##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
Commission File No. 000-25064
 
 HEALTH FITNESS CORPORATION
 (Exact name of registrant as specified in its charter)
 Minnesota
    
    No. 41-1580506(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification No.)
 1650 West 82 nd Street, Bloomington, MN 55431  (Address of Principal Executive Offices)
 Registrants telephone number (952) 831-6830
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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Health Fitness Corporation
Consolidated Financial Statements
Table of Contents
 PAGEPART I. FINANCIAL INFORMATIONITEM 1.
    
    Consolidated Financial Statements (unaudited)Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007
    
    
    3Consolidated Statements of Operations for the three
months ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the three
months ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17ITEM 4.
    
    Controls and Procedures
    
    
    17PART II. OTHER INFORMATION
    
    
    19ITEM 1.
    
    Legal Proceedings
    
    
    19ITEM 1A.
    
    Risk Factors
    
    
    19ITEMS 2-4.
    
    Not Applicable
    
    
    19ITEM 5.
    
    Other Information
    
    
    19ITEM 6.
    
    Exhibits
    
    
    19Signatures
    
    
    
    
    20Exhibit Index
    
    
    
    
    21Statement Re: Computation of Earnings Per ShareSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
  2




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 HEALTH FITNESS CORPORATION
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 MARCH 31, 2008 AND DECEMBER 31, 2007
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETSCash
    
    $
    915,684
    
    
    $
    1,946,028Trade and other accounts receivable, less allowances of $241,800 and $243,300
    
    
    13,079,407
    
    
    
    14,686,879Inventory
    
    
    431,199
    
    
    
    569,458Prepaid expenses and other
    
    
    548,372
    
    
    
    226,891Deferred tax assets
    
    
    406,367
    
    
    
    406,367Total current assets
    
    
    15,381,029
    
    
    
    17,835,623PROPERTY AND EQUIPMENT, net
    
    
    1,307,309
    
    
    
    1,400,570OTHER ASSETSGoodwill
    
    
    14,546,250
    
    
    
    14,546,250Software, less accumulated amortization of $914,100 and $795,100
    
    
    1,721,732
    
    
    
    1,734,920Trademark, less accumulated amortization of $370,300 and $345,500
    
    
    122,748
    
    
    
    147,561Other intangible assets, less accumulated amortization of $259,700 and $241,700
    
    
    269,375
    
    
    
    287,334Other
    
    
    5,607
    
    
    
    9,807$
    33,354,050
    
    
    $
    35,962,065LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    $
    1,397,450
    
    
    $
    2,121,154Accrued salaries, wages, and payroll taxes
    
    
    2,618,128
    
    
    
    4,011,580Other accrued liabilities
    
    
    331,121
    
    
    
    1,187,045Accrued self funded insurance
    
    
    300,888
    
    
    
    333,724Deferred revenue
    
    
    1,365,811
    
    
    
    1,722,254Total current liabilities
    
    
    6,013,398
    
    
    
    9,375,757DEFERRED TAX LIABILITY
    
    
    108,623
    
    
    
    108,623LONG-TERM OBLIGATIONS
    
    
    
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock, $0.01 par value; 50,000,000 shares authorized; 20,273,817 and
19,928,590 shares issued and outstanding at March 31, 2008 and December 31,
2007, respectively
    
    
    202,738
    
    
    
    199,285Additional paid-in capital
    
    
    29,776,646
    
    
    
    29,350,211Accumulated comprehensive loss from foreign currency translation
    
    
    (56,669
    )
    
    
    (56,413
    )Accumulated deficit
    
    
    (2,690,686
    )
    
    
    (3,015,398
    )27,232,029
    
    
    
    26,477,685$
    33,354,050
    
    
    $
    35,962,065
  3




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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months EndedMarch 31,2008
    
    
    2007REVENUE
    
    $
    18,702,667
    
    
    $
    16,590,033COSTS OF REVENUE
    
    
    13,360,402
    
    
    
    11,780,139GROSS PROFIT
    
    
    5,342,265
    
    
    
    4,809,894OPERATING EXPENSESSalaries
    
    
    2,972,377
    
    
    
    2,398,802Other selling, general and administrative
    
    
    1,763,665
    
    
    
    1,482,525Amortization of trademarks and other intangible assets
    
    
    42,770
    
    
    
    42,770Total operating expenses
    
    
    4,778,812
    
    
    
    3,924,097OPERATING INCOME
    
    
    563,453
    
    
    
    885,797OTHER INCOME (EXPENSE)Interest expense
    
    
    (923
    )
    
    
    (2,099
    )Other, net
    
    
    2,285
    
    
    
    (1,514
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    564,815
    
    
    
    882,184INCOME TAX EXPENSE
    
    
    240,103
    
    
    
    370,517NET EARNINGS
    
    $
    324,712
    
    
    $
    511,667NET EARNINGS PER COMMON SHARE:Basic
    
    $
    0.02
    
    
    $
    0.03Diluted
    
    
    0.02
    
    
    
    0.03WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    20,080,747
    
    
    
    19,306,797Diluted
    
    
    20,412,464
    
    
    
    20,252,110
  4




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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedMarch 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    324,712
    
    
    $
    511,667Adjustments to reconcile net earnings to net cash used in operating activities:Stock-based compensation
    
    
    183,454
    
    
    
    157,001Depreciation and amortization
    
    
    266,822
    
    
    
    220,454Change in assets and liabilities, net of assets acquired:Trade and other accounts receivable
    
    
    1,607,472
    
    
    
    345,903Inventory
    
    
    138,259
    
    
    
    (288,638
    )Prepaid expenses and other
    
    
    (321,481
    )
    
    
    (120,171
    )Other assets
    
    
    4,200
    
    
    
    3,336Trade accounts payable
    
    
    (723,960
    )
    
    
    (356,596
    )Accrued liabilities and other
    
    
    (2,282,212
    )
    
    
    (641,956
    )Deferred revenue
    
    
    (356,443
    )
    
    
    (409,154
    )Net cash used in operating activities
    
    
    (1,159,177
    )
    
    
    (578,154
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (11,812
    )
    
    
    (195,300
    )Capitalized software development costs
    
    
    (105,789
    )
    
    
    (125,480
    )Business acquisition, net of cash acquired
    
    
    
    
    
    
    (13,408
    )Net cash payment made for acquisition
    
    
    
    
    
    
    (737,500
    )Net cash used in investing activities
    
    
    (117,601
    )
    
    
    (1,071,688
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    
    
    
    
    1,774,277Repayments under line of credit
    
    
    
    
    
    
    (1,154,628
    )Costs from issuance of preferred stock
    
    
    
    
    
    
    (17,415
    )Proceeds from the issuance of common stock
    
    
    92,206
    
    
    
    21,249Proceeds from the exercise of stock options
    
    
    154,228
    
    
    
    93,298Net cash provided by financing activities
    
    
    246,434
    
    
    
    716,781NET DECREASE IN CASH
    
    
    (1,030,344
    )
    
    
    (933,061
    )CASH AT BEGINNING OF PERIOD
    
    
    1,946,028
    
    
    
    987,465CASH AT END OF PERIOD
    
    $
    915,684
    
    
    $
    54,404SUPPLEMENTAL CASH FLOW DISCLOSURESSupplemental cash flow information:Cash paid for interest
    
    $
    923
    
    
    $
    2,099Cash paid for taxes
    
    
    65,963
    
    
    
    101,109Noncash investing and financing activities affecting cash flows:Common stock issued for acquisition earnout
    
    
    
    
    
    
    737,500
  5




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HEALTH FITNESS CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    nd
     Consolidation
 Cash
 6




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Trade and Other Accounts Receivable
 Inventories -
 Property and Equipment
 Software Development Costs
   Goodwill
 7




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Intangible Assets
 Revenue Recognition 
    Net Earnings Per Common Share
 Stock-Based Compensation
 Fair Values of Financial Instruments 
 Income Taxes
 8




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Use of Estimates
   Segment Data:
 Three Months EndedMarch 31,2008
    
    
    2007REVENUE:Fitness ManagementStaffing Services
    
    $
    9,706,347
    
    
    $
    9,980,516Program and Consulting Services
    
    
    619,759
    
    
    
    694,23410,326,106
    
    
    
    10,674,750Health ManagementStaffing Services
    
    
    4,295,744
    
    
    
    3,679,504Program and Consulting Services
    
    
    4,080,817
    
    
    
    2,235,7798,376,561
    
    
    
    5,915,283Total RevenueStaffing Services
    
    
    14,002,091
    
    
    
    13,660,020Program and Consulting Services
    
    
    4,700,576
    
    
    
    2,930,013$
    18,702,667
    
    
    $
    16,590,033GROSS PROFIT:Fitness ManagementStaffing Services
    
    $
    2,115,870
    
    
    $
    2,099,858Program and Consulting Services
    
    
    237,045
    
    
    
    362,8512,352,915
    
    
    
    2,462,709Health ManagementStaffing Services
    
    
    938,907
    
    
    
    911,965Program and Consulting Services
    
    
    2,050,443
    
    
    
    1,435,2202,989,350
    
    
    
    2,347,185Total Gross ProfitStaffing Services
    
    
    3,054,777
    
    
    
    3,011,823Program and Consulting Services
    
    
    2,287,488
    
    
    
    1,798,071$
    5,342,265
    
    
    $
    4,809,894
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Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51
 Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS
133).
 .
 Stock Options
   10




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Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    In Years
    
    Price
    
    Exercisable
    
    Price$0.30  $0.39
    
    
    60,500
    
    
    
    0.87
    
    
    $
    0.39
    
    
    
    60,500
    
    
    $
    0.390.47  0.69
    
    
    170,000
    
    
    
    1.55
    
    
    
    0.55
    
    
    
    170,000
    
    
    
    0.550.95  1.25
    
    
    174,000
    
    
    
    1.94
    
    
    
    1.19
    
    
    
    166,500
    
    
    
    1.201.26  2.27
    
    
    356,100
    
    
    
    3.87
    
    
    
    1.84
    
    
    
    323,600
    
    
    
    1.822.28  3.05
    
    
    1,345,500
    
    
    
    4.70
    
    
    
    2.69
    
    
    
    521,875
    
    
    
    2.722,106,100
    
    
    
    3.97
    
    
    $
    2.18
    
    
    
    1,242,475
    
    
    $
    1.87
  Three Months EndedMarch 31,2008
    
    2007Risk-free interest rate
    
    
    2.83
    %
    
    
    4.69
    %Expected volatility
    
    
    41.0
    %
    
    
    52.6
    %Expected life (in years)
    
    
    4.25
    
    
    
    4.25Dividend yield
    
    
    
    
    
    
    
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    AverageExercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    TermOutstanding at December 31, 2007
    
    
    2,338,300
    
    
    $
    1.96Granted
    
    
    385,000
    
    
    
    2.55Exercised
    
    
    (297,200
    )
    
    
    0.57Canceled/Forfeited
    
    
    (320,000
    )
    
    
    2.45Outstanding at March 31, 2008
    
    
    2,106,100
    
    
    $
    2.18
    
    
    $
    807,738
    
    
    
    3.96Exercisable at March 31, 2008
    
    
    1,242,475
    
    
    $
    1.87
    
    
    $
    786,014
    
    
    
    3.17
 Restricted Stock
 Employee Stock Purchase Plan
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Equity Incentive Plan
 Accrued Acquisition Earnout
 Common Stock Repurchase Plan
 .
 Legal Proceedings
 Liquidated Damages
 12




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Patent Matter
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read the following discussion and analysis of our financial condition and results of
operations together with our financial statements and the related notes appearing under Item 1 of
Part 1. Some of the information contained in this discussion and analysis or set forth elsewhere in
this quarterly report, including information with respect to our plans and strategy for our
business and expected financial results, includes forward-looking statements that involve risks and
uncertainties. You should review the Risk Factors under Item 1A of the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 for a discussion of important factors that
could cause actual results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
 CRITICAL ACCOUNTING POLICIES
  BUSINESS DESCRIPTION
   13




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RESULTS OF OPERATIONS
  Three Months EndedMarch 31,2008
    
    
    2007REVENUE
    
    
    100.0
    %
    
    
    100.0
    %COSTS OF REVENUE
    
    
    71.4
    
    
    
    71.0GROSS PROFIT
    
    
    28.6
    
    
    
    29.0OPERATING EXPENSESSalaries
    
    
    15.9
    
    
    
    14.5Other selling, general and administrative
    
    
    9.4
    
    
    
    8.9Amortization of acquired intangible assets
    
    
    0.2
    
    
    
    0.3Total operating expenses
    
    
    25.6
    
    
    
    23.7OPERATING INCOME
    
    
    3.0
    
    
    
    5.3OTHER INCOME (EXPENSE)
    
    
    0.0
    
    
    
    0.0EARNINGS BEFORE INCOME TAXES
    
    
    3.0
    
    
    
    5.3INCOME TAX EXPENSE
    
    
    1.3
    
    
    
    2.2NET EARNINGS
    
    
    1.7
    %
    
    
    3.1
    %
 Results of Operations for the quarter ended March 31, 2008 compared to the quarter ended March 31,
2007.
 Revenue.
 .
   Gross Profit.
  14




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Operating Expenses and Operating Income.
   Other Income and Expense.
 Income Taxes.
  Net Earnings.
 15




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LIQUIDITY AND CAPITAL RESOURCES
     INFLATION
  OFF-BALANCE SHEET ARRANGEMENTS
  PRIVATE SECURITIES LITIGATION REFORM ACT
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RECENTLY PASSED LEGISLATION
 Sarbanes-Oxley.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  17




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18




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PART II.  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
 None
 
 ITEM 6. EXHIBITS
  19




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SIGNATURES
  Dated: May 15, 2008
    
    HEALTH FITNESS CORPORATIONBy
    
    /s/ Gregg O. LehmanGregg O. LehmanPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ Wesley W. WinnekinsWesley W. WinnekinsChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
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Exhibit No.
    
    Description3.4
    
    Restated Bylaws of the Company, as amended February 11, 2008 -
incorporated by reference to Exhibit 3.4 to our Form 10-K for
the fiscal year ended December 31, 2007*10.1
    
    Agreement for Separation From Employment, dated January 31,
2008, between the Company and Jerry V. Noyce  incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K
dated January 31, 2008*10.2
    
    Consulting Agreement, dated January 31, 2008, between the
Company and Jerry V. Noyce  incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K dated January
31, 2008*10.3
    
    Employment Agreement, dated February 1, 2008, between the
Company and John E. Griffin  incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K dated January
31, 2008*10.4
    
    Employment Agreement, dated February 1, 2008, between the
Company and James O. Reynolds  incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K dated January
31, 2008*10.5
    
    2008 Executive Bonus Plan  incorporated by reference to
Exhibit 10.45 to our Form 10-K for the fiscal year ended
December 31, 2007*10.6
    
    Compensation Arrangements for Executive Officers for Fiscal
Year 2008  incorporated by reference to Exhibit 10.46 to our
Form 10-K for the fiscal year ended December 31, 2007**11.0
    
    Statement re: Computation of Earnings per Share**31.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**31.2
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002**32.1
    
    Certification of President and Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**32.2
    
    Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Indicates management contract or compensatory plan or arrangement**
    
    Filed herewith 21