2003 Annual Report
As we look to the future and reflect upon our success,
we continue to focus Medifast’s efforts on providing
safe and effective nutritional solutions for weight and
disease management.
Medifast products are manufactured in a food and pharmaceutical grade, FDA inspected
facility in Owings Mills, MD.
Common Stock Information
Quarter Low
Quarter High
The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or
commissions and may not represent actual
transactions.
There were 7,315 beneficial holders of the
Company’s Common Stock, as of
November 5, 2003.
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No dividends on Common Stock were declared
by the Company during 2003 or 2002.
Quarter
Ending
3/31/03
Quarter
Ending
6/30/03
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9/30/03
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The Company's Common Stock has been quoted under the symbol MED since December 20, 2002. The old symbol,
MDFT, had been traded since February 5, 2001. The Common Stock is traded on the American Stock Exchange.
Over 20 years of growth. A brief history of Medifast.
Led by former Marine Colonel Bradley T. MacDonald, 56,
Maryland-based Medifast, Inc. is focused on becoming the
leader in innovative, great tasting, soy-based medical meal
replacement products. MacDonald has successfully
repositioned the Company to focus on the growing
epidemic of obesity and the development, manufacturing
and distribution of
disease
management and diet product lines under the Medifast®
brand. The efforts are primarily directed toward
penetrating the growing $6.4 billion meal replacement
market.
consumable health,
Medifast's operations are primarily conducted through two
wholly owned subsidiaries, Jason Pharmaceuticals, Inc. and
Take Shape for Life, Inc.
focus
William Vitale, MD, founded Jason Pharmaceuticals, Inc.
in 1980. This subsidiary's primary
is the
development, manufacturing and distribution of the
Medifast program and Medifast products. Medifast is a
loss program, which
medically supervised weight
specializes in multidisciplinary patient education programs
and uses
replacement
the highest quality meal
supplements. Medifast offers a wide spectrum of weight
management options depending on the amount of weight
one has to lose. Unlike other diets, Medifast provides life
changing behavior modification programs and products
that provide support through weight loss and weight
maintenance. The Medifast program teaches how to lose
weight and keep it off for life.
Jason Pharmaceuticals is proud of the Medifast brand,
which has been recommended by over 15,000 physicians
nationwide and used by more than 1,000,000 overweight
customers. Medifast offers more than 50 years combined
knowledge and experience with world-class customer
service, technical and medical support. Medifast products
are manufactured to exacting specifications in our state-of-
the-art production facility in Owings Mills, Maryland.
Product labeling, quality, control, manufacturing processes
and equipment are subject to regulations and inspections
mandated by the Food & Drug Administration (FDA),
Maryland State Department of Health and Hygiene and
Baltimore County Department of Health. Our plant
strictly adheres to all Good Manufacturing Practices and
has proudly maintained its status as an "OU" (Orthodox
Union) Kosher-approved facility.
The Take Shape for Life, Inc subsidiary is a health network
that since August 2002 has enrolled over 150 physicians
and medical professionals to supervise a network of
qualified Health Advisors. For more information about
Take Shape for Life, please visit www.tsfl.com.
1980
Medifast is founded by Dr. William Vitale.
1989
Medifast begins using soy as the main source of protein in its
meal replacements, because of clinical data favoring
“vegetable” over “animal” proteins.
1996
Medifast® and Take Shape® meal replacement programs are
selected to be used in a study on obesity conducted by the
National Institutes of Health.
1999
The Food & Drug Administration authorizes the use of health
claims about the role of soy protein in reducing the risk of
coronary heart disease.
2001
Medifast introduces Hearty Apple Cinnamon Oatmeal,
Chicken Flavored Noodle Soup and Peach Iced Tea.
2002
Medifast launches new disease and condition management
products focused on arthritis, coronary health and
menopause.
Medifast is listed on the American Stock Exchange (MED).
2003
Medifast officially launches Take Shape for Life, Inc., a
network of health professionals who provide physician
supervised weight and disease management and fitness
programs across the country.
Medifast acquires Consumers Choice Systems, which
markets the brand Woman’s Wellbeing®.
To Our Shareholders
2003 was a phenomenal year for Medifast, Inc. Our passion has always been to improve the lives of our
customers by providing sound nutritional solutions to combat obesity, diabetes, arthritis, and coronary health
and the associated diseases. That is exactly what we are doing as we continue to focus on the fundamentals of
weight and disease management through nutritional intervention.
An Industry Leader
Despite increased public concern, the number of overweight and obese Americans has continued to
climb to epidemic proportions. In 1990, about 60 percent of American adults were overweight of which
about 20 percent were obese. By 2000, that number had climbed to 64 percent being overweight,
including about 30 percent who were obese. The Company’s forward momentum in product
development has positioned us as a leader in the medical meal replacement and clinical weight
maintenance industry. What separates Medifast from other companies that offer weight loss products
and programs is the Company’s clinically proven approach to weight loss and long-term weight
maintenance.
Focused on Infrastructure and Growth
In mid-
Our business has three main components – production, manufacturing and distribution.
September, the Company completed the purchase of a 119,000 square foot distribution facility in
Ridgley, Maryland, which management believes is a fundamental step in further developing the
resources the Company needs to support the expected growth in years to come. The infrastructure is in
place for the Company to generate up to $200 million in sales with the addition of the new distribution
facility.
Additionally, the Company bolstered its Executive Management staff to include in-house Legal
Counsel and Corporate Vice Presidents. We hired seasoned talent from outside the Company, as we
centralized our core functions in sales and marketing, operations and information technology.
Tapping the Diabetic Industry and Building Intellectual Property
In early 2002, the Johns Hopkins University Bloomberg School of Public Health Clinic began a two-
year study to evaluate the efficacy of our dosage-controlled, engineered food, Medifast Plus for
Diabetics® compared to basic nutrition recommendations by the American Diabetes Association
(ADA). Preliminary results show that participants using the patented Medifast Plus for Diabetics
product lost twice as much weight as those following the ADA’s guidelines. In addition to weight loss,
the initial study results show that Medifast participants sustained an average 9% decrease in blood
fasting glucose and an average 19% decrease in insulin levels.
We believe the results of this trial will show that the majority of patients who were dependent on various
drugs to regulate diabetes will be able to reduce dosages or be completely off their medications after
going on the Medifast program. Given that approximately $9 billion is spent on medication for type
II diabetes, management believes that once the final results of the clinical study are published showing
the enormous cost savings and health benefits, the Diabetic line will have the potential to make serious
headway in the market. Additionally, the Medifast Plus for Diabetics line of meal replacement shakes
are officially patented by the United States Patent and Trademark Office, providing an even more
competitive advantage for the Company.
3
2003 Annual Report
Tackling Adolescent Obesity
Throughout 2003, the Company expanded the product line of its cutting-edge adolescent weight
management program, Fit! by Medifast® with the intention of penetrating the overweight adolescent
market. The Company believes this market represents a ripe and potentially lucrative market
opportunity. In addition, the Company has begun a ground-breaking clinical study with the Johns
Hopkins Bloomberg School of Public Health, to prove the effectiveness of Fit! by Medifast meal
replacement products in controlling calories and weight in adolescents.
Partnerships
The Company continues to exploit significant opportunities to grow the business.
In 2003, the
Company partnered with NovaCare Rehabilitation to combat obesity through NovaCare’s chain of over
200 centers. The Company has also formed an alliance with Hi-Tech Pharmacal to develop and produce
retail diabetic meal replacement products. Additionally, the Company expanded the distribution of its
Woman’s Wellbeing line through a distribution agreement with Amazon.com.
In March 2004, the Company signed a joint venture agreement with XL Health, Inc., one of the leading
diabetes management companies in the United States. The Company’s clinically tested Medifast Plus
for Diabetics line will be the exclusive nutritional product offered for XL Health’s CMS Medicare
Demonstration Project to provide Diabetes, Congestive Heart Failure (CHF) and Coronary Artery
Disease (CAD) disease management and pharmacy benefits to over 10,000 Medicare Fee-For-Service
patients in Texas. The Demonstration Project is the largest of its kind ever conducted by CMS.
Medifast has also obtained the exclusive rights to secure and implement a similar program to manage
dependent diabetics in the Department of Defense as part of the partnership with XL Health.
Your management team desires to develop new marketing relationships with third parties that have
existing relationships within the medical community, in an effort to reach the significant population of
Americans who need nutritional disease management solutions and to secure international distribution
in Europe and Asia.
Building our Business
In 2003, the Company acquired Hi-Energy Weight Control Centers, a national company specializing
in weight management programs, with licensed weight loss centers in over 50 locations. Hi-Energy
Centers offer a competitive marketing edge through a regional advertising program, exclusive territories
and marketing support. The Company intends to increase the number of licensed and corporately
owned centers to over 125 nationwide by year-end 2004, while introducing new disease management
product lines in each Center. The Company also plans to promote its existing MEDSLIM clinics so
physicians can provide enhanced medical support and oversight to their patients to attain maximum
results.
In mid June, the Company completed the asset acquisition of Consumer Choice Systems (CCS). CCS
is a retail distribution company focused on high quality, innovative products for women. CCS products,
under the Woman’s Wellbeing® brand, include supplements addressing menopause relief, regularity,
coronary health and joint health, as well as products addressing the detection, prevention and relief of
urinary tract and bladder infections. CCS products are currently distributed in over 18,000 retail outlets
nationwide. The CCS business is supported by a website and toll-free customer service line where
customers can inquire about product information and retail availability. The Woman’s Wellbeing® line
is the Company’s only product line that is offered through the retail sales channel.
2003 Financial Highlights
Medifast revenues grew substantially in 2003. The Company more than doubled revenues to $25.4
million, an increase of 106% versus $12.3 million in 2002. This was primarily driven by our aggressive
advertising campaign and our Take Shape for Life Health Network adding many new qualified Health
Advisors. Stockholders equity improved to $17.1 million versus $5.6 million in 2002. In addition, the
value of Medifast stock grew 165% during the year.
On Track for Success
As we look to the future and reflect upon our success, we continue to focus Medifast’s efforts on
providing safe and effective nutritional solutions for weight and disease management. We are
determined to become the leader in the weight and disease management industry. I am proud of our
accomplishments during 2003 and thank our customers, employees, vendors and you, our shareholders,
for your continuing support.
Warmest Regards,
Bradley T. MacDonald
Chief Executive Officer and
Chairman of the Board
5
2003 Annual Report
Sunrise Distributing
A 119,000 square foot distribution facility in Ridgley,
Maryland was purchased in 2003.
Distribution and Manufacturing
Over the last year, the Company has been focused on developing the infrastructure to support its
anticipated growth. Specifically, the Company invested in improvements to its manufacturing facility
and distribution capability by adding new lines of equipment and purchasing a new distribution
facility. The Company is confident these investments will improve operations and processes while
making the Company more efficient and dynamic.
Jason Pharmaceuticals, Inc., the Company’s wholly owned manufacturing subsidiary, operates in
a 49,000 square foot state-of-the-art food and pharmaceutical-grade facility in Owings Mills,
Maryland. Since the purchase of a nutritional bar production line in 2003, the Company is able
to produce over 95% of its clinically proven meal replacement supplements in-house.
The Company’s new 119,000 square foot distribution facility, Sunrise Distributing in Ridgley,
Maryland is about 80 miles from the Owings Mills manufacturing facility. In addition to
distributing Medifast clinically proven meal replacement foods, the facility is also used for the
storage and distribution of the Company’s Woman’s Wellbeing line of women’s health products
to physicians, patients, health advisors and retail drug stores. Currently the Company fills over
1,000 packages per day but has the capacity to expand its operations as needed. Since the
transition, the Company’s operations have significantly improved while its distribution errors
have greatly declined. The Company attributes these improvements to the acquisition of the
assets and management expertise of a 15-year-old distributor who coordinates the operations of
the facility. Additionally, the Company has added multiple quality assurance processes to ensure
customer satisfaction.
The formulation, processing, packaging, labeling and advertising of the Company's products are
subject to regulation by several federal agencies, including the Food and Drug Administration
(FDA). The Company must comply with the standards, labeling and packaging requirements
imposed by the FDA for the marketing and sale of medical foods, vitamins and nutritional
products. The FDA also requires “medical food” labeling to list the name and quantity of each
ingredient and identify the product as a “weight management, modified fasting or fasting
supplement” in the labeling.
The operations of the Company may also be subject to the regulations and enforcement powers
of the Federal Trade Commission (FTC), and the Consumer Product Safety Commission. The
Company's activities are also regulated by various agencies of the states and localities in which
the Company's products are sold. Medifast’s products are manufactured and packaged in
accordance with customer specifications and sold under private labels both domestically and in
foreign countries through their own distribution channels.
The manufacturing facility strictly adheres to all Good Manufacturing Practices and has
maintained its status as an "OU" (Orthodox Union) Kosher-approved facility. The
manufacturing facility has the capability for massive increases to its production output with
minimal capital expenditures. The company is presently operating on only one single shift.
Adding one additional shift, along with minimal machinery expenses, would enable the
Company to produce enough products to generate over $200 million in sales.
7
2003 Annual Report
Medifast nutritional products are formulated with
only the highest quality ingredients.
Research and Product Development
Medically supervised, low calorie diets are making a comeback, as consumers search for a safe and effective
solution that provides balanced nutrition, quick weight loss and valuable behavior modification education.
In addition, consumers are becoming more aware of chronic diseases and conditions such as diabetes,
coronary health, menopause and arthritis.
Medifast is a medically supervised weight management program, which specializes in
multidisciplinary patient education programs using the highest quality meal replacement
supplements. Medifast’s core programs and products have grown to include disease
management and sports performance products. Medifast is particularly focused on disease
management with a complete line of clinically tested supplements for Diabetics. In addition
the company has developed specialty products to combat a variety of diseases and conditions
through nutritional therapy. These products include, Medifast Plus® for Women’s Health,
Medifast Plus® for Joint Health and Medifast Plus® for Coronary Health. Medifast is focusing
on clinical sports nutrition with two gender specific bio-engineered foods specially designed
for athletes, Take Shape™ Women’s Sports Drink and Take Shape™ Bio-engineered Food for
men.
Most Medifast® products qualify to make the FDA’s heart healthy claim, “May Reduce the Risk
of Heart Disease.” In order to make this claim, a product must contain at least 6.25 grams of soy
protein per serving and be low in fat, saturated fat and cholesterol. Unlike popular fad diets and
herbal supplements, Medifast products are a safe, nutritionally balanced choice, offering gender
specific formulas containing high protein and low carbohydrates, a soy protein source rather than
animal protein source, and vitamin and mineral fortification. It is very difficult to meet the
minimum recommended nutritional requirements on a low-calorie diet, but a dieter can easily
meet these requirements using the nutrient dense Medifast brand of meal replacement food
supplements.
Medifast nutritional products are formulated with high-quality, low-calorie, low-fat ingredients.
Many Medifast products are soy based and contain 24 essential vitamins and minerals, as well
as other nutrients essential for good health. The Company uses DuPont Protein Technologies’
Solae® brand soy protein, which is a high-quality complete protein derived from soybeans.
9
2003 Annual Report
Management’s mission is to position the company as
the leader in the field of medically supervised health
related nutrition programs.
The Fit! drink box and bars were
created to help kids eat better
and get the nutrition that their
growing bodies need.
Fit! ®
Approximately 30 percent of adolescents (ages 6 to 19) are overweight and 15.5 percent are obese. Medifast recognizes
the danger of this trend and has developed an entire line of low calorie, power-packed meal replacements specially
formulated to help children stay healthy, maintain good nutrition and even manage weight.
Fit! is a revolutionary line of great tasting, soy-based food supplements formulated specially to meet the nutritional needs
of adolescents. Each product is a first-rate substitute for sugar-rich candies and other fattening, unhealthy foods that
appeal to adolescents. Fit! foods not only give adolescents adequate calories but also provide them with up to 65 percent
of the RDA (Recommended Daily Allowance) requirements for 24 essential vitamins and minerals per serving, are high
in potassium and calcium, naturally sweetened, low in lactose and cholesterol free. These products receive the FDA’s
Healthy Heart claim “may reduce the risk of heart disease,” because they contain more than 6.25 grams of soy protein
per serving. Fit! has up to 35 percent RDA of calcium and 50 percent RDA of magnesium; two minerals that are
important for proper bone growth and nervous system development. Fit! was originally launched with a chocolate ready-
to-drink shake and chocolate and peanut butter bars, but the line has expanded to include Chocolate, Vanilla and
Creamsicle Shakes, Chocolate Mint and Oatmeal Raisin Bars, Hot Cocoa with marshmallows, Chicken Noodle Soup,
Vanilla Berry Oatmeal and Chocolate Pudding.
Health Accessories
Medifast added a supply of easy-to-use health
line.
accessories to our expanding product
Marketed under the Take Shape™ brand, the line
includes a digital oral thermometer, a digital ear
thermometer, a blood pressure monitor, a body
composition analyzer and a digital scale. Each
accessory provides our customers with the option to
monitor their progress from the comfort and
privacy of their home.
2003 Products
Chocolate Pudding
The end of 2003 brought Medifast’s newest tasty meal replacement alternative,
Chocolate Pudding. The 110-calorie soy based meal replacement is certified Kosher
Dairy by the Orthodox Union and is low in lactose. One serving of Pudding contains
up to 60 percent of 24 essential vitamins and minerals as well as 14 grams of protein.
Coronary Health
The latest addition to Medifast’s line of disease management products, Medifast Plus
for Coronary Health, is a safe and effective meal replacement supplement specially
formulated to protect against heart disease. Formulated with the highest quality
nutrients, vitamins and minerals, including nine grams of soy protein per serving, each
shake provides a natural defense against heart conditions brought about by improper diets. Medifast Plus for Coronary
Health contains Coenzyme Q10, a nutrient which has been shown in studies to reduce plaque deposits in the arteries
and reduce the incidences of plaque rupture, both of which are precursors to heart attacks. Each shake contains amino
acids, which prevent fatty build-up in the heart and liver. This product also features Pycnogenol®, which has been shown
to act as an antioxidant and as the body’s first line of defense against heart disease.
Minestrone Soup
This great-tasting 110-calorie soy based meal replacement is another high quality addition to our clinically proven
replacement food choices. Loaded with hearty vegetables, each bowl is cholesterol free and has only 1 gram of fat. One
serving of Minestrone soup contains up to 55 percent of the RDA requirements for 24 essential vitamins and minerals,
which helps ensure a healthy, nutritious diet.
Raspberry Tea
Further developing the flavors of our products, Medifast released Raspberry Iced Tea, an exciting new flavor similar to
our popular Peach Tea. This fat-free, cholesterol-free, soy based, high protein drink is a refreshing substitute for other
supplements. Each drink provides up to 100 percent of the RDA requirements for 24 essential vitamins and minerals
and is formulated with 14 grams of protein.
11
Consumers Choice Systems
Medifast took ownership of the Woman’s Wellbeing® brand with the asset acquisition of CCS in July 2003. Medifast
expanded its vast product line. The UTI line offers complete prevention, detection and relief products for urinary tract
infections. UTI Cranberry Plus Blueberry provides concentrate of cranberry and blueberry, which have been shown in
studies to help prevent the occurrence of UTIs. UTI Test Kits provide both protein and nitrite tests to allow individuals
to test for a urinary tract infection in the comfort of their own homes. UTI Relief® contains 97.2 mg of phenazopyridine
hydrochloride, the #1 doctor recommended ingredient for relieving the symptoms of UTIs. Since the acquisition, CCS
has developed test sticks to replace the test kits, providing a more convenient, easy-to-use method for testing for UTIs.
This unique and revolutionary design separates the product from anything else on the market and is as simple to use as
a pregnancy test.
The Woman’s Wellbeing line boasts Menopause Relief® Pills, with soy protein isoflavones and red clover to help reduce
the symptoms of menopause such as hot flashes, night sweats and irritability. The line also contains Woman’s Wellbeing
Personal Cream Lubricant, a non-sticky, long-lasting moisturizing lubricant to restore the moisture a woman may lose
as a result of menopause, other conditions, and certain medication. In October, the Company launched four disease
management shakes under the Woman’s Wellbeing brand: Coronary Health, Comfort & Regularity, Joint Health and
Menopause Relief.
Our goal is to provide education
and solutions for women’s health
and wellness issues.
Clinically Proven
Medifast® products have been proven to be effective for weight and disease management in clinical studies conducted
by the U.S. Government and Johns Hopkins University.
In early 2002, The Johns Hopkins Bloomberg School of Public Health Nutrition and Health Research Clinic began a
two-year study to evaluate the efficacy of the dosage controlled, engineered food, Medifast Plus® for Diabetics compared
to basic nutrition recommendations by the American Diabetes Association (ADA). Preliminary results show that
participants using Medifast Plus for Diabetics lost twice as much weight as those following the ADA’s guidelines.
Additionally, two-thirds of those on the Medifast program lost at least 5 percent of their weight, which is a standard
measure of the FDA’s threshold to indicate clinically significant weight loss, versus one-quarter of those on the ADA
diet. In addition to weight loss, the initial study results are that Medifast participants sustained an average 9 percent
decrease in blood fasting glucose and an average 19 percent decrease in insulin levels. Final study results are expected in
December 2004.
Preliminary study results show:
• 19% Decrease in Insulin
• 12% Decrease in Fasting Triglycerides
• 10% Decrease in Blood Glucose
• 27% Increase in Quality of Life
• 9% Increase in HDL (good) cholesterol
• 7.5% Decrease in Body Fat
• 8% Decrease in Blood Pressure
Medifast products are
clinically proven,
physician recommended meal
replacements.
The Company announced a ground-breaking Urban Obesity Study with Coppin State College in Baltimore, Maryland.
The 68-week study, headed by the Coppin State School of Nursing, will test the efficacy and healthcare cost savings of
Medifast engineered dosage-controlled meal replacement supplements in the urban community. The Company is also
initiating a clinical study with Johns Hopkins Bloomberg School of Public Health in Baltimore, Maryland to test the
efficacy of Medifast meal replacements versus a standard reference diet on weight loss and weight maintenance in a joint
parent-child plan approach. The 18-month study will consist of 80 overweight or obese boys and girls between the ages
of 8 and 15 and 40 of their parents. The principal investigator and Johns Hopkins study examiner, Dr. Lawrence
Cheskin, is interested in whether a joint parent-child approach using Medifast engineered foods will result in greater
weight loss than children dieting alone.
13
2003 Annual Report
Major enhancements were made to the Company’s
call center and order taking operations.
Markets and Competition
According to a recent market data study, consumers spend about $39 billion per year trying to lose
weight or prevent weight gain. This figure includes spending on diet sodas, diet foods, artificially
sweetened products, appetite suppressants, diet books, videos and cassettes, medically supervised and
commercial programs and fitness clubs. The weight loss meal replacement supplement market grew
by over 9 percent in 2003, and currently accounts for $6.4 billion of the U.S weight loss market
according to a recent market research study.
Obesity is a complex condition, one with serious social and psychological dimensions, that
affects virtually all ages and socioeconomic groups. According to the Centers for Disease
Control (CDC), roughly two-thirds of the U.S. adult population is overweight and of that,
one-third is obese. Approximately 15 percent of children ages 6-19 are obese. Researchers
at RTI International and the CDC have estimated that obesity-attributable medical
expenditures reached $75 billion in 2003. Obesity is reaching epidemic levels and is a
major contributor to the global burden of chronic disease and disability. The overweight
and obese have a large risk for serious diet-related chronic diseases, including type II
diabetes, cardiovascular disease, hypertension and stroke, depression and certain forms of
cancer.
Our Business Model - Medifast’s current business model incorporates four channels
of distribution.
The Medifast Lifestyles® Program - This program is a medically supported network of
health care professionals who support patients on the Medifast program. Patients order
products directly from Medifast’s website (medifastdiet.com) or toll-free number. The
Lifestyles practitioner ensures that each individual receives personalized attention
throughout the weight loss program. Management estimates that more than 15,000
physicians nationwide have used Medifast as a treatment for their overweight patients since
1980, and that an estimated 1 million patients have used its products to lose and maintain
their weight.
These in-house qualified medical practitioners coordinate supervision of the Medifast
program with the patient’s primary care physician. Customers have access to qualified
medical practitioners for program support and advice by calling a toll-free telephone help
line or by e-mail. Medifast provides extensive program support materials on Medifast
products and programs, which are placed free of charge in customer orders, in addition to
being provided on the Company’s website.
Take Shape for Life™ - This program is a comprehensive, medically supervised health
network designed to assist in long-term weight loss and disease and lifestyle management.
The program features Medifast weight and disease management products, along with a
team of physician led personal Health Advisors, to support the individual through their
weight and or disease management program.
Program entrants are encouraged to consult with their primary care physician and Take
15
2003 Annual Report
Shape for Life Health Advisor for screening purposes.
Physician directed Health Advisors are supported,
educated and qualified by The Health Institute, a
dedicated training institute staffed by Medifast
professionals. Health Advisors obtain qualification
based upon a testing of their knowledge of Medifast
and the Medifast product line.
The Company has developed a Tasting program, which
is similar to a home-based party model for introducing
new customers to the Medifast program. Health
Advisors recruit program entrants and provide them
with program guidance, Medifast product samples and
the opportunity to order products. Additionally,
management plans for a very rapid expansion of this
program through lead generation created by the
Company’s marketing and recruiting efforts.
Physicians and Clinics - Many Medifast physicians
choose to implement the Medifast program within
their practice. These physicians carry an inventory of
Medifast products and resell them to patients. They
also provide appropriate testing, medical support and
evaluations for patients on the program. The Company
implemented the MEDSLIM® Program in 2002,
which allows licensing opportunities for its medically
prescribed weight management program.
In 2003, the Company acquired Hi-Energy Weight
Control® Centers, a national company specializing in
weight management programs, with weight loss centers
in over 50 locations. Hi-Energy Centers offer a
competitive marketing edge through a regional
advertising program, exclusive territories and marketing
support. The Company intends to increase the number
of licensed and corporately owned clinics to over 125
nationwide by year-end 2004, while introducing new
disease management product lines in each clinic. The
Company also plans
its existing
MEDSLIM clinics so that physicians can provide
clinically proven products, programs and protocols to
attain maximum results.
to promote
Consumer Choice Systems - Founded in March 1996,
and assets acquired by Medifast in 2003, CCS is a retail
distribution company focusing on high quality,
innovative products for women. CCS products, under
the Woman’s Wellbeing brand, include supplements
addressing menopause relief, regularity, coronary health
and joint health, as well as products addressing the
detection, prevention and relief urinary tract and
bladder infections. CCS products are currently
distributed in over 18,000 retail outlets nationwide.
The CCS business is supported by a website and toll-
free customer service line where customers can inquire
about product information and retail availability.
Competition and Risk - The most significant
competition for meal replacements is individuals’ do-it-
yourself diet plans. A recent Gallup study found that 71
percent of people attempting a diet did so on their own.
In view of the fact that such plans generally fall well
short of their goals, this high level of do-it-yourself
activity presents a significant marketing opportunity for
the meal replacement industry.
In this respect, the
Company’s weight management/diet control is subject
to seasonality. Traditionally the holiday season
(November/December) of each year are considered
poor for diet control products and services. January and
February generally show increases in sales.
in
foothold
The meal replacement business is dominated primarily
by SlimFast® Foods Company (Unilever), which has a
strong
retail markets. Medifast
management estimates that SlimFast® retail sales are
running at a $1 billion annual rate. SlimFast® products
generally have higher caloric and sugar content than
comparative Medifast® products. Dr. Phil’s Shape Up!
was introduced into the retail market in 2003. The line
of apple and pear body type nutritional supplements
consists of shakes and bars, with a nutritional profile
similar to SlimFast®. Unlike other meal replacement
programs, Shape Up! Claims that different body
shapes require different weight loss approaches.
Weight Watchers International and Jenny Craig, Inc.
(privately held) sell low-calorie, prepackaged meals and
focus on the benefits of portion control. Weight
Watchers helps to generate demand for its products and
“winning points” program by hosting pay-as-you-go
meetings.
There are only a few competitors making use of medical
liquid meal replacements or weight management
products. These companies include OptiFast (Novartis
Nutrition Corporation) and Robards, Inc. (Food
Sciences Corporation, Inc.)
Recently, there has been increased publicity and
controversy about the benefits and efficacy of high
protein,
low carbohydrate diets, similar to Atkins,
causing considerable confusion and debate amongst
dieters.
According to the American Dietetic
Association, these diets tend to be low in calcium, fiber
and other essential vitamins and minerals. An industry
report published by Adams, Harkness and Hill, finds
the demand for “low carb” diets is steady increasing, but
believes the long-term trend will focus on carbohydrate
control and balance.
its
Medifast has a significant advantage over
competition because it has been on the cutting edge of
product development with soy protein and weight
management products since 1989. Medifast products
are formulated with high-quality, low-calorie, low-fat
ingredients that provide alternatives to fad diets or
medicinal weight loss remedies. The Medifast® brand
has been clinically tested and proven at Johns Hopkins
University and has been safely and effectively used in its
weight management center for over 15 years.
additional
record keeping,
The FDA could, in certain circumstances, require the
reformulation of certain products to meet new
standards, require the recall or discontinuation of
certain products not capable of reformulation, or
require
expanded
documentation of the properties of certain products,
scientific
expanded or different
substantiation.
If the FDA believes the products are
unapproved drugs or food additives, the FDA may
initiate similar enforcement proceedings. Any or all
the
requirements could adversely affect
such
Company's operations and its financial condition.
labeling,
and
The FDA also requires “medical food” labeling to list
the name and quantity of each ingredient and identify
the product as a “weight management/modified fasting
or fasting supplement” in the labeling.
The Company, like other producers and distributors of
products that are ingested, faces an inherent risk of
exposure to product liability claims in the event that,
among other things, the use of its products results in
17
injury. The Company maintains insurance against
product liability claims with respect to the products it
manufactures. With respect to the retail and direct
marketing distribution of products produced by others,
the Company's principal form of insurance consists of
arrangements with each supplier of those products to
name the Company as beneficiary on each of such
vendor's product liability insurance policies. The
Company does not buy products from suppliers who do
not maintain such coverage. Additionally, the Company
maintains directors and officers liability insurance in
order to attract "high quality and experienced" directors
and officers.
Legal Proceedings - On June 10, 2003, Medifast,
filed a
Inc. and Jason Pharmaceuticals, Inc.
Complaint for Damages, Injunctive Relief and
Determination of Discharge ability against John
A. Sankey in the U.S. Bankruptcy Court for the
District of Alaska. The Defendant, who trades
under the name, "Diet–Fast," and who also owns
Wellness Institute of Alaska, Inc., was at one
time a distributor of Medifast products, but the
Company
distributorship
contract. Nevertheless, the Defendant continued
to utilize Medifast trademarks and service marks
in violation of said contract. On December 3,
2003, the parties entered into an Agreement for
Settlement whereby the Defendant would cease
using all trademarks and service marks of the
Company. The court approved the Settlement
on February 2, 2004.
terminated
the
On August 21, 2002 Food Sciences Corporation, Inc.
trading as Robard Corporation, a competitor of the
Company, filed a lawsuit in the (U.S. District Court for
the District of New Jersey Camden Vicinage,) alleging,
among other things, slanderous and libelous statements
made to Plaintiff 's customers. The Company filed a
Counterclaim and Third Party Claims against other
competitors, alleging, among other things, business
defamation, trademark infringement and conspiracy.
Plaintiff and Defendant both claim damages in excess
of $75,000. The Company intends to vigorously defend
its reputation of ethical integrity (integrity of its
products and formulas) and its trademarks.
2003 Annual Report
In 2003 the Company placed increased emphasis
on integrated advertising, public relations and
investor relations’ strategies.
Sales and Marketing
The Company has made tremendous strides in its sales and marketing operations as it continues to build
upon a core strategic plan and proven advertising strategy that has led the Company’s teleweb operation
to drive the sales of its medically supervised weight and disease management products and programs.
The marketing department is staffed by a team of dynamic and technology proficient
professionals who work closely with medical and technical staff in the development of cutting
edge websites, customer support material, advertising and marketing strategies as well as
management of intellectual properties, patents and clinical distributors. The marketing team has
been instrumental in the integration of the acquisitions of Consumers Choice Systems and Hi-
Energy Weight Control Centers. In addition, the staff works closely with product development
to develop product packaging, labeling, promotional material and advertising. The marketing
department develops marketing and advertising strategies for all subsidiaries and divisions of
Medifast, Inc.
The Company’s Sales division was streamlined in 2003 focusing on Clinical Affairs, Business
Development and Retail Sales for the Company’s new CCS division. The Clinical Affairs and
business development team were instrumental in the development of the clinic-licensing
program, MEDSLIM‚ and the integration of Hi-Energy Weight Control®. The sales team is
responsible for prospecting larger medical accounts, clinics, hospitals, and HMOs as well as
prospecting business opportunities for the Medifast and Woman's Wellbeing brands.
The Company launched a completely redesigned website using the latest technology and user-
friendly features to enhance the Company’s website presence. The new site provides consumers
and business associates with an up-to-date, state-of-the-art resource for information about
Medifast, Inc., and its products. Visitors will find the aesthetics of the new site inviting and
sophisticated. The design will allow for significant growth and updating in the years to come.
The new Medifast website is hosted in a state-of-the-art IBM-certified data center, built like a
fortress including 18-inch thick steel reinforced concrete walls. The data center security system
includes extensive camera surveillance, controlled access and biometric hand-scanning
technologies, a dry-chemical fire-suppressant system, a controlled temperature and humidity
environment and a 24x7x365 Network Operations Center staffed with Cisco, Juniper, IBM and
Linux certified engineers. The data center features multiple electrical power feeds with additional
back-up power generation.
The primary advertising medium used to attract customers to its teleweb operation in 2003 was
print magazines including Parade, USA Weekend, AARP Magazine and Newsweek. The
Company placed increased emphasis in 2003 on integrated advertising, public relations and
investor relations’ strategies. The Company tested a 60-second direct response television
commercial in the fall of 2003, which produced a dramatic response. The Company will continue
to expand its advertising efforts in 2004 with an integrated strategy to include television, print
19
Company to market its products and programs to an
interested audience and as a result is leading to the
expansion of the medical practitioner network.
Medifast launched a For Physicians section on
its website where qualified medical practitioners can
learn about the Medifast program, register as a
Medifast physician or place orders online and receive a
2 percent discount.
There were major enhancements to the Company’s
call center and order taking capabilities to include an
upgrade to the latest release of software to allow
the Company to use the latest phone technology,
improving the employee to customer relationship.
The Company continued its upgrades to its Navision
ERP system to more effectively and efficiently
manage the
inventories and order
shipments.
increasing
and radio campaigns.
In addition,
the Company plans to develop a
30-minute infomercial, which will compare Medifast
to the competition and highlight the Company’s
Diabetic product line. Emphasis will be placed on
public relations in 2004 as the Company expands its
disease management strategies with the results of
the study on Medifast Plus for Diabetics. The
Company plans to expand its direct response television
campaign throughout the year across cable and satellite
stations as well as major networks. These sales and
marketing initiatives tie in with current market trends,
seasonal diet trends, and Internet and product
development strategies.
“Medifast is Awesome Baby!” In November 2002, the
Company announced that Dick Vitale, a former
basketball coach and celebrity sportscaster joined the
Medifast team to assist in promoting a healthy lifestyle
using the Company’s weight and disease management
and sports nutrition products. Mr. Vitale is a
spokesperson for the Company’s Take Shape for Life
business and was the keynote speaker at its 2003
conference in Orlando, Florida. The Company also
uses Mr. Vitale as a coach and motivator in marketing
and advertising for its Fit! Adolescent and Take Shape
Sports Nutrition lines.
In 2003, the Company
conducted a successful radio campaign promoting the
Medifast brand during
the NCAA basketball
tournament, featuring Mr. Vitale as the spokesperson.
The three-year agreement between Mr. Vitale and the
Company is to augment the Company’s already
established
efforts,
which included more than doubling advertising and
coupon support.
and marketing
sales
The Company’s Clinical Affairs and Marketing
departments planned and attended several medical
professional trade shows in 2003. The Company
continues to advertise to its physician and qualified
medical practitioner network in trade publications. This
industry specific advertising, which consists of direct
mail and targeted ads that include a tear off business
reply card, has assisted in the creation of the Medifast
database of medical practitioners, which allows the
Medifast Corporate Officers
Mr. Leo V. Williams
CEO Take Shape for Life, Inc.
Consumer Choice Systems.
Executive
Vice President
Medifast
Mr. Richard J. Law
Corporate
Vice President
Infrastructure
Development
Our Vision
Mr. Michael S. McDevitt
Vice President of Finance
Medifast, Inc. will be the medical meal replacement industry leader providing superior
weight management products to its customers while surpassing the customers’
expectations for quality, value, and brand awareness. We dedicate ourselves to
excellence, integrity, and responsiveness to the marketplace while providing a safe and
rewarding workplace for all associates. We undertake to commit ourselves to personal
and corporate growth benchmarked to industry standards and we will work together
to enhance the value of our company to our stockholders, vendors, and customers while
honoring our obligations as corporate citizens of the communities we live and work.
Mr. Bradley T. MacDonald
Chairman of the Board
CEO of Medifast Inc.
BRADLEY T. MACDONALD became Chairman of the Board and Chief
from Washington Theological Union as well as a B.A. from Villanova University.
Executive Officer of Medifast, Inc. on January 28, 1998. Prior to joining the
Reverend Reilly was ordained a priest in 1974. His assignments included
Company, he was appointed Program Director of the U.S. Olympic Coin
Associate Pastor, pastor at St. Denis, Havertown, Pennsylvania, Professor at
Program of the Atlanta Centennial Olympic Games. Mr. MacDonald was
Villanova University, Personnel Director of the Augustinian Province of St.
previously employed by the Company as its Chief Executive Officer from
Thomas of Villanova, Provincial Counselor, and Founder of SILOAM
September 1996 to August 1997. From 1991 through 1994, Colonel MacDonald
Ministries where he ministers and counsels HIV/AIDS patients and caregivers.
returned to active duty Deputy Director and Chief Financial Officer of the
He is currently on the Board of Directors of Villanova University, is President of
Retail, Food, Hospitality and Recreation Businesses for the United States Marine
the board of "Bird Nest" in Philadelphia, Pennsylvania and is a Board Member
Corps. Prior thereto, Mr. MacDonald served as Chief Operating Officer of the
of Prayer Power. Fr. Reilly was recently elected Provincial of the Augustinian
Bonneau Sunglass Company, President of Pennsylvania Optical Co., and
Order at Villanova, PA. He will oversee more than 300 Augustinian Friars and
Chairman and CEO of MacDonald and Associates, which had major financial
their service to the Church, teaching at universities and high schools, ministering
interests in a retail drug, consumer candy, and pilot sunglass companies. Mr.
to parishes, serving as chaplains in the Armed Forces and hospitals, ministering
MacDonald was national president of the Marine Corps Reserve Officers
to AIDS victims, and serving missions in Japan and South America.
Association and retired from the Marine Corps Reserve as a Colonel in 1997,
after 27 years of service. He has been appointed to the Defense Advisory Board
MICHAEL C. MACDONALD, a Director,
is a corporate officer, the
for Employer Support of the Guard and Reserve (ESGR). Mr. MacDonald
President, North American Solutions Group for the Xerox Corporation. Mr. M.
serves on the Board of Directors of the Wireless Accessories Group
MacDonald's former positions at Xerox Corporation include executive positions
(OTCBB:WIRX). He is also on the Board of Directors of the Marine Corps
in the sales and marketing areas. He is currently on the Board of Trustees of
Reserve Toys for Tots Foundation and is a Foundation Trustee of the Marine
Rutgers University and a Director of the Jimmy V Foundation. Mr. M.
Reserve Association.
MacDonald is the brother of Bradley T. MacDonald, the CEO of the Company.
REVEREND DONALD FRANCIS REILLY, O.S.A., a Director, holds a
SCOTT ZION is a Director and Corporate Secretary for Medifast, Inc. He
Doctorate in Ministry (Counseling) from New York Theological and an M.A.
received a Bachelor of Arts Degree from Denison University, Granville, Ohio.
21
Medifast Board of Directors
Rev. Donald F. Reilly O.S.A.
Mr. Michael MacDonald
Mr. Scott Zion
Mr. Michael J. McDevitt
Ms. Mary Travis
Rev. Joseph Calderone O.S.A.
Additional Information
Corporate Address
11445 Cronhill Drive
Owings Mills, MD 21117
800.638.7867
www.medifastdiet.com
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Ave - 3rd Floor
Brooklyn, NY 11219
Independent Public Accountants
Bagell, Josephs & Company, LLC
Gibbsboro, New Jersey
BDO Seidman Affiliate
General Counsel
Mr. Michael Tanczyn ESQ
Towson, Maryland
Mr. Robert Hallock ESQ
Owings Mills, MD
Common Stock Listing
AMX:MED
Annual Meeting
Date: 9/03/04
Time: 10 am.
Place: 11445 Cronhill Drive
Owings Mills, MD 21117
Investor Relations
For additional copies or investment
information, please contact our Investor
Relations department:
Investor Relations
11445 Cronhill Drive
Owings Mills, MD 21117
(800).638.7867
investment@medifastdiet.com
Mr. Zion is currently a principal in Resources Development, Inc. a health care
partnerships with industry as well as coupling technical capabilities with
consulting company in Napa, California.
Prior to forming Resources
operational requirements.
Development, he was Senior Vice President of Sales and Marketing for Santen,
Inc. an ophthalmic pharmaceutical company. Before Santen, he was Senior Vice
MARY T. TRAVIS, a Director, is currently employed with Sunset Mortgage
President and General Manager for Akorn, Inc., an ophthalmic manufacturing
Company, L.P. in Pennsylvania as the Senior Vice President of Wholesale
and distribution company. Pilkington Barnes Hind, a worldwide contact lens
Operations and was formerly the Vice President of Operations for the Financial
company, as Head of North American Sales and Marketing, also employed him.
Mortgage Corporation. Mrs. Travis is an expert in mortgage banking with over
Prior to that, he spent 20 years with the Mead Johnson Nutritional Division of
31 years of diversified experience. She is an approved instructor of the Mortgage
Bristol Myers Squibb in various positions of increasing responsibility in sales
Bankers Association Accredited School of Mortgage Banking and is a Delegate
management. He has extensive experience in nutritional products particularly in
and 2nd Vice President of the Mortgage Bankers Association of Greater
the areas of sales and marketing.
Philadelphia. She is the key financial executive on the Company’s Audit
Committee providing oversight of the Company’s external auditors.
MICHAEL J. MCDEVITT, a Director, is a retired Senior Executive and Senior
Security Manager with the Federal Bureau of Investigation (FBI). He is
REVEREND JOSEPH D. CALDERONE, O.S.A., was named a director of
recognized nationally as a leading authority in the U.S. Government on physical
Medifast in November 2003. Rev. Calderone is the Associate Director of
security and technical countermeasures. Mr. McDevitt developed and managed
Campus Ministry at Villanova University. Formerly, he spent over eight years
highly successful technical security programs through a succession of leadership
with the Loyola University Medical Center as the hospital Chaplain and taught
posts, culminating in a Senior Executive Services position in the Investigative
multiple courses including Introduction to the Practice of Medicine and Business
Technology Branch, FBI Laboratory Division. He managed nearly two hundred
Ethics. Rev. Calderone is currently a Captain in the US Navy Reserves and
Special Agent’s and engineering support staff spanning a broad spectrum of
serves as the Wing Chaplain for the 4th Marine Aircraft Wing. He has spent
technical security programs, as well as an annual budget exceeding $200 million.
over 25 years in the medical related field and plans to assist the Company with
Senior government personnel regard him as a leading expert on technology
future growth plans involving development of clinical affairs and diabetic
applied to physical security and has played a leading role in developing critical
nutrition initiatives.
Certification
CERTIFICATION PURSUANT TO RULE 13-A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Bradley T, MacDonald, certify that:
1. I have reviewed this annual report on Form 10-KSB of Medifast, Inc.
2. Based in my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by the annual report.
3. Based on my knowledge, the financial statements and other financial information included in the annual report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this annual report:
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such discloser controls and procedures to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report
is being prepared.
b. Evaluated the effectiveness the registrant’s discloser controls and procedures as of a date within 90 days prior to the filing date of this
annual report (the “Evaluation Date”); and
c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the evaluation date.
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record,
process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls; and
6. The registrant’s other certifying officers and I have indicated in the this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 15, 2004
_/s/ BRADLEY T. MACDONALD__
Bradley T. MacDonald
Chairman and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Medifast, Inc. (the “Company”) on Form 10-KSB for the year ended December 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Bradley T. MacDonald, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of the operations
of the Company.
By: /s/ Bradley T. MacDonald
Bradley T. MacDonald
Chief Financial Officer
March 15, 2004
FORWARD LOOKING
STATEMENTS
Forward-looking statements made
in this release are made pursuant to
the safe harbor provisions of the
Private Securities Litigation Reform
Act of 1995. Investors are cautioned
that all forward-looking statements
involve risk and uncertainties which
may cause actual results to differ
from anticipated results, including
risks associated with the timing and
development of the Company's
reserves and projects as well as
risks of downturns in economic
conditions generally, and other risks
detailed from time to time in the
Company's filings with the
Securities and Exchange
Commission.
Table of Contents:
Management’s Discussion and Analysis
Industry Comparison of Stock Prices
Consolidated Financial Statements
Independent Auditors’ Report
Statements of Operations
Balance Sheet
Statements of Changes in
Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Stock Options
Executive Compensation
Directors Compensation
Recent Developments
Security Ownership
Certification
23
24
25
26
27
28
29
30
40
41
41
41
41
42
MEDIFAST INC. 2003 FINANCIALS
Management’s Discussion and Analysis
2003 Comparison with 2002
OPERATING
Consolidated net sales for 2003 were $25,379,000 as
compared to 2002 sales of $12,345,000, an increase of
$13,034,000, or 106%. The revenue increase for the Company
is attributed to the following: (a) increased Direct Patient Sales
via the Internet’s Physicians Lifestyles Program; (b) increased
advertising support via national print and radio that stimulated
increased sales; (c) increased International sales and (d)
increase in the Take Shape for Life health network sales.
Gross margins increased to 73% in 2003 from 70% in 2002,
due to the higher margins of the Medifast® products. The
increase is attributed to the increased margin of Medifast®
direct and Internet sales directly to patients via the Lifestyles
and Take Shape for Life programs. Selling, general and
administrative (SG&A) expenses of $14,956,000 for 2003
were $8,050,000 more than the $6,906,000 in 2002, due to
increased advertising expenses to increase new sales,
employee costs, upgrading the educational level and training
of middle management and the addition of the Take Shape for
Life health network sales and marketing infrastructure and
commission costs.
In 2003, the Company realized a tax expense of $1,148,000, as
compared to a tax benefit of $925,000 in 2002 as a result of
previous net loss carry forward.
Interest expense increased by $49,000 due to the Company's
increased borrowings for infrastructure growth.
A preferred stock dividend in the amount of $58,000 was
accrued to shareholders in 2003.
The Company experienced income from operations for the
year 2003 of $3,598,000. This compares with income from
operations of $1,752,000 in 2002, an increase of 105%. The
profit from operations is attributed to the success of national
print and radio advertising, the dynamic growth in the Take
Shape for Life Health Advisor Network,
international
distribution to Asia, increased sales to physicians and clinics,
improved gross margins and more direct patient sales via the
Internet and the toll free-telephone number supporting the
Medifast® physician network and their patients directly.
Industry Comparison of Stock Prices
NUTRACEUTICAL GROUP
Company
Medifast (MED)
Natural Alternatives International (NAII)
Weider Nutrition (WNI)
Pure World, Inc. (PURW)
Twinlab Corporation (TWLB)
Natures Sunshine Products, Inc. (NATR)
Company
Medifast (MED)
Natural Alternatives International (NAII)
Weider Nutrition (WNI)
Pure World, Inc. (PURW)
Twinlab Corporation (TWLB)
Natures Sunshine Products, Inc. (NATR)
PHARMACEUTICAL GROUP
Company
Medifast (MED)
Abbott Labs (ABT)
Unilever (UL)
Novartis (NVS)
Bristol Myers Squibb (BMY)
Index Comparison
$100 Invested in 1999 would return:
Nutraceutical Group Index
Medifast (MED)
S&P 500
December 31,
2003
Stock Price
$14.10
6.40
4.45
2.51
0.02
December 31,
2003
Stock Price
$14.10
6.40
4.45
2.51
0.02
December 31,
2003
Stock Price
$14.10
46.34
37.60
45.89
28.60
December 31,2002
Stock Price
$5.32
3.98
1.45
0.51
0.10
9.71
December 31,1999
Stock Price
$0.22
3.25
3.69
3.12
7.94
8.00
December 31,2002
Stock Price
$5.32
40.00
38.25
36.73
23.15
1999
$100
$100
$100
$
Change
$8.78
2.42
3.00
2.00
(0.08)
(1.29)
%
Change
165.0%
60.8%
206.9%
392.1%
(80.0)%
(13.3)%
$
Change
%
Change
$13.88
6309.1%
3.15
0.76
(0.61)
(7.92)
0.42
$
Change
$8.78
6.34
(0.65)
9.16
5.45
96.9%
20.6%
(19.6)%
(99.7)%
5.3%
%
Change
165.0%
15.9%
(1.7)%
24.9%
23.5%
2003
$1,052
$6,309
$90
Factual material is obtained from sources believed to be reliable, but the Company is not responsible for any errors or omissions
contained herein.
LIQUIDITY AND CAPITAL RESOURCES
On June 11, 2003 Jason Enterprises, Inc. acquired the assets of
Consumers Choice Systems, Inc., a Delaware Corporation.
The Company obtained all the assets of the business that
support their retail and international business including the
distribution rights in 18,000 retail food and drug stores. Jason
Enterprises, Inc. acquired the assets for 76,120 shares of
Medifast, Inc. restricted common stock and 50,000 five-year
warrants at a purchase price of $10.00 per share. The
transaction will be accounted for as an asset purchase
transaction. The Company is expecting to record limited and
selected liabilities that amount to approximately $1.35 million.
On July 24, 2003 the Company announced an agreement with
Amazon.com. Through the agreement the Consumer Choice
Systems, Women’s Wellbeing branded products will be offered
on Amazon.com’s website in the women’s health section.
On July 25, 2003, the Company announced that it had sold an
aggregate of 550,000 shares of common stock and warrants to
purchase 82,500 shares of common stock (the "PIPE Shares")
24
to Mainfield Enterprises,
Inc. and Portside Growth &
Opportunity Fund. The shares of common stock were sold for
a cash consideration of $12.40 per share, or a total of
$6,820,000, and the warrants, exercisable for a period of five
years from the date of issuance, at an exercise price equal to
one hundred fifteen percent (115%) of the five-day volume
weighted average price (the "PIPE Transaction"), all pursuant
to the terms of that certain Securities Purchase Agreement by
and between the Company and Mainfield Enterprises, Inc. and
Portside Growth & Opportunity Fund dated as of July 24, 2003
(the "Securities Purchase Agreement").
On September 12, 2003 Medifast, Inc.’s wholly owned
subsidiary Seven Crondall, LLC purchased a 119,825 sq. foot
distribution facility located at 601 Sunrise Ave., Ridgely,
Maryland, 21660 from NewRoads, Inc. for $2,200,000. The
Company financed $1,760,000 through Merrill Lynch Capital
at the 30 day LIBOR interest rate plus 220 basis points over
seven years.
On September 12, 2003 the Company also acquired the assets
and expertise of Dunst and Associates, Inc., a 15-year
experienced distributor in Eldersburg,Maryland to operate its
new distribution facility. The Company acquired Dunst and
Associates assets for $400,000 in cash and 3,347 shares of
Medifast, Inc. common stock.
Inc.’s wholly owned
On November 7, 2003 Medifast,
subsidiary Jason Properties, LLC purchased the assets of
Hi-Energy Weight Control Centers, located in Gulf Breeze,
Florida. The acquisition includes equipment,
inventory,
trademarks, and licenses for fifty Hi-Energy clinics. The
clinics are located primarily in the southeastern region of the
United States. The assets were purchased for $1,500,000 in
cash, which included selected liabilities, capital expenditures,
costs of assets and miscellaneous fees.
On November 7, 2003 Medifast,
Inc.’s wholly owned
subsidiary Jason Pharmaceuticals, Inc. increased its Secured
Line of Credit from $1,000,000 to $5,000,000 from Mercantile
Safe-Deposit and Trust of Baltimore, Maryland. The line of
credit is at the LIBOR plus two percent. The increased line
may be used to finance equipment, inventory, and receivables
of Medifast, Inc.
On March 5, 2004 the Company entered into a joint venture
agreement with XL Health, Inc., one of the leading diabetic
management companies in the United States. Medifast, Inc.’s
Medifast Plus for Diabetics line will be the exclusive
nutritional product for XL Health’s CMS Medicare
Demonstration Project. The pilot project will use Medifast
Plus for Diabetics as the exclusive nutritional intervention
program to prove the cost effectiveness of disease management
programs for Medicare beneficiaries. Take Shape For Life, Inc,
through its’ parent Medifast, Inc, provided a one million dollar
corporate guarantee of XL’s revolving credit line secured by
the assets of the Company through Mercantile Safe-Deposit
and Trust company, the Company’s lender.
REPORT OF INDEPENDENT AUDITORS 2003
Board of Directors and Stockholders
Medifast, Inc.
We have audited the consolidated balance sheet of Medifast, Inc. and its subsidiaries as of December 31, 2003, and the
related consolidated statements of income, changes in stockholders' equity and comprehensive loss and cash flows for the
year then ended. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Medifast, Inc. and subsidiaries as of December 31, 2003, and the consolidated results of
their operations and their consolidated cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
Bagell, Josephs & Company, LLC
Gibbsboro, New Jersey
March 10, 2004
25
REPORT OF INDEPENDENT AUDITORS 2002
Board of Directors and Stockholders
Medifast, Inc.
We have audited the accompanying consolidated statements of income, changes in stockholders’ equity and cash flows of
Medifast, Inc. and subsidiaries for the year ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of
Medifast, Inc. and subsidiaries for the year ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
Wooden & Benson
Baltimore, Maryland
March 4, 2003
Consolidated Statements of Operations
December 31,
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from continuing operations before other income (expenses)
Other income (expenses):
Interest and other financing expense, net
Other income
Net income before (provision) benefit for income taxes
Provision for income tax benefit (expense)
Net income/comprehensive income
Less:
Preferred Stock dividend requirement
Net income attributable to common stockholders
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding
– basic
– diluted
See accompanying notes
26
2003
$25,379,000
6,825,000
18,554,000
14,956,000
3,598,000
(150,000)
110,000
(40,000)
3,558,000
(1,148,000)
2,410,000
2002
$12,345,000
3,687,000
8,658,000
6,906,000
1,752,000
(101,000)
47,000
(54,000)
1,698,000
925,000
2,623,000
2001
$5,022,000
2,211,000
2,811,000
2,066,000
745,000
(240,000)
61,000
(179,000)
566,000
22,000
588,000
58,000
218,000
52,000
0
58,000
$2,352,000
$0.25
$0.22
9,305,731
10,952,367
0
218,000
$2,405,000
$0.36
$0.30
6,722,505
8,737,292
10,000
62,000
$526,000
$0.08
$0.07
6,524,969
8,069,646
Consolidated Balance Sheet
December 31,
Assets
Current assets:
Cash
Accounts receivable - net of allowance for doubtful accounts of $55,000
Inventory
Prepaid expenses and other current assets
Investment securities
Deferred compensation
Deferred tax asset
Total current assets
Property, plant and equipment – net
Trademarks and intangibles
Other assets
Total assets
Liabilities And Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Dividends payable
Line of credit
Current maturities of long term debt
Total current liabilities
Long term debt, net of current portion
Total liabilities
Stockholder’s Equity:
Series B convertible preferred stock; par value $1.00;
600,000 shares authorized; 403,734 shares issued and outstanding
Series C convertible preferred stock; par value $0.001; market value $1.00;
1,015,000 shares authorized; 267,000 shares issued and outstanding
Common stock; par value $.001 per share; 15,000,000 shares authorized;
10,482,609 shares issued and outstanding
Additional paid-in capital
Accumulated comprehensive loss
Accumulated deficit
Less: Cost of 83,863 shares of common stock in treasury
Total Liabilities And Stockholders’ Equity
See accompanying notes
27
2003
2002
$2,524,000
641,000
2,988,000
936,000
3,983,000
321,000
596,000
11,989,000
7,449,000
4,419,000
375,000
$24,232,000
1,714,000
58,000
55,000
764,000
2,591,000
4,564,000
7,155,000
404,000
267,000
10,000
20,120,000
(25,000)
(3,016,000)
17,760,000
(683,000)
17,077,000
$24,232,000
$837,000
284,000
1,259,000
249,000
1,079,000
4,126,000
4,498,000
608,000
1,000
$9,888,000
1,189,000
25,000
91,000
304,000
1,609,000
2,701,000
4,310,000
521,000
985,000
7,000
9,613,000
(5,381,000)
5,745,000
(167,000)
5,578,000
$9,888,000
Consolidated Statements of Changes in Stockholders Equity
Series B
Series C
Preferred Stock
Preferred Stock
Common Stock
Number of
Shares
Stated
Value
Amount
Number of
Shares
Stated
Value
Amount
Number of
Shares
Par Value
$0.001
Amount
Additional
Paid-In
Capital
Accum.
Comp.
Loss
Accumulated
Deficit
Total
Treasury
Stock
Balance, December 31, 2001 552,757
$553,000
849,000
$849,000
6,564,531
$7,000
$8,915,000
($7,786,000)
$2,538,000
$0
170,000
222,664
106,060
(31,467)
(32,000)
(30,000)
(30,000)
141,438
102,000
102,000
64,000
64,000
Common Stock Issued
to Employees, directors
consultants & contractors
Options exercised to
Common Stock
Warrants Converted to
Common Stock
Preferred Converted to
Common Stock
Dividends on Preferred
Stock
Preferred Stock issued for
cash
Preferred Stock issued to
employees and consultants
Options granted to non-
employees
Purchase of Treasury Shares
Dividend resulting from
beneficial conversion
feature
Net Income
218,000
189,000
35,000
62,000
69,000
218,000
189,000
(165,000)
35,000
(93,000)
(93,000)
102,000
64,000
69,000
(2,000)
125,000
(125,000)
2,623,000
2,623,000
Balance, December 31, 2002 521,290
$521,000
985,000
$985,000
7,204,693
$7,000
$9,613,000
0
$(5,381,000)
$5,745,000
$(167,000)
Preferred converted to
Common Stock
Options exercised to
Common Stock
Warrants converted to
Common Stock
Common Stock issued to
Directors, Consultants and
acquisitions
Common Stock issued for
Series "C" Dividend
Dividend paid in stock
Net Income
(117,556)
(117,000)
(718,000)
(718,000)
1,671,108
2,000
833,000
615,714
288,724
590,000
350,000
665,970
1,000
8,717,000
36,400
18,000
590,000
(516,000)
350,000
8,717,000
18,000
(45,000)
(45,000)
(25,000)
2,410,000
2,385,000
Balance, December 31, 2003
403,734
$404,000
267,000
$267,000
10,482,609
$10,000
$20,120,000
($25,000)
($3,016,000)
$17,760,000
($683,000)
See accompanying notes
28
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities from
continuing operations:
Depreciation and amortization
Realized gain on investment securities
Common stock issued for services
Series “C” Preferred issued for services
Deferred income tax expense (benefit)
Changes in:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Deferred compensation
Other assets
Accounts payable and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of certificates of deposit
Investment in certificates of deposit
Purchase of investment securities
Proceeds from sale of property and equipment
Purchase of building
Purchase of intangible assets
Purchase of property and equipment
Net cash (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series A preferred stock
Issuance of Common stock
Issuance of Series C convertible preferred stock
Repayment of capital lease obligations
Increase (decrease) in credit line (net)
Principal repayments of long-term debt
Proceeds from long-term debt
Dividends paid on preferred stock
Purchase of treasury shares
Net cash provided by financing activities
Net Increase in Cash and Cash Equivalents
Cash and cash equivalents - beginning of the year
Cash and Cash Equivalents end of the year
Supplemental Disclosures of Cash Flows Information
Interest paid
Taxes paid
29
2003
2002
$2,410,000
$2,623,000
677,000
(1,000)
207,000
0
1,138,000
(357,000)
(1,729,000)
(735,000)
(350,000)
0
488,000
321,000
0
95,000
24,000
(925,000)
(1,000)
(619,000)
(173,000)
0
199,000
912,000
1,748,000
2,456,000
418,000
0
(3,982,000)
0
(1,980,000)
(2,128,000)
(1,353,000)
319,000
(409,000)
0
4,000
(3,451,000)
(505,000)
(526,000)
(9,025,000)
(4,568,000)
0
6,722,000
0
0
(36,000)
(346,000)
2,669,000
(45,000)
0
(150,000)
59,000
102,000
(23,000)
91,000
(374,000)
3,070,000
(94,000)
(2000)
8,964,000
2,679,000
1,687,000
837,000
567,000
270,000
$2,524,000
$837,000
$154,000
0
$90,000
0
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosures of Non-Cash Investing and Financial Activities:
Common stock issued for services
Conversion of preferred stock B and C to common stock
Series C preferred stock issued to an officer
Common stock for intangibles and fixed assets
Preferred stock dividends
Options issued to non-employees
Warrants issued to preferred stockholders
2003
$207,000
835,000
0
1,949,000
18,000
0
0
2002
$95,000
0
20,000
0
0
69,000
71,000
See accompanying notes
Notes to Consolidated Financial Statements
Note A - Business
The year of 2003 was one of phenomenal growth for
Medifast, Inc. (the “Company”). The growth accomplished
by the Company throughout 2003 is particularly apparent in
the categories such as revenue and pre-tax profit, both of
which were up over 100% from the year-end December 31,
2002. However it is also necessary to place an emphasis on
the growth of particular infrastructure components, such as
the production, order taking and shipping capabilities, that
are the operating platforms which will allow the continuance
of these growth rates in the coming years. The major
operations responsible for this growth are conducted
throughout the five wholly owned subsidiaries, Jason
Pharmaceuticals, Inc., Take Shape for Life, Inc., (“TSFL”)
Jason Enterprises, Inc., Jason Properties, LLC, and Seven
Crondall, LLC.
The Company is engaged in the manufacturing and
distribution of Medifast‚ and Hi-Energy‚ branded and
private label weight and disease management products.
These products are sold through various channels of
distribution, to include medical professionals, weight loss
clinics, direct consumer marketing supported via the phone
and the web, supported by licensed, qualified medical
practitioners including qualified health advisors. The
processing, formulation, packaging, labeling and advertising
of the Company’s products are subject to regulation by one
or more federal agencies, including the Food and Drug
Administration,
the
consumer Product Safety Commission, the United States
Department of Agriculture, and
the United States
Environmental Protection Agency.
the Federal Trade Commission,
30
through
initiated
During the year of 2003 the Company significantly
improved its financial outlook. The major factors for this
improvement were related to the the increased revenues and
profits generated throughout the year, the acquisition of
assets, and the raising of more than $6.8 million dollars
the
through a Private Placement
Company’s financial advisor and placement agent, Merrill
Lynch & Company, Inc. The raising of capital provided the
necessary funds to allow the Company to move forward with
multiple strategies that will be the main drivers for the future
revenue growth. These strategies include, but are not limited
to
featuring
television, print and radio, expansion of their Corporate
Weight and Disease Management Clinics and the dynamic
growth of the Take Shape For Life health network. The
capital also allowed the Company to move forward in
building an internal infrastructure that will parallel the
substantial growth in revenues that are expected to occur
during the next five years. The following financial
transactions, which occurred throughout 2003, assisted in
providing the financial platform as well as the necessary
infrastructure to allow the Company to execute its plan for
exponential and profitable growth in 2004 and beyond.
the Company’s advertising
initiatives,
On June 11, 2003 Medifast, Inc.'s wholly owned subsidiary
Jason Enterprises, Inc. completed the acquisition of the
assets of Consumer Choice Systems, Inc. (“CCS”). CCS is
a retail distribution company focusing on high quality,
innovative products for women, marketed under the
Woman’s Wellbeing brand. CCS products are currently
distributed in over 18,000 retail outlets nationwide. The
CCS business is supported by a website and toll-free
Notes to Consolidated Financial Statements (continued)
customer service line where customers can inquire about
product information and retail availability.
On July 25, 2003, the Company announced it had sold an
aggregate of 550,000 shares of common stock and warrants
to purchase 82,500 shares of common stock (the "PIPE
Shares") to Mainfield Enterprises, Inc. and Portside Growth
& Opportunity Fund. The shares of common stock were sold
for a cash consideration of $12.40 per share, or a total of
$6,820,000, and the warrants, exercisable for a period of five
years from the date of issuance, at an exercise price of
$16.78, that being equal to one hundred fifteen percent
(115%) of the five-day volume weighted average price (the
"PIPE Transaction"), all pursuant to the terms of that certain
Securities Purchase Agreement by and between the
Company and Mainfield Enterprises, Inc. and Portside
Growth & Opportunity Fund dated as of July 24, 2003 (the
"Securities Purchase Agreement").
On August 4, 2003 Medifast, Inc.'s wholly owned subsidiary
Jason Enterprises, Inc established a Revolving Line of
Credit with Wachovia Bank, National Association of $1
million. The Line of Credit is at Libor plus 2.5%. The Line
of Credit will be used to finance foreign exchange needs
related to the Company’s overseas requirements.
On September 12, 2003 Medifast, Inc.'s wholly-owned
subsidiary Seven Crondall Associates, LLC purchased a
119,825 sq. foot distribution facility from New Roads, Inc.
for $2.6 million. The “state of the art” distribution facility,
located on the Maryland eastern shore, has given the
Company the capability to distribute over $200 million of
Medifast product sales per year. The Company financed
$1.76 million through Merrill Lynch Capital at the 30 day
LIBOR interest rate plus 220 basis points over seven years.
On November 7, 2003 Medifast, Inc.'s wholly-owned
subsidiary Jason Properties, LLC purchased the assets of Hi-
Energy Weight Control Centers, a national company
specializing in weight management programs, with weight
loss centers in over 50 locations. Hi-Energy centers offer a
competitive marketing edge through a regional advertising
program, exclusive territories and marketing support.
On November 7, 2003 Medifast, Inc.'s wholly owned
subsidiary Jason Pharmaceuticals, Inc. increased its Secured
Line of Credit with Mercantile Safe Deposit and Trust of
Baltimore, Maryland from $1 million to $5 million. The
Line of Credit is at Libor plus two percent. The increased
Line of Credit will be used to finance capital requirements
inventory and
incurred while building equipment,
receivables as its business is expected to expand and grow in
2004.
31
Note B - Significant Accounting Policies
Significant accounting policies followed in the preparation
of the financial statements are as follows:
1. Principles of Consolidation and Basis of Presentation:
The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, Jason
Pharmaceuticals, Inc., Take Shape For Life, Inc., Seven
Crondall Associates, LLC, Jason Properties, LLC and Jason
Enterprises, Inc. All inter-company accounts have been
eliminated.
2. Cash and Cash Equivalents
For the purposes of the statement of cash flows,
the
Company considers all highly liquid debt instruments
purchased with maturity of three months or less to be cash
equivalents. At December 31, 2003, the Company had
invested in four $100,000 certificates of deposit, which are
considered cash equivalents. The Company also invested
$465,000 in miscellaneous investments through Merrill
Lynch. These investments are considered cash equivalents
due to terms of maturity.
3. Inventory:
Inventory is stated at the lower of cost or market, utilizing
the first-in, first-out method. The cost of finished goods
includes the cost of raw materials, packaging supplies, direct
and indirect labor and other indirect manufacturing costs.
4. Advertising
Advertising costs such as preparation, layout, design and
production of advertising are deferred. They are expensed
when the advertisement is first used, except for the costs of
executory contracts, which are amortized as performance
(under the contract is received.) Advertising costs so
deferred were $295,000 at December 31, 2003. Advertising
expense for the years ended December 31, 2003 and 2002
amounted to $2,233,000 and $1,214,000, respectively.
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. The Company
computes depreciation and amortization using the straight-
line method over the estimated useful lives of the assets
acquired as follows:
Building and improvements
Equipment and fixtures
Vehicles
39 years
3 - 15 years
5 years
The carrying amount of all long-lived assets is evaluated
periodically to determine whether adjustment to the useful
life or to the unamortized balance is warranted. Such
evaluation is based principally on the expected utilization of
the long-lived assets and the projected undiscounted cash
flows of the operations in which the long-lived assets are
used.
Notes to Consolidated Financial Statements (continued)
12. Stock-Based Compensation
The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). The provisions of
SFAS 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles
Bulletin Opinion No. 25, “Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects
on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option
incentive plans.
On October 9, 1993 and as amended in May 1995, the
Company adopted a stock option plan ("Plan") authorizing
the grant of incentive and nonincentive options for an
aggregate of 500,000 shares of the Company's common
stock to officers, employees, directors and consultants.
Incentive options are to be granted at fair market value.
Options are to be exercisable as determined by the stock
option committee.
In November 1997, June 2002 and July 2003, the Company
amended the Plan by increasing the number of shares of the
Company's common stock subject to the Plan by an
aggregate of 200,000 shares, 300,000 shares and 250,000
shares respectively.
The Company has elected to continue to account for stock
option grants in accordance with APB 25 and related
interpretations. Under APB 25, where the exercise price of
the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation is recognized.
If compensation expense for the Company's stock-based
compensation plans had been determined consistent with
SFAS 123, the Company's net income and net income per
share including pro forma results would have been the
amounts indicated (over):
6. Income Taxes
The Company accounts for income taxes in accordance with
the liability method. Deferred taxes are recognized for
temporary differences in the recognition of income and
expenses for financial reporting and income tax purposes,
principally due to net operating loss carryforwards and
allowances.
7. Earnings Per Common Share
Basic earnings per share is calculated by dividing net profit
attributable to common stockholders by the weighted
average number of outstanding common shares during the
year. Basic earnings per share exclude any dilutive effects of
options, warrants and other stock-based compensation,
which are included in diluted earnings per share.
8. Revenue
Revenue from sales is recognized when the product is
shipped to customers or purchased by wholesale customers.
9. Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States of America requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
10. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance
sheet for cash, certificates of deposit, accounts receivable,
accounts payable and accrued liabilities approximate fair
value because of the immediate or short-term maturity of the
financial instruments.
The Company believes that its indebtedness approximates
fair value based on current yields for debt instruments with
similar terms.
11. Concentration of Credit Risk
Financial instruments that potentially subject the Company
to credit risk consist of cash, certificates of deposit,
investment securities and trade receivables.
Cash,
certificates of deposit and investment securities at December
31, 2003 include amounts deposited with multiple financial
institutions that exceed the federal insurance coverage by
$3,862,000. The Company markets its products primarily to
medical professionals, clinics, and Internet medical sales
and has no substantial concentrations of credit risk in its
trade receivables.
32
Note B - Significant Accounting Policies (continued)
12. Stock Based Comphensation
December 31,
2003
2002
Net income:
$2,410,000
$2,623,000
$2,623,000
As reported
Total stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax effects
Pro forma
Net income per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
(403,000)
$2,007,000
(95,000)
(95,000)
$2,528,000
$2,528,000
$0.25
$0.22
$0.21
$0.18
$0.36
$0.36
$0.30
$0.30
$0.34
$0.34
$0.29
$0.29
The pro forma effect on net income may not be
representative of the pro forma effect on net income of
future years due to, among other things: (i) the vesting
period of the stock options and the (ii) fair value of
additional stock options in future years.
For the purpose of the above table, the fair value of each
option grant is estimated as of the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
Dividend Yield
Expected Volatility
2003
0.0%
0.40
2002
0.0%
0.40
Risk-Free Interest Rate
3.00%-3.50%
3.00%-5.00%
Expected Life in Years
1-5
1-5
responsible
13. Segment Information
In 2003 and 2002, the Company’s international joint venture
arrangements for distribution of goods in the Asian market
were
recognition of
the
approximately $2,000,000 and $233,000, respectively.
the Company’s retail distribution through the
In 2003,
division of Consumer Choice Systems recognized revenue
of $730,000.
revenue
for
14. Recent Accounting Pronouncements
In June 2001,
the FASB issued Statement No. 142
“Goodwill and Other Intangible Assets”. This Statement
addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. It addresses how
33
intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business
combination) should be accounted for
in financial
statements upon their acquisition. This Statement also
addresses how goodwill and other intangible assets should
be accounted for after they have been initially recognized in
the consolidated financial statements. This statement has
been considered in the preparation of the consolidated
financial statements.
On July 20, 2000, the Emerging Issues Task Force issued
EITF 00-14 “Accounting For Certain Sales Incentives”
which establishes accounting and reporting requirements for
sales incentives such as discounts, coupons, rebates and free
products or services. Generally, reductions in or refunds of
a selling price should be classified as a reduction in revenue.
the implementation date is the
For SEC registrants,
beginning of the fourth quarter after the registrant’s fiscal
year end December 15, 1999. EITF 00-14 has been
considered in the preparation of the consolidated financial
statements.
In December 1999,
the Securities and Exchange
Commission issued Staff Accounting Bulletin (“SAB”) No.
101, “Revenue Recognition in Financial Statements.” SAB
101 provides guidance for revenue recognition under certain
circumstances, and is effective during the first quarter of
fiscal year 2001. SAB 101 has been considered in the
preparation of the consolidated financial statements.
In December 2002, the FASB issued Statement No. 148,
“Accounting for Stock-Based Compensation-Transition and
Disclosure”, an amendment of FASB Statement No.
123”(“SFAS 148”). SFAS 148 amends FASB Statement No.
123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also
amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported
net income of an entity’s accounting policy decisions with
employee
respect
compensation. Finally, this Statement amends Accounting
Principles Board (“APB”) Opinion No. 28, “Interim
Financial Reporting”,
to require disclosure about those
effects in interim financial information. SFAS 148 is
effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account
for stock-based employee compensation using the intrinsic
value method of APB Opinion No. 25, “Accounting for
Stock Issued to Employees”, but has adopted the enhanced
disclosure requirements of SFAS 148.
stock-based
to
Notes to Consolidated Financial Statements (continued)
The following table summarizes the stock option activity for the years ended December 31:
Outstanding at beginning of year
Options granted
Options reinstated
Options exercised
Options forfeited or expired
Outstanding at end of year
Options exercisable at year end
Options available for grant at end of year
2003
2002
Shares
891,669
163,500
0
(615,714)
0
439,455
302,668
810,545
Weighted
Average
Exercise
Price
$0.69
5.32
0.00
1.16
0.00
1.76
0.76
Shares
706,000
340,000
100,000
(222,664)
(31,667)
891,669
714,994
108,331
Weighted
Average
Exercise
Price
$0.36
1.14
1.50
0.85
0.26
0.69
0.64
The following table summarizes information about stock options outstanding and exercisable at December 31, 2003.
Options Outstanding
Range of
Exercise
Prices
Number
Outstanding
Weighted
Average
Contractual
Life
Remaining
(in Years)
Options Exercisable
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$0.25
$0.32
$0.50
$0.65
$0.80
$0.86
$1.23
$1.26
$1.60
$4.80
$8.26
$11.12
$11.15
165,00
16,670
100,000
25,001
20,001
6,667
6,668
16,667
8,334
35,779
2,000
16,668
20,000
439,455
1.3
2.7
1.9
3.6
3.5
3.5
3.7
3.7
3.8
4.3
4.4
4.4
4.5
2.5
$0.25
$0.32
$0.50
$0.65
$0.80
$0.86
$1.23
$1.26
$1.60
$4.80
$8.26
$11.12
$11.15
$1.71
165,000
10,000
100,000
0
1,667
3,333
0
0
0
19,332
0
0
3,333
$0.25
$0.32
$0.50
$0.65
$0.80
$0.86
$1.23
$1.26
$1.60
$4.80
$8.26
$11.12
$11.15
302,665
$0.76
34
Notes to Consolidated Financial Statements (continued)
15. Investments
In accordance with SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities”, securities are
classified into three categories: held-to-maturity, available-
for-sale and trading. The Company’s investments consist of
debt and equity securities classified as available-for-sale
securities. Accordingly, they are carried at fair value in
accordance with SFAS No. 115. Further, SFAS No. 115 the
unrealized holding gains and losses for available-for-sales
securities are excluded from earnings and reported, net of
deferred income taxes, as a separate component of
stockholders’ equity, unless the loss is classified as other
than a temporary decline in market value.
16. Reclassifications
Certain amounts for the year ended December 31, 2002
have been reclassified to conform with the presentation of
the December 31, 2003 amounts. The reclassifications
have no effect on net income for the year ended December
31,2002.
Note C - Inventory
Inventory consists of the following at
December 31, 2003:
Raw materials
Packaging
Finished goods
$813,000
$694,000
$1,481,000
$2,988,000
Note D - Property, Plant & Equipment
Property, plant and equipment at December 31, 2003
consist of the following:
Land
Building and building improvements
Equipment and fixtures
Vehicle
$565,000
5,937,000
2,855,000
20,000
9,377,000
the patent of the Medifast Diabetic Nutrition and Weight
Loss Drink Composition. The patent number is 6,706,697.
Costs associated with the issuance, which consist of raw
materials, salaries, and consulting fees, amounted to
$331,000.
As part of the asset purchase agreement with Consumer
Choice Systems, Inc. the Company purchased intangible
assets totaling $500,000. These assets consisted of the
Consumer Choice Systems Customer List, and the
Trademarks and Property Rights to several Consumer
Choice Systems products.
As part of the asset purchase agreement with Hi-Energy
Weight Control Centers, the Company purchased intangible
assets valued at $1,000,000. These assets consisted of the Hi
Energy Customer List and the Hi Energy Trademarks.
A summary of Trademarks and Intangibles as of December
31, 2003 is as follows:
Trademarks
Customer Lists
Other Intangibles
Less accumulated amortization
Trademarks and intangibles
$660,000
1,100,000
2,909,000
4,669,000
250,000
$4,419,000
Amortization expense for the years ended December 31,
2003 and 2002 were $227,000 and $23,000, respectively.
Note F- Accounts Payable & Accrued Expenses
Accounts payable and accrued expenses include the
following at December 31, 2003:
Trade payables
Accrued expenses and other
Accrued payroll and related taxes
Sales commissions payable
Deferred revenue
Total
$969,000
121,000
96,000
360,000
168,000
$ 1,714,000
Less accumulated depreciation & amortization
Property, plant and equipment - net
1,928,000
$7,449,000
Note G - Income Taxes
Substantially all of the Company's property, plant and
equipment is pledged as collateral for various loans (see
Note H).
Depreciation expense for the years ended December 31,
2003 and 2002 were $421,000 and $246,000, respectively.
Note E - Trademarks
On March 16, 2004, the Company anticipates approval will
be issued from the U.S. Patent and Trademark Office for
35
At December 31, 2003, the principal components of the net
deferred tax assets are as follows:
Net operating loss carryforwards
Accounts receivable
Inventory overhead and write downs
Total deferred tax assets
Current benefit
Total
$290,000
32,000
274,000
596,000
596,000
$ 0
Notes to Consolidated Financial Statements (continued)
In 2002, it was determined that the entire net operating loss
was realizable by 2004 and the valuation allowance was
eliminated. A reconciliation of the federal statutory rate to
the income tax expense is at right:
Income tax (benefit) based on
federal statutory rate
State and local tax (benefit),
net of federal benefit
2003
2002
$973,000
$577,000
175,000
111,000
Decrease in valuation allowance
Income tax benefit (expense)
0
$1,148,000
(1,613,000)
$(925,000)
The Company has net operating loss carryforwards of approximately $750,000 that are available to offset future taxable
income. These carryforwards expire from 2009 to 2019. The Tax Reform Act of 1986 contains provisions that limit the net
operating loss carryforwards available for use should significant changes in ownership interests occur. The Company may
be subject to rules related to an ownership change which may require the applications of these limitations.
Note H - Long Term Debt and Line of Credit
Long-term debt as of December 31, 2003 consists of the following:
$2,850,000 fifteen year term loan secured by the building and land at a
variable rate which was 3.87% at December 31, 2003
$1,760,000 ten-year reducing revolver line of credit
rate at LIBOR plus 220 bps , which was 3.32% on December 31, 2003
$186,976 three-year term loan secured by 20,000 restricted common shares
variable rate which was 7% at December 31, 2003
$220,000 two-year term loan secured by equipment at a floating rate
which was 6% at December 31, 2003
$200,000 five-year term loan secured by equipment
fixed rate was 3% at December 31, 2003
$100,000 unsecured note payable at a fixed rate of 3%, discounted to an
incremental borrowing rate of 12%
Note payable over 3 years secured by vehicle at a fixed rate of 12.25%
$550,000 agreement three years secured by certain assets of the Company
Less current portion
$2,581,000
1,740,000
151,000
73,000
172,000
59,000
2,000
550,000
5,328,000
764,000
$4,564,000
Future principal payments on long-term debt for the next 5 years are as follows:
2004 ......................................
2005 ......................................
2006 ......................................
2007 ………………………..
2008 ………………………..
Thereafter…………………...
$764,000
585,000
624,000
477,000
65,000
2,413,000
$5,328,000
The Company has established a $5 Million revolving line of credit at the LIBOR rate plus 2% with Mercantile Safe
Deposit and Trust Company secured by substantially all of the assets of Jason Pharmaceuticals, Inc. The outstanding bal-
ance on this line was $55,000 at December 31, 2003.
36
Notes to Consolidated Financial Statements (continued)
the Series “B” convertible preferred stock terms and
conditions as follows (1) a dividend of 10% paid in
preferred stock, or (2) cash at the option of the holder.
The Board also fixed the conversions of Series “B”
preferred at $0.50 per share in common stock and
eliminated the spiral conversion provision and reduced
voting to 2 votes per share.
Throughout the year of 2003, 117,556 shares of Series
“B” Convertible Preferred Stock were converted into
235,112 shares of Common Stock. As of December 31,
2003 there were 403,734 shares of Series “B” Convertible
Preferred Stock remaining.
Note L - Series “C” Convertible Preferred Stock
In the Fall of 2001, the Company was authorized to issue
1,015,000 shares of Series “C” Preferred Convertible
Stock par value (.001), market value $1.00 per share.
Each share is entitled to a dividend of 10% of liquidation
value $1.00 ($.10) per share and is to be converted on
December 31, 2006 unless converted prior thereto. Each
Holder of Preferred Series “C” Stock is entitled to one
(1) vote per share in all matters in which holders of the
Company’s Common Stock are entitled to vote. Each
share of Preferred Series “C” Stock is convertible, at the
option of the holder, after one year from the issuance
date into Common Stock of the Company. The
conversion price will be $.50 a share. In 2002, 11,500
warrants issued at $0.35 per share were distributed
proportionately to Series “C’ preferred holders.
Throughout the year of 2003, 718,000 shares of Series
“C” Preferred Convertible Stock were converted into
1,436,000 shares of Common Stock. As of December 31,
2003 there were 267,000 shares of Series “C” Preferred
Convertible Stock remaining.
The beneficial conversion feature for the 166,000 shares
of Series “C” Preferred Convertible Stock issued in 2002,
representing the difference between the conversion price
and fair value of the common stock at the date of issuance,
was $125,000. Such amount was treated as a preferred
stock dividend for accounting purposes and reflected in
the calculation of the per share results attributed to
common stockholders.
Note I Employment Agreements
The CEO of Medifast, Inc., Bradley T. MacDonald, has a
two-year employment agreement for an aggregate annual
base salary of $225,000 with a bonus potential of 50% of
base salary provided the Company makes its profit plan per
the Board approved forecast. This contract has been
extended to December 31, 2005. Due to the inequities of
funding a retirement plan in the 401K, and in recognition
of the performance responsible for the turnaround of the
Company, the Board of Directors approved a Selective
Executive Retirement Compensation Plan funded by the
form of deferred compensation. The Deferred
Compensation Plan will be funded up to $350,000 by a
dollar for dollar match program, having Mr. MacDonald
defer $175,000, followed by a Company match of
$175,000. Mr. MacDonald exercised 100,000 options at
$.25 in January 2003 and 15,000 options at $.75 in March
2003. He has no options remaining available to exercise.
Note J - Redeemable Preferred Stock
In August 1996, the Company sold 432,500 shares of
Series “A” nonvoting preferred stock that generated gross
proceeds of $865,000, or $2.00 per share. Each share was
entitled to a dividend of 8% ($.16) per share. The shares
were convertible into the Company's common stock on the
basis of one share of common stock for each share of
convertible preferred stock. In 2001, 157,000 shares opted
to convert to Series “C” Preferred Convertible Stock and
85,000 shares were redeemed under the partial settlement
and conversion to Series “C” preferred convertible stock
offered to Series “A” preferred stockholders as approved by
the Board of Directors. In 2002 the remaining 75,000
shares were redeemed.
Note K - Series “B” Convertible Preferred Stock
In January 2000, the Company was authorized to issue
600,000 Series “B” Convertible Preferred Stock (“Preferred
Stock B”) par value $1.00 per share. Each share is entitled to
a dividend of 10% of liquidation value $1.00 ($.10) per share
and is to be converted on January 15, 2005 unless converted
prior thereto. Each holder of Preferred Series “B” stock is
entitled to four votes per share in all matters in which
holders of the Company’s common stock are entitled to vote.
Each share of Preferred Series “B” stock is convertible, at
the option of the holder after one year from the issuance date
into common stock of the Company. The initial conversion
price will be 75% of the market value of the Company’s
common stock on the day prior to conversion with a
maximum conversion price of $.50 per share subject to
adjustment as defined. In March 2002, the Board amended
37
Notes to Consolidated Financial Statements (continued)
Note M - Warrants
During 2003, the Company issued 200,000 warrants to James
Paradis and Anthony Burrascono, both affiliated with
Villanova University and 200,000 warrants to Mr. David
Scheffler, an investment banker, for advisory and consulting
services provided to the Company. The warrants vest in five
equal installments of 40,000 warrants per year over a five-year
period. These are five-year warrants to purchase common
shares at an exercise price of $4.80 per share. These warrants
may be cancelled, with a 90 day notice, if the consultants fail
to perform to the satisfaction of the company.
During 2003,
the Company issued 50,000 warrants to
Consumer Choices Systems, Inc. (“CCS”) as part of the
payment for the purchase of the assets of CCS. These warrants
are three-year warrants to purchase common shares at an
exercise price of $10.00 per share. Of this amount, 25,000
warrants were exercised in 2003.
During the year the company issued 63,750 warrants and
18,750 warrants to Mainfield Enterprises, Inc. and Portside
Growth & Opportunity Fund. These warrants are five-year
warrants to purchase common shares at exercise prices of
$16.78 per share, which was equal to one hundred fifteen
percent (115%) of the five-day volume weighted average price,
all pursuant to the terms of that certain Securities Purchase
Agreement by and between the Company and Mainfield
Enterprises, Inc. and Portside Growth & Opportunity Fund
dated as of July 24, 2003.
During 2002, the Company issued 128,524 warrants to holders
of Series “B” Preferred Stock and 11,200 warrants to holders
of Series “C” Preferred stock. These are three year warrants to
purchase common shares at exercise prices of $0.35 per share.
These warrants were valued at $71,000.
The fair value of these warrants was estimated using the Black-
Scholes
following
with
assumptions:
interest rate 3% - 3.5%, dividend yield 0%,
volatility 0.40 and expected life of five years.
pricing model
the
The Company has the following warrants outstanding for the purchase of its common stock:
Exercise
Price
$0.25
$0.35
$0.35
$0.45
$0.625
$1.50
$1.50
$4.80
$10.00
$16.78
Expiration date
January, 2003
August, 2004
March, 2005
September, 2003
September, 2004
August, 2003
April, 2003
April, 2008
June, 2006
July, 2008
Weighted average exercise
Year Ended December 31,
2003
0
40,100
0
0
2,500
0
0
400,000
25,000
82,500
550,100
$6.49
2002
56,000
80,100
102,724
30,000
27,500
60,000
60,000
0
0
0
416,324
$0.73
As of December 31, 2003, 230,100 of the warrants were exercisable. Additionally, during 2003 there
were 263,724 warrants exercised at various exercise prices.
38
Notes to Consolidated Financial Statements (continued)
Note N - Commitments, Contingents and Other Matters
The Company, like other manufacturers and distributors of
products that are ingested, faces an inherent risk of exposure
to product liability claims in the event that, among other
things, the use of its products results in injury.
Note O - Litigation
On June 10, 2003, Medifast, Inc. and Jason Pharmaceuticals,
Inc. filed a Complaint for Damages, Injunctive Relief and
Determination of Discharge ability against John A. Sankey
in the U.S. Bankruptcy Court for the District of Alaska.
Defendant, who also trades under the name, "Diet–Fast,"
and who also owns Wellness Institute of Alaska, Inc., was at
one time a distributor of Medifast products, but the
Company
contract.
Nevertheless, Defendant continued to utilize Medifast
trademarks and service marks in violation of said contract.
On December 3, 2003, the parties entered into an Agreement
for Settlement whereby Defendant would cease using all
trademarks and service marks of the Company. The court
approved the Settlement on February 2, 2004.
the distributorship
terminated
and conspiracy. Plaintiff and Defendant both claim
damages in excess of $75,000. The company intends to
vigorously defend its reputation of ethical integrity
(integrity of its products and formulas) and its trademarks.
Note P - Subsequent Events
On March 5, 2004 the Company entered into a joint
venture agreement with XL Health, Inc., one of the
leading diabetic management companies in the United
States. Medifast, Inc.’s Medifast Plus for Diabetics
product line will be the exclusive nutritional product for
XL Health’s CMS Medicare Demonstration Project. The
pilot project will use Medifast Plus for Diabetics as the
exclusive nutritional intervention program to prove the
cost effectiveness of disease management programs for
Medicare beneficiaries. As part of the joint venture
Mercantile Safe Deposit and Trust Company became the
Lender to XL Health for a one-year Series “A” revolving
loan with a maximum principal amount of $1 Million.
Medifast, Inc. guaranteed the payment on behalf of XL
Health, and therefore has become the Guarantor of the
Loan to Mercantile Safe Deposit and Trust.
On August 21, 2002 Food Sciences Corporation, Inc. trading
as Robard Corporation, a competitor of the Company, filed a
lawsuit in the U.S. District Court for the District of New
Jersey Camden Vicinage, alleging, among other things,
slanderous and libelous statements made to Plaintiff's
customers. The Company filed a Counterclaim and Third
Party Claims against other competitors, alleging, among
other things, business defamation, trademark infringement
Medifast, Inc. intends to increase the number of licensed
and corporately owned clinics to over 125 nationwide by
year-end in 2004. The Company has acquired over 30
additional Hi-Energy licensed Weight Control Centers
since December 31, 2003. With of over 100 Weight and
Disease Control clinics to date, Medifast, Inc. has become
one of the six largest Weight Control Clinic licensors and
operators in the United States.
Executive Compensation
The following table sets forth information as to the compensation of the Chief Executive Officer of the Company
and each other executive officer who received compensation in excess of $100,000 for 2003, 2002, and 2001.
Name
Bradley T. MacDonald
Chairman of the Board
&CEO
Year
2003
2002
2001
Salary ($)
Bonus ($)
Value of Common/
Preferred Stock Issued
in Lieu of Cash
Option
Awards
Other Annual
Compensation
225,000
145,000
135,371
112,000
75,000
(0)
0
0
$20,000 (2)
0
100,000 (1)
0
0
0
0
(1) The Board of Directors reinstated 100,000 options at $1.50 per share granted in 1997 and not exercised.
Mr. MacDonald exercised those options in December 2002 per the Board’s direction.
(2) Mr. MacDonald was issued 20,000 shares of restricted Series “C” Preferred Convertible Stock as part of
compensation related to restructuring and raising new capital.
39
Stock Options
shares of Common Stock.
The Company’s 1993 Employee Stock Option Plan (the
“Plan”), as amended in July 1995, December 1997, June 2002,
and again in July 2003 authorizes the issuance of options for
The Plan
1,250,000
authorizes the Board of Directors or the Compensation
Committee appointed by the Board to grant incentive stock
options and non-incentive stock options to officers, key
employees, directors, and independent consultants, with
directors who are not employees and consultants eligible only
to receive non-incentive stock options. Employee stock
options are vested over 2 years.
* The following tables set forth pertinent information as of
December 31, 2003 with respect to options granted under the
Plan since the inception of the Plan to the persons set forth
under the Summary Compensation Table, all current executive
officers as a group and all current Directors who are not
executive officers as a group of the Company.
In
addition, a chart listing option holders, grants made in FY
2003, and a list of aggregated options and the value of these
options, is provided.
Options Granted
Average Exercise Price
Options Exercised
Average Exercise Price
Shares sold
Options unexercised
as of 12/31/03
Bradley T.
MacDonald (1)
215,000
$0.86
215,000
$0.86
“0”
All Current Executive
Officers as a Group
92,500
$0.67
76,665
$0.53
“0”
All Current Independent
Directors as a Group
110,000
$1.07
100,000
$0.70
“0”
95,000
15,835
10,000
FY03 Grants @
Price & Expiration
Month/Year
Approximate 5 YR
Potential Realizable
Value at %10
Annual Stock
Appreciation
Unexercised Options
as of 12/31/03
Current Executive Officers & Directors
12,500@$4.80 2008
Employees
Consultants
69,333@$8.71 2008
81,667@$2.23 2008
*Vested options granted are below. 1,250,000 authorized.
12,500
46,669
4,445
63,614*
Value of
Unexercised
Options as of
12/31/03
$116,250
$258,260
$41,339
$415,849
40
Compensation of Directors
The Company is authorized to pay a fee of $300 for each meeting attended by its Directors who are not executive officers. It
reimburses those who are not employees of the Company for their expenses incurred in attending meetings. Independent
Directors claimed $2,459 in Director’s fees and/or expenses in 2003. See “Executive Compensation – Stock Options” for
stock options granted under the 1993 Plan to the Directors. The Company authorized stock options under rule 144 of 2,500
shares at $4.80 to all non-executive members of the board of directors, which includes Michael J. McDevitt, Michael C.
MacDonald, Scott Zion, Mary Travis and Rev. Donald Reilly.
Recent Developments
On March 5, 2004 the Company entered into a joint venture agreement with XL Health, Inc., one of the leading diabetic
management companies in the United States. Medifast, Inc.’s Medifast Plus for Diabetics line will be the exclusive nutritional
product for XL Health’s CMS Medicare Demonstration Project. The pilot project will use Medifast Plus for Diabetics as the
exclusive nutritional intervention program to prove the cost effectiveness of disease management programs for Medicare
beneficiaries. As part of the joint venture Mercantile Safe Deposit and Trust Company became the Lender to XL Health for
a revolving loan with a maximum principal amount of $1 Million. Medifast, Inc. guaranteed the payment on behalf of XL
Health, and therefore has become the Guarantor of the Loan to Mercantile Safe Deposit and Trust.
Medifast, Inc. intends to increase the number of licensed and corporately owned clinics to over 125 nationwide by year-end
in 2004. The Company has acquired over 30 additional Hi-Energy licensed Weight Control Centers since December 31, 2003.
With of over 100 Weight and Disease Control clinics to date, Medifast, Inc. has become one of the six largest Weight Control
Clinic licensors and operators in the United States.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial ownership of shares of Common Stock or voting Preferred
Stock as of December 31, 2003 of the Chief Executive Officer, each Director, each nominee for Director, each current executive
officer named in the Summary Compensation Table under "Executive Compensation" and all executive officers and Directors as
a group. The number of shares beneficially owned is determined under the rules of the Securities and Exchange Commission and
the information is not necessarily indicative of beneficial ownership for any other person. Under such rules, "beneficial ownership"
includes shares as to which the undersigned has sole or shared voting power or investment power and shares, which the
undersigned has the right to acquire within 60 days of March 15, 2003 through the exercise of any stock option or other right.
Unless otherwise indicated, the named person has sole investment and voting power with respect to the shares set forth in the table.
NAME AND ADDRESS*
Bradley T. MacDonald……….………………………………….
Donald F. Reilly………………………………………………....
Michael C. MacDonald………………………………………….
Scott Zion………………………………………………………..
Mary Travis……………………………………………………...
Michael J. McDevitt……………………………………………..
NUMBER
OF SHARES
1,309,873 (1)
65,452 (2)
38,354 (2)
182,500 (2)
5,340 (2)
13,900 (2)
% OF
OUTSTANDING
12.5%
0.62%
0.37%
1.74%
0.05%
0 .13%
Executive Officers and Directors as a group
(8 persons) …………………………………………………...
1,615,419
15.41%
*The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills, Maryland 21117
(1) Mr. MacDonald beneficially owns 1,129,873 shares of common stock and 90,000 shares of voting Series “C” Preferred Convertible Stock. Mrs. Shirley D.
MacDonald and Ms. Margaret E. MacDonald, wife and daughter of Mr. MacDonald, individually or jointly own 492,625 shares of stock.
(2) Certain Independent directors were issued a total of 3,500 shares of common stock and 12,500 options to buy common stock at $4.80, as compensation for
their participation as Board Members in 2003.
41