the prior year period. Health Risk Analytics includes our risk management and underwriting services. Revenues increased 3.1% in the third quarter of 2012 to $0.9 million compared to the prior year period. For the nine month period ended September 30, 2012, revenues decreased 4.7% to $2.9 million compared to the prior year period due to a decline in revenue from one of our larger customers. Cost of Operations Consolidated cost of operations was $26.6 million for the third quarter of 2012, compared to $28.7 million for the prior year period. For the nine months ended September 30, 2012, cost of operations was $84.6 million compared to $87.2 million for the nine months ended September 30, 2011. The following table shows cost of operations as a percentage of revenues for the corresponding service lines. (in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, As a % of As a % of As a % of As a % of 2012 Revenues 2011 Revenues 2012 Revenues 2011 Revenues Portamedic/Health & Wellness $ 21,585 80.7 % $ 22,981 75.4 % $ 68,680 80.2 % $ 69,465 75.6 % Heritage Labs 2,015 65.8 % 2,124 67.1 % 6,624 65.9 % 6,883 66.6 % Hooper Holmes Services 3,403 78.8 % 4,002 80.9 % 10,874 79.3 % 12,244 76.9 % Subtotal 27,003 29,107 86,178 88,592 Intercompany eliminations (a) (447 ) (422 ) (1,532 ) (1,435 ) Total $ 26,556 78.9 % $ 28,685 75.2 % $ 84,646 78.5 % $ 87,157 74.7 % (a) represents intercompany cost of operations pertaining to sales from Heritage Labs to Portamedic 20 --------------------------------------------------------------------------------Consolidated cost of operations as a percentage of revenues increased to 78.9% and 78.5% for the three and nine month periods ended September 30, 2012, respectively, compared to the prior year periods. The increase in cost of operations as a percentage of revenues is due to Portamedic revenues declining at a rate greater than its associated costs, as a significant percentage of costs in this service line are fixed and therefore, did not decrease as revenues declined. The new Portamedic service delivery model deployed during the second quarter of 2012 is expected to lower the Portamedic cost of operations, while improving customer service. Portamedic costs of operations was also impacted by the investments we made in this service line during 2011 and 2012, largely our investment in the deployment and operating costs related to our new workflow system (known as "Partnerlink"), our new ordering and status website and an updated version of our iParamed e-Exam. Additionally, Portamedic cost of operations was impacted by increased health professional fees due to the Company's efforts to attract and retain quality health professionals. Cost of operations for Portamedic for the three and nine month periods ended September 30, 2011, includes a credit of $0.6 million and $0.5 million, respectively, relating to a refund received from a supplier pertaining to improperly charged sales tax on purchased materials. Heritage Labs cost of operations decreased as a percentage of revenues to 65.8% for the three months ended September 30, 2012 as compared to the prior year period. This decrease is primarily due to product mix associated with our lab kit assembly service line and lower shipping costs. Hooper Holmes Services cost of operations decreased as a percentage of revenues to 78.8% for the three month period ended September 30, 2012, compared to the prior year period. This decrease is primarily attributable to cost reduction initiatives completed earlier in 2012. Selling, General and Administrative Expenses For the Three Months For the Nine Months Ended (in thousands) Ended September 30, Decrease September 30, Decrease 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011 Selling, general and administrative expenses $ 9,212 $ 11,002 $ (1,790 ) $ 31,698 $ 32,438 $ (740 ) Consolidated SG&A expenses for the three month period ended September 30, 2012 decreased $1.8 million compared to the prior year period. The decrease is primarily attributable to decreases of: • Incentive compensation expense totaling $0.7 million; • IT costs associated with operating our old Portamedic customer ordering system and reduced depreciation expense totaling $0.6 million; • Portamedic regional and administrative salaries and related expenses totaling $0.3 million; • Write-off of certain order processing application software totaling $0.2 million completed in the third quarter of 2011; • Executive salaries and recruiting costs totaling $0.2 million; • Sales salaries totaling $0.2 million; • Legal fees and reduced intangible amortization expense totaling $0.2 million; and • Workers Compensation and other employee benefit costs totaling $0.1 million. These decreases in SG&A were partially offset by increases of: • Depreciation expense associated with our new Portamedic order processing system (known as "Partnerlink") totaling $0.3 million; • Salaries associated with the expansion of our Strategic Development Department totaling $0.2 million; and • Administrative sales salaries and expenses associated with our Health & Wellness service line totaling $0.2 million. 21--------------------------------------------------------------------------------Consolidated SG&A expenses for the nine month period ended September 30, 2012 decreased $0.7 million compared to the prior year period. This decrease is primarily attributable to decreases of: • Incentive compensation expense totaling $1.1 million; • IT costs associated with operating our old Portamedic customer ordering system and reduced depreciation expense totaling $1.0 million; • Portamedic regional and administrative salaries and related expenses totaling $0.4 million; • Write-off of certain order processing application software totaling $0.2 million; • Executive salaries and recruiting costs totaling $0.5 million; • Sales salaries and expenses totaling $0.1 million; and • Legal costs, general insurance and reduced intangible amortization expense totaling $0.4 million. These decreases in SG&A were offset by increases of: • IT salaries, implementation and training costs and maintenance costs for our new Portamedic order processing system totaling $1.1 million; • Depreciation expense associated with our new Portamedic order processing system totaling $0.7 million; • Salaries associated with the expansion of our Strategic Development Department totaling $0.5 million; • Administrative sales salaries and expenses associated with our Health & Wellness service line totaling $0.3 million; and • Health insurance costs and workers compensation costs totaling $0.3 million. Restructuring For the three and nine month periods ended September 30, 2012, we recorded restructuring charges of $0.02 million and $2.2 million, respectively. These charges were primarily associated with our Portamedic service line as discussed in the above section "Restructure of Portamedic Operations". Restructuring charges for the three and nine month periods ended September 30, 2011 were $0.02 million and $0.1 million, respectively, and consisted primarily of severance and branch office closure costs. Operating Loss from Continuing Operations Our consolidated operating loss from continuing operations for the three month period ended September 30, 2012 was $2.1 million, or 6.3% of consolidated revenues, compared to a consolidated operating loss from continuing operations for the three month period ended September 30, 2011 of $1.5 million, or 4.1% of consolidated revenues. For the nine month period ended September 30, 2012, our consolidated operating loss from continuing operations was $10.7 million, or 9.9% of consolidated revenues, compared to a consolidated operating loss from continuing operations for the nine month period ended September 30, 2011 of $3.0 million, or 2.6% of consolidated revenues. Other (Expense) Income Interest income for the three month period ended September 30, 2012 was $0.01 million compared to $0.02 million for the prior year period. For the nine month period ended September 30, 2012, interest income was $0.02 million compared to $0.05 million for the prior year period. The decrease for the three and and nine month periods ended September 30, 2012 is primarily due to lower cash balances. Other (expense) income, net for the three and nine months ended September 30, 2012 was an expense of $0.1 million and $0.2 million, respectively, and consisted primarily of bank credit facility fees. For the three and nine month periods ended September 30, 2011 other (expense) income, net was a net gain of $0.2 million and $0.1 million, respectively, and also consisted primarily of bank credit facility fees, offset by a credit of $0.3 million primarily related to the reversal of accrued interest and penalties resulting from entering into voluntary compliance agreements with 12 states relating to unclaimed property. Income Taxes We recorded a net tax expense of $0.01 million and $0.03 million for the three and nine month periods ended September 30, 2012, respectively. For the three and nine month periods ended September 30, 2011, we recorded a net tax expense of $0.03 million and $0.08 million, respectively. These 2012 and 2011 charges reflect certain state tax liabilities. No federal or state tax benefits were recorded relating to the current or prior year loss, as we continue to believe that a full valuation allowance is required on our net deferred tax assets. 22 --------------------------------------------------------------------------------Loss from Continuing Operations Loss from continuing operations for the three month period ended September 30, 2012 was $2.2 million, or $0.03 per share on both a basic and diluted basis, compared to a loss of $1.3 million, or $0.02 per share on both a basic and diluted basis, in the same period of the prior year. Loss from continuing operations for the nine month period ended September 30, 2012 was $10.9 million, or $0.16 per share on both a basic and diluted basis, compared to a loss of $3.0 million, or $0.04 per share on both a basic and diluted basis, in the same period of the prior year. Discontinued Operations In June 2008, we sold substantially all of the assets and liabilities of our Claims Evaluation Division ("CED") operating segment. In connection with the sale of the CED, we were released as the primary obligor for certain lease obligations acquired but remain secondarily liable in the event the buyer defaults. In the second quarter of 2012, we reduced the reserve for this liability by $0.07 million. The corresponding gain is reported in the accompanying consolidated statement of operations in discontinued operations for the nine months ended September 30, 2012. At September 30, 2012, we maintained a liability of $0.1 million for this lease obligation. The guarantee is provided for the term of the lease, which expires in July 2015. As of September 30, 2012, the maximum potential amount of future payments under the guarantee is $0.3 million. Liquidity and Capital Resources As of September 30, 2012, our primary sources of liquidity are our holdings of cash and cash equivalents, and our revolving line of credit, if borrowing capability is available based on compliance with financial covenants. At September 30, 2012 and December 31, 2011, our working capital was $17.9 million and $28.3 million, respectively. Our current ratio as of September 30, 2012 and December 31, 2011 was 2.4 to 1 and 3.5 to 1, respectively. Significant uses affecting our cash flows for the nine month period ended September 30, 2012 include: • a net loss of $10.9 million, including non-cash charges of $3.1 million in depreciation and amortization expense, $0.5 million in share-based compensation expense, and a loss on disposal and impairment of fixed assets of $0.2 million; • capital expenditures of $3.3 million; • an increase in inventory of $0.5 million; and • an increase in accounts receivable of $0.2 million. These uses of cash were partially offset by: • a combined net increase in accounts payable, accrued expense and other long-term liabilities (including restructuring payments related to employee severance of $1.1 million) of $1.4 million; and • a decrease in other assets of $1.2 million. Loan and Security Agreement We have a loan and security agreement (the "Loan and Security Agreement") with TD Bank, N.A. ("TD Bank") which expires on March 8, 2013. We are currently exploring future funding alternatives and options in anticipation of the expiration of the Loan and Security Agreement. There can be no assurance that we will be able to obtain such funding or, if funding were available, that it would be on terms acceptable to us. The Loan and Security Agreement provides for 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. As of September 30, 2012, we had a $0.1 million TD VISA credit card account which reduces our borrowing capacity. As of September 30, 2012, our borrowing capacity under the revolving line of credit totaled $14.2 million and there were no outstanding borrowings. 23 --------------------------------------------------------------------------------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, we were 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, we are required to pay an annual loan fee of $0.1 million. During the three and nine month periods ended September 30, 2012, we incurred unused line fees of $0.02 million and $0.08 million, respectively. During the three and nine month periods ended September 30, 2011, we incurred unused line fees of $0.04 million and $0.1 million, respectively. We 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 granted TD Bank a mortgage lien encumbering our corporate headquarters. 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 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 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. We are 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 our cash on deposit with TD Bank is less than $6 million. As of September 30, 2012, both because our cash on deposit with TD Bank exceeded $6 million and our 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 September 30, 2012 was (17.9) to 1. As such, we would fail this financial covenant and therefore would have no borrowing capability under the terms of our Loan and Security Agreement. Our failure or that of any subsidiary guarantor 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 our 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) on our ability and our subsidiary guarantors to perform under the Loan and Security Agreement. 24 -------------------------------------------------------------------------------- In June 2012, we restructured our Portamedic service line, which included the deployment of a new model for delivering paramedical exam services. 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. For the three and nine months ended September 30, 2012, our consolidated revenues totaled $33.7 million and $107.9 million, respectively, representing declines of 11.8% and 7.5%, respectively, from the prior year periods which were primarily attributable to the Portamedic service line. We are monitoring the impact of the new Portamedic delivery model and believe it is too soon to determine the model's long-term impact on revenues. Nonetheless, in response to the declining revenues, subsequent to September 30, 2012, we have taken additional actions to reduce our costs and cash outflows, including headcount reductions and a reduction in capital expenditures and operating expenses, and we are evaluating additional cash flow measures, including alternative sources of financing. The actions taken are expected to reduce or delay expenses and uses of cash during the remainder of 2012 and thereafter. If the new Portamedic delivery model is not successful and revenues continue to decline, operating losses will continue, assets may become impaired and we will be required to take additional actions to further reduce or delay expenses and uses of cash. This would also reduce our cash reserves and potentially require us to seek alternative sources of financing, including but limited to new credit facilities and the sale of assets and service lines. There is no guarantee that the Portamedic delivery model will reverse the decline in revenues or that our cost reduction actions will generate the savings necessary to offset revenue declines, operating losses and uses of cash. If we are unsuccessful in reducing and reversing past revenue declines and cost reduction initiatives cannot be implemented to offset revenue declines, these factors would adversely affect our liquidity and we may be required to obtain additional sources of liquidity in order to meet our obligations through at least September 30, 2013. Such sources of liquidity may not be available at terms acceptable to us. Cash Flows from Operating Activities For the nine month period ended September 30, 2012, net cash used in operating activities of continuing operations was $5.1 million, compared to net cash provided by operating activities of continuing operations of $0.2 million in the prior year period. The net cash used in operating activities of continuing operations for the nine month period ended September 30, 2012 of $5.1 million reflects a net loss of $10.9 million and non-cash charges of $3.1 million of depreciation and amortization, $0.5 million of share-based compensation expense, and a loss on disposal and impairment of fixed assets of $0.2 million. Changes in working capital included: • an increase in accounts receivable of $0.2 million. Our consolidated days sales outstanding ("DSO"), measured on a rolling 90-day basis, was 49.5 days at September 30, 2012, compared to 40.5 days at December 31, 2011 and 47.3 days at September 30, 2011. 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 in the first quarter of each year, in comparison to the prior year-end and we experience a decrease in the second quarter of each year compared to the first quarter of the same year. Our third quarter 2012 DSO is consistent with historical trends as it increased in comparison to the second quarter of 2012. As has historically been the case, we believe our DSO will again be at its lowest point of the year by December 2012. Our consolidated allowance for doubtful accounts, which includes a reserve for revenue reductions, declined approximately $0.02 million since December 31, 2011, resulting from net write-offs; • a combined net increase in accounts payable, accrued expenses and other long-term liabilities of $1.4 million; • an increase in inventories of $0.5 million; and • a decrease in other assets of $1.2 million. 25 -------------------------------------------------------------------------------- The net cash provided by operating activities of continuing operations for the nine month period ended September 30, 2011 of $0.2 million reflects a loss of $3.0 million from continuing operations, including non-cash charges of $2.7 million of depreciation and amortization, $0.5 million of share-based compensation expense, and the write-off of software under development of $0.2 million. Changes in working also capital included: • an increase in accounts receivable of $0.7 million. Our consolidated DSO, measured on a rolling 90-day basis, was 47.3 days at September 30, 2011, compared to 40.4 days at December 31, 2010 and 48.0 days at September 30, 2010. Our consolidated allowance for doubtful accounts, which includes a reserve for revenue reductions, declined approximately $0.3 million since December 31, 2010, of which $0.05 million and $0.1 million was credited to revenue during the three and nine month periods September 30, 2011, respectively; • a combined net increase in accounts payable, accrued expenses and other long-term liabilities of $0.6 million; • an increase in inventories of $0.5 million; and • a decrease in other assets of $0.4 million. Cash Flows used in Investing Activities For the nine month period ended September 30, 2012, we used $3.3 million in net cash for investing activities of continuing operations primarily for capital expenditures primarily related to the development of an IT system for processing customer orders, our new inventory management system and new Heritage Lab specimen analyzing equipment. For the nine month period ended September 30, 2011, we used $3.3 million in net cash for investing activities of continuing operations primarily for capital expenditures primarily related to the development of our new IT system for processing customer orders, new inventory management system and new iParamed technology platform. Cash Flows used in Financing Activities The net cash used in financing activities of continuing operations for the nine month periods ended September 30, 2012 and 2011 of $0.3 million and $0.3 million, respectively, represents costs associated with our Loan and Security Agreement with TD Bank and a reduction in capital lease obligations. 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 consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Share Repurchases We did not purchase any shares of our common stock during the nine month periods ended September 30, 2012 and 2011. Dividends No dividends were paid during the nine month periods ended September 30, 2012 and 2011. We are restricted 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 September 30, 2012, there have been no material changes in contractual obligations as disclosed in Item 7 to our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011, under the caption "Contractual Obligations". Inflation Inflation has not had, nor is it expected to have, a material impact on our consolidated financial results. 26 --------------------------------------------------------------------------------Critical Accounting Policies There were no changes to our critical accounting policies during the nine month period ended September 30, 2012. Such policies are described in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011. |