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UNITED
STATESSECURITIES 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, 2007
 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
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 3600 American Boulevard West, Bloomington, Minnesota 55431
(Address of Principal Executive Offices)
 Registrants telephone number (952) 831-6830
 
 þ o
  o 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, 2007 and
December 31, 2006
    
    
    3Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    14ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19ITEM 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATION
    
    
    20ITEM 1. Legal Proceedings
    
    
    20ITEM 1A. Risk Factors
    
    
    20ITEMS 2-4. Not Applicable
    
    
    20ITEM 5. Other Information
    
    
    20ITEM 6. Exhibits
    
    
    21Signatures
    
    
    22Exhibit Index
    
    
    23Statement re: Computation of Earnings per Share302 Certification of President and CEO302 Certification of CFO906 Certification of President and CEO906 Certification of CFO
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PART I.  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 HEALTH FITNESS CORPORATION
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCURRENT ASSETSCash
    
    $
    54,404
    
    
    $
    987,465Trade and other accounts receivable, less allowances of $284,500
and $283,100
    
    
    12,058,954
    
    
    
    12,404,856Prepaid expenses and other
    
    
    1,110,698
    
    
    
    701,889Deferred tax assets
    
    
    217,476
    
    
    
    217,476Total current assets
    
    
    13,441,532
    
    
    
    14,311,686PROPERTY AND EQUIPMENT, net
    
    
    888,408
    
    
    
    767,675OTHER ASSETSGoodwill
    
    
    14,522,877
    
    
    
    14,509,469Software technology, less accumulated amortization of $471,600
and $370,200
    
    
    1,682,617
    
    
    
    1,658,575Trademark, less accumulated amortization of $271,100 and $246,300
    
    
    221,996
    
    
    
    246,809Other intangible assets, less accumulated amortization of
$186,200 and $166,500
    
    
    342,890
    
    
    
    362,528Deferred tax assets
    
    
    437,011
    
    
    
    437,010Other
    
    
    21,260
    
    
    
    24,597$
    31,558,591
    
    
    $
    32,318,349LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESTrade accounts payable
    
    $
    1,448,255
    
    
    $
    1,811,939Accrued salaries, wages, and payroll taxes
    
    
    2,257,352
    
    
    
    3,249,424Accrued acquisition earnout
    
    
    
    
    
    
    1,475,000Other accrued liabilities
    
    
    339,099
    
    
    
    120,044Accrued self funded insurance
    
    
    332,114
    
    
    
    201,053Line of credit
    
    
    619,649
    
    
    
    Deferred revenue
    
    
    1,253,967
    
    
    
    1,663,121Total current liabilities
    
    
    6,250,436
    
    
    
    8,520,581LONG-TERM OBLIGATIONS
    
    
    
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock, $0.01 par value; 50,000,000 shares authorized;
19,664,073 and 19,220,217 shares issued and outstanding
    
    
    196,370
    
    
    
    192,202Additional paid-in capital
    
    
    26,976,912
    
    
    
    25,989,447Accumulated comprehensive income
    
    
    (28,099
    )
    
    
    (35,186
    )Accumulated deficit
    
    
    (1,837,028
    )
    
    
    (2,348,695
    )25,308,155
    
    
    
    23,797,768$
    31,558,591
    
    
    $
    32,318,349
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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months EndedMarch 31,2007
    
    
    2006REVENUE
    
    $
    16,590,033
    
    
    $
    14,567,261COSTS OF REVENUE
    
    
    11,780,139
    
    
    
    10,962,781GROSS PROFIT
    
    
    4,809,894
    
    
    
    3,604,480OPERATING EXPENSESSalaries
    
    
    2,398,802
    
    
    
    1,995,899Selling, general and administrative
    
    
    1,482,525
    
    
    
    1,119,176Amortization of intangible assets
    
    
    42,770
    
    
    
    108,462Total operating expenses
    
    
    3,924,097
    
    
    
    3,223,537OPERATING INCOME
    
    
    885,797
    
    
    
    380,943OTHER INCOME (EXPENSE)Interest expense
    
    
    (2,099
    )
    
    
    (1,680
    )Change in fair value of warrants
    
    
    
    
    
    
    434,521Other, net
    
    
    (1,514
    )
    
    
    (4,010
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    882,184
    
    
    
    809,774INCOME TAX EXPENSE
    
    
    370,517
    
    
    
    150,101NET EARNINGS
    
    
    511,667
    
    
    
    659,673Dividend to preferred shareholders
    
    
    
    
    
    
    96,410NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS
    
    $
    511,667
    
    
    $
    563,263NET EARNINGS PER COMMON SHARE:Basic
    
    $
    0.03
    
    
    $
    0.04Diluted
    
    
    0.03
    
    
    
    0.01WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasic
    
    
    19,306,797
    
    
    
    15,001,832Diluted
    
    
    20,252,110
    
    
    
    19,666,941
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HEALTH FITNESS CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedMarch 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    511,667
    
    
    $
    563,263Adjustments to reconcile net earnings to net cash used in operating activities:Depreciation
    
    
    176,004
    
    
    
    120,289Amortization
    
    
    44,450
    
    
    
    110,142Warrant valuation
    
    
    
    
    
    
    (434,521
    )Stock-based compensation
    
    
    157,001
    
    
    
    75,459Deferred taxes
    
    
    
    
    
    
    (208,401
    )Loss on disposal of assets
    
    
    
    
    
    
    159Change in assets and liabilities:Trade and other accounts receivable
    
    
    345,903
    
    
    
    (298,965
    )Prepaid expenses and other
    
    
    (408,809
    )
    
    
    (47,939
    )Other assets
    
    
    3,336
    
    
    
    5,836Trade accounts payable
    
    
    (356,596
    )
    
    
    50,072Accrued liabilities and other
    
    
    (641,956
    )
    
    
    (639,482
    )Deferred revenue
    
    
    (409,154
    )
    
    
    (135,682
    )Net cash used in operating activities
    
    
    (578,154
    )
    
    
    (839,770
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (320,780
    )
    
    
    (144,486
    )Business acquisition, net of cash acquired
    
    
    (13,408
    )
    
    
    (64,072
    )Accrued acquisition earnout
    
    
    (737,500
    )
    
    
    Net cash used in investing activities
    
    
    (1,071,688
    )
    
    
    (208,558
    )CASH FLOWS FROM FINANCING ACTIVITIES:Costs from issuance of preferred stock
    
    
    (17,415
    )
    
    
    (95,403
    )Proceeds from the issuance of common stock
    
    
    21,249
    
    
    
    85,698Proceeds from the exercise of stock options
    
    
    93,298
    
    
    
    3,125Proceeds from the line of credit
    
    
    619,649
    
    
    
    Net cash provided by (used in) financing activities
    
    
    716,781
    
    
    
    (6,580
    )NET DECREASE IN CASH
    
    
    (933,061
    )
    
    
    (1,054,908
    )CASH AT BEGINNING OF PERIOD
    
    
    987,465
    
    
    
    1,471,505CASH AT END OF PERIOD
    
    $
    54,404
    
    
    $
    416,597Non-cash investing and financing activities affecting cash flows:Common stock issued for acquisition earnout
    
    $
    737,500
    
    
    
    
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Consolidation
 Reclassifications
 Cash
 6




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Trade and Other Accounts Receivable
 Property and Equipment
 Software Development Costs
   Goodwill
 Intangible Assets
 7




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Revenue Recognition 
    Net Earnings Per Common Share
 Stock-Based Compensation
 Fair Values of Financial Instruments 
 Valuation of Derivative Instruments
 Income Taxes
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Use of Estimates
    Segment Data:
 Three Months EndedMarch 31,2007
    
    
    2006REVENUE:Fitness
Management RevenueStaffing Services
    
    $
    9,992,694
    
    
    $
    9,699,524Program and Consulting Services
    
    
    696,233
    
    
    
    566,07310,688,917
    
    
    
    10,265,597Health
Management RevenueStaffing Services
    
    
    3,667,338
    
    
    
    3,070,012Program and Consulting Services
    
    
    2,233,778
    
    
    
    1,231,6525,901,116
    
    
    
    4,301,664Total
RevenueStaffing Services
    
    
    13,660,022
    
    
    
    12,769,536Program and Consulting Services
    
    
    2,930,011
    
    
    
    1,797,725$
    16,590,033
    
    
    $
    14,567,261GROSS PROFIT:Fitness
Management RevenueStaffing Services
    
    $
    2,109,181
    
    
    $
    1,994,580Program and Consulting Services
    
    
    364,851
    
    
    
    300,5272,474,032
    
    
    
    2,295,107Health
Management RevenueStaffing Services
    
    
    907,236
    
    
    
    656,076Program and Consulting Services
    
    
    1,428,626
    
    
    
    653,2972,335,862
    
    
    
    1,309,373Total
Gross ProfitStaffing Services
    
    
    3,016,417
    
    
    
    2,650,656Program and Consulting Services
    
    
    1,793,477
    
    
    
    953,824$
    4,809,894
    
    
    $
    3,604,480
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  .
 
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.
 Stock Options
    11




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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
    
    
    
    155,400
    
    
    
    1.12
    
    
    $
    0.39
    
    
    
    155,400
    
    
    $
    0.390.47 - 0.69
    
    
    
    494,650
    
    
    
    0.69
    
    
    
    0.54
    
    
    
    494,650
    
    
    
    0.540.95 - 1.25
    
    
    
    239,000
    
    
    
    2.76
    
    
    
    1.15
    
    
    
    179,250
    
    
    
    1.161.26 - 2.27
    
    
    
    458,600
    
    
    
    3.91
    
    
    
    1.85
    
    
    
    380,200
    
    
    
    1.842.28 - 3.00
    
    
    
    1,283,000
    
    
    
    3.58
    
    
    
    2.77
    
    
    
    462,375
    
    
    
    2.782,630,650
    
    
    
    2.87
    
    
    $
    1.90
    
    
    
    1,671,875
    
    
    $
    1.51
  Three Months EndedMarch 31,2007
    
    2006Risk-free interest rate
    
    
    4.69
    %
    
    
    4.32
    %Expected volatility
    
    
    52.6
    %
    
    
    76.0
    %Expected life (in years)
    
    
    4.25
    
    
    
    4.24Dividend yield
    
    
    
    
    
    
    
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Aggregate
    
    
    AverageExercise
    
    
    Intrinsic
    
    
    RemainingOptions
    
    
    Price
    
    
    Value
    
    
    TermOutstanding at December 31, 2006
    
    
    2,250,900
    
    
    $
    1.64Granted
    
    
    505,500
    
    
    
    2.81Exercised
    
    
    (122,000
    )
    
    
    0.76Canceled/Forfeited
    
    
    (3,750
    )
    
    
    2.72Outstanding at March 31, 2007
    
    
    2,630,650
    
    
    $
    1.90
    
    
    $
    2,406,147
    
    
    
    3.48Exercisable at March 31, 2007
    
    
    1,671,875
    
    
    $
    1.51
    
    
    $
    2,173,476
    
    
    
    2.53
 Restricted Stock
 Accrued Acquisition Earnout
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.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Critical Accounting Policies.
 General.
 Results of Operations
  Three Months EndedMarch 31,2007
    
    2006REVENUE
    
    
    100.0
    %
    
    
    100.0
    %COSTS OF REVENUE
    
    
    71.0
    
    
    
    75.3GROSS PROFIT
    
    
    29.0
    
    
    
    24.7OPERATING EXPENSESSalaries
    
    
    14.5
    
    
    
    13.7Other selling, general and administrative
    
    
    8.9
    
    
    
    7.7Amortization of acquired intangible assets
    
    
    0.3
    
    
    
    0.7Total operating expenses
    
    
    23.7
    
    
    
    22.1OPERATING INCOME
    
    
    5.3
    
    
    
    2.6OTHER INCOME (EXPENSE)
    
    
    0.0
    
    
    
    2.9EARNINGS BEFORE INCOME TAXES
    
    
    5.3
    
    
    
    5.5INCOME TAX EXPENSE
    
    
    2.2
    
    
    
    1.0NET EARNINGS
    
    
    3.1
    
    
    
    4.5Dividend to preferred shareholders
    
    
    0.0
    
    
    
    0.7NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS
    
    
    3.1
    %
    
    
    3.8
    %
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Results of Operations for the quarter ended March 31, 2007 compared to the quarter ended March
31, 2006.
 Revenue.
 .
   Gross Profit.
    Operating Expenses and Operating Income.
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.
 Other Income and Expense.
 Valuation of Derivative Instruments,
 Income Taxes.
 Net Earnings Applicable to Common Shareholders.
 Dividends to Preferred Shareholders.
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LIQUIDITY AND CAPITAL RESOURCES
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INFLATION
  OFF-BALANCE SHEET ARRANGEMENTS
  PRIVATE SECURITIES LITIGATION REFORM ACT
   18




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RECENTLY PASSED LEGISLATION
 Sarbanes-Oxley.
  HIPAA.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
  19




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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
 Salary Increases
  2007 Executive Bonus Plan
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Cash Incentive Plan
  
 ITEM 6. EXHIBITS
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SIGNATURES
  Dated: May 15, 2007
    
    
    
    HEALTH FITNESS CORPORATIONBy
    
    /s/ Gregg O. Lehman

          Gregg O. LehmanPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ Wesley W. Winnekins

          Wesley W. WinnekinsChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
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Exhibit No.
    
    Description*10.1
    
    2007 Executive Bonus Plan  incorporated by reference to
Exhibit 10.41 to our Form 10-K for the fiscal year ended
December 31, 2006*10.2
    
    Compensation Arrangements for Executive Officers for Fiscal
Year 2007  incorporated by reference to Exhibit 10.42 to our
Form 10-K for the fiscal year ended December 31, 2006*10.3
    
    Cash Incentive Plan  incorporated by reference to Exhibit
10.43 to our Form 10-K for the fiscal year ended December 31,
2006**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 23