MINNEAPOLIS, MN -— Despite first quarter total revenue increasing 8.2 percent for Health Fitness Corp., the company’s shareholders saw a net earnings decrease of 10.3 percent, according to first quarter 2006 financials released by the company. The company said that additional expenses incurred in later 2005 and early 2006 resulted in the decline.

Total revenue increased 8.2 percent to $14.6 million from $13.5 million in first quarter 2005. Operating income decreased 65.3 percent to $0.4 million in the first quarter 2006 from $1.1 million during the same period last year. Net earnings applicable to common shareholders decreased 10.3 percent in the first quarter 2006 to $0.56 million. It stood at $0.63 million during the same period last year. Diluted earnings per share decreased to $0.01 per share from $0.04 per share.

Still, Jerry Noyce, president and CEO of HFC said the company performed "close to plan” for the first quarter. The first quarter results included the planned investment made in late 2005 and first quarter 2006 to enhance and strengthen the operational capabilities of the company’s corporate health management business. HFC hired several new associates to oversee the development and execution of its health management business plan and welcomed 18 new employees from its December 2005 acquisition of HealthCalc.Net.

“These additional expenses resulted in a decline of our operating profit,” said Noyce. “At this point, we believe these investments have begun to realize results.”

The company recently launched a health management program to two new Fortune 500 customers and received more invitations to propose its health management services to large companies, business that would not have occurred without this investment, said Noyce.

“These are positive indications that our plan to expand beyond fitness management into a broader platform involving integrated health management services is moving in the right direction,” he said.

Revenue was $14.5 million for the first quarter, up $1.1 million or 8.2 percent, compared to $13.4 million for the first quarter last year. Gross profit was $3.6 million for the quarter, an increase of $162,678, or 4.7 percent, compared to $3.4 million for the first quarter last year. Gross profit as a percent of revenue was 24.7 percent for the quarter compared with 25.6 percent for the same period last year. A non-cash benefit of $434,521 was recorded during the first quarter due to a change in the fair value of warrants HFC issued in 2005 to new investors. Net earnings applicable to common shareholders were $563,263, a decrease of $64,671, or 10.3 percent, compared to $627,934 for the same quarter last year.

"Revenue from our Health Management Program Services increased $779,302, or 206.0 percent, to $1.15 million, from $378,262 for the first quarter of 2005,” said Noyce. “This increase is due to revenue of $590,864 from HealthCalc, a company we acquired in December 2005. The remaining revenue increase of $188,438 is due to the start-up of two new health management contracts in the energy industry.” Gross profit as a percent of revenue fell to 24.7 percent for the quarter, from 25.6 percent for the first quarter of 2005. This decrease is due primarily to start-up costs for a large fitness management contract in the automotive industry, and two new health management contracts in the energy industry. “Our experience indicates that as large contracts enter into full production, gross margins typically improve,” said Noyce.

Operating expenses increased $879,165, or 37.5 percent, to $3.2 million, from $2.3 million for the first quarter of 2005. Of this increase, approximately $509,000 is due to salaries, other operating expenses and asset depreciation related to HFC’s acquisition of HealthCalc. In addition, the company incurred approximately $75,000 of stock option compensation expense in the first quarter of 2006 in connection with its adoption of FAS 123R on January 1, 2006. The remaining cost increase of $295,000 is primarily due to additional staff hired during 2005 to develop and execute its health management business plan.

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