2 0 0 4 A n n u a l R e p o r t
M A K I N G P E O P L E H E A LT H Y
25 years strong
FINANCIAL HIGHLIGHTS
FISCAL YEAR
2004
2003
2002
INCOME STATEMENT
Revenue
Operating Income
$27,340,000
$25,379,000
$12,345,000
$3,004,000
$3,598,000
$1,752,000
Net Income Attributed to Common Shareholders
$1,729,000
$2,352,000
$2,405,000
BALANCE SHEET
Total Assets
Stockholders Equity
WEIGHTED AVG. SHARES OUTSTANDING
Basic
Diluted
SHARE DATA
Basic EPS
Diluted EPS
$25,968,000
$24,232,000
$9,888,000
$19,206,000
$17,077,000
$5,578,000
$10,832,360
$9,305,731
$6,722,505
$12,413,424
$10,952,367
$8,737,292
$0.16
$0.14
$0.25
$0.22
$0.36
$0.30
Medifast, Inc. (the “Company” or “Medifast” ) is a Delaware corporation, incorporated in 1980. The Company’s operations
are primarily conducted through five of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc. (“Jason”), Take Shape for
Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven Crondall, LLC. The Company is engaged
in the production, distribution, sale and support of weight management and disease management products and other
consumable health and diet products manufactured in a modern, FDA-approved facility in Owings Mills, MD.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements which may involve known and unknown risks, uncertainties and other factors that
may cause Medifast, Inc. actual results and performance in future periods to be materially different from any future results or performance
suggested by these statements. Medifast, Inc. cautions investors not to place undue reliance on forward-looking statements, which speak
only to management’s expectations on this date.
About
Medifast is committed to making people healthy through nutritional intervention.
With restaurants offering huge meal portions, and with the high fat and caloric content of many foods
on the market today, it is no wonder that 64.5% of American adults are overweight or obese. This
alarming health trend has led to increased incidences of diabetes, heart disease, arthritis, and other
health problems. Medifast is in a unique position to address these issues. Our products and programs
have been clinically proven, recommended by over 15,000 physicians, and used by more than 1 million
people for 25 years.
Medifast, Inc. 2004 Annual Report 1
To Our Shareholders
2004 proved to be yet another year of significant growth and success for the
Company. Medifast revenues grew 8% in 2004, despite a significant drop in our international sales.
Every Medifast brand showed positive growth in 2004. The Medifast Direct and Physicians businesses
continue their impressive growth due to highly-focused, effective marketing. Take Shape for Life was
accepted into the prestigious Direct Selling Association and developed a party plan model, which we
expect will fuel its growth in 2005. Our Hi-Energy Weight Control Centers have grown to more than
100 clinics, making us one of the largest weight control center companies in the country. Consumers
Choice Systems has expanded its retail penetration in the U.S. and is expanding into Canada. Finally,
Sunrise Distributing has become a valuable distribution and printing facility for our core businesses,
and is now a revenue generator, serving external customers.
A great deal of credit for our growth must go to the talented, energetic Medifast team. These
dedicated individuals share my passion for making people healthy and have helped drive our growth
to new levels.
Medifast possesses three unique attributes which give us a competitive edge in the marketplace:
• Manufacturing - Jason Pharmaceuticals, Inc., the Company’s wholly-owned manufacturing
subsidiary, produces over 95% of the Medifast products in our state-of-the-art, FDA-approved
food and pharmaceutical-grade facility in Owings Mills, Maryland. Being both a manufacturer
and a distributor allows us favorable margins and the flexibility to compete aggressively. As our
business continues to grow, our manufacturing facility has the capacity to significantly increase
production with minimal capital expenditures.
• Diverse Products - The Medifast soy-based formulas have been on the leading edge of nutrition
technology for the last 25 years. In 2004 alone, we created 23 new products, thanks to our
dynamic Research and Development team. Our diverse meal replacement menu makes the
Medifast program easy for people to stay on and helps to attract and maintain customers.
2 Medifast Inc. 2004 Annual Report
• Clinical Studies - Over the years, Medifast has earned an impressive reputation with
customers and within the medical community. Clinical data from some of the most respected
institutions in the world, including Johns Hopkins University and the National Institutes of
Health, have proven Medifast's effectiveness. In 2005, Johns Hopkins University made an
important addition to our already prestigious library of clinical claims. Lawrence Cheskin,
M.D., Johns Hopkins Bloomberg School of Public Health, announced results of a two-year
study of diabetic patients comparing Medifast products with a food diet recommended by
the American Diabetic Association. In addition to impressive health improvements, after 86
weeks, the Medifast group lost twice as much weight and were twice as compliant as the group
following a diet based on the American Diabetes Association’s dietary guidelines. Additionally,
24% of the Medifast users decreased or eliminated their diabetes medication, compared to 0%
on the standard ADA diet.
Medifast’s growth over the last five years has been outstanding by any standard. Our goal is to continue
to make people healthy and to further penetrate the $39 billion weight loss market.
Rest assured that everyone at Medifast is working hard to turn our opportunities into results.
Medifast programs and products have been
clinically proven, recommended by
over 15,000 physicians, and used
by more than 1 million people
for 25 years.
Sincerely,
Bradley T. MacDonald
Executive Chairman
Medifast Inc. 2004 Annual Report 3
The Medifast Direct business, through its Lifestyles Program, is a medically supported program
wherein consumers order products directly from Medifast’s website www.medifastdiet.com or toll-
free numbers. Customers also have access to qualified medical and nutritional practitioners for
program support and information.
During 2004, Medifast utilized print ads, TV ads, direct mail and web marketing to drive business.
As a result of targeting our core demographic base, Medifast’s advertising expenditures have resulted
in a much higher return for each advertising dollar spent.
In mid-2004, the Medifast website, www.medifastdiet.com, was redesigned to improve functionality
and enhance the shopping experience, as well as to create an engaging support environment for
customers. Medifast is now among the leaders
in the online weight loss arena.
include the
Many physicians and clinics
Medifast program within
their practice
while providing appropriate testing, medical
support and evaluations for patients on the
program. Medifast has grown its Physician
business through direct mail and promotion at
national conferences of the American Society
of Bariatric Physicians, American Academy
of Family Physicians, American Academy of
Nurse Practitioners, and American Diabetes
Association.
4 Medifast Inc. 2004 Annual Report
In 2004, Medifast continued to target
our core demographic
customers and improve the
effectiveness of our marketing efforts.
In its second year of existence, Take Shape for Life continued to expand its direct sales Health
Advisor network. The Health Advisor network is a system of independent businesspeople
providing tools, education and support along with Medifast products to improve the health
of their clients.
In September 2004, Take Shape for Life received acceptance as a full member of the prestigious
Direct Sales Association (DSA). The DSA is the premiere trade organization for the direct
sales industry. With exclusive membership, the DSA selects only member companies that
meet their high standards for product excellence, fair distributor policies, and demonstrated
ethics in business. Each DSA member company is bound by a strict code of ethics in all
business dealings.
2004 achievements also include introduction of the TSFL Tasting Program, which utilizes a party
plan model. Robust training and marketing materials also energized our Health Advisor network.
Tsfl healTh advisors
at the annual 2004 tsfl conference.
Medifast Inc. 2004 Annual Report 5
Hi-Energy Weight Control Centers specialize
in clinically-supervised weight management
programs to promote both weight loss and
improved health. As a physical clinic
that offers support and its own private
label products, Hi-Energy is one of the
industry’s most dynamic businesses.
During 2004, the number of Hi-Energy
Weight Control Centers grew to over 100.
Most of the current centers are licensees.
Additionally, the Company is operating
11 corporately-owned clinics that serve as
models to attract qualified licensees.
Hi-Energy provides its
customers with a wide variety
of products, programs, and services
that make it one of the industry’s
most dynamic businesses.
6 Medifast Inc. 2004 Annual Report
(cid:35)(cid:47)(cid:46)(cid:51)(cid:53)(cid:45)(cid:37)(cid:50)(cid:51)(cid:0)(cid:35)(cid:40)(cid:47)(cid:41)(cid:35)(cid:37)(cid:0)(cid:51)(cid:57)(cid:51)(cid:52)(cid:37)(cid:45)(cid:51)
Founded in March 1996, and acquired by Medifast in 2003, Consumers Choice Systems™ is a retail
distribution company focusing on high quality, innovative products for women and people with diabetes.
The Woman’s Wellbeing brand includes supplements for urinary tract infections and menopause relief.
CCS products are currently distributed in retail outlets nationwide.
In 2005, the Company will launch Maintain by Medifast, a clinically proven line of foods formulated
to help people with Type 2 (adult-onset) diabetes control their weight and the adverse effects of
their condition.
DISTRIBUTION
The Sunrise Distributing 119,000 square foot distribution operation
uses over 1,000 feet of conveyor systems, state-of-the-art shipping
technologies and tracking software to ensure accurate and timely
processing. In addition to providing the daily fulfillment services for
all Medifast subsidiaries, Sunrise Distributing also services multiple
external customers. Services include specialty packing, product
assembly, inventory management, and fulfillment with e-processing
and advanced reporting.
PRINTING
Today, the company produces most of its own marketing and
advertising materials at Sunrise Distributing through an expanded
print shop and mail house. Its state of the art technology helps reduce
costs of materials for our business segments. In December 2004, the Company acquired a Xerox
iGen3 digital production press, becoming one of only 150 companies who have obtained this
top-of-the-line machine.
Our capabilities, which include a full-service print
house, warehouse and distribution facility, allow Sunrise
Distributing to service a complete range of
business needs for internal and external clients.
Medifast Inc. 2004 Annual Report 7
The Medifast Family
of Products
• medifast 55 shakes •
• medifast 70 shakes •
• plus for appetite suppression shakes •
• bars • soups •
• oatmeal • pudding • drinks •
• plus for diabetics •
• plus for women’s health •
• plus for joint health •
• plus for coronary health •
• fit! for kids •
8 Medifast Inc. 2004 Annual Report
BOARD OF DIRECTORS
Rev. Joseph D. Calderone,
OSA
Michael C. MacDonald
Michael J. McDevitt
Rev. Donald F. Reilly, OSA
Mary T. Travis
R. Scott Zion
PRESIDENT
EXECUTIVE CHAIRMAN
Michael S. McDevitt
Bradley T. MacDonald
ADDITIONAL INFORMATION
Headquarters
Medifast, Inc.
11445 Cronhill Drive
Owings Mills, MD 21117
800.223.1809
www.medifastdiet.com
Investor Relations Contact
Jeremy Hunt
Stock Exchange Listing
American Stock Exchange
Trading Symbol: MED
Independent Public
Accountants
Bagell, Josephs & Company, LLC
Gibbsboro, New Jersey
BDO Seidman Affiliate
Transfer Agent and Register
American Stock Transfer
and Trust Company
59 Maiden Lane
Plaza Level
New York City, NY 10038
800-937-5449
Annual Meeting
September 16, 2005
BOARD OF DIRECTORS
Bradley T. MacDonald
Executive Chairman,
Medifast, Inc.
Reverend Donald F. Reilly, OSA
Provincial,
Augustinian Order of Villanova, PA
Michael C. MacDonald
President of Global Accounts and Marketing Operations,
Xerox Corporation
R. Scott Zion
Principal,
Resources Development, Inc.
Mary T. Travis
Senior Vice President of Wholesale Operations,
Sunset Mortgage Company, LP
Michael J. McDevitt
Senior Executive (retired),
Federal Bureau of Investigation
Reverend Joseph D. Calderone, OSA
Associate Director of Campus Ministry,
Villanova University
CORPORATE OFFICERS
Michael S. McDevitt
President
Leo V. Williams, III
Executive Vice President
Richard J. Law
Vice President
Brendan N. Connors, CPA
Vice President of Finance
Quick, Easy, Clinically Proven
Medifast, Inc.
11445 Cronhill Drive
Owings Mills, Maryland 21117
800 • 223 • 1809
medifastdiet.com
Medifast Inc. 2004 Annual Report V.7.28.5a
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File No. 000-23016
----------
MEDIFAST, INC.
----------------------------------------------------
DELAWARE
-------------------------------
Incorporation State
13-3714405
-------------------
Tax Identification number
11445 CRONHILL DRIVE, OWINGS MILLS, MD
---------------------------------------------------------------
Principal Office Address
21117
----------
Phone (410) 581-8042
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
---------------------------------------
Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorpo-
rated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [ ]
The issuer’s revenues for the fiscal year ended December 31, 2004 were $27,340,000
Aggregate market value of voting stock held by non-affiliates of registrant (deemed by registrant for this pur-
pose to be neither a director nor a person known to registrant to beneficially own, exclusive of shares subject to
outstanding options, less than 5% of the outstanding shares of registrant’s Common Stock) computed by refer-
ence to the closing sales price as reported on the American Stock Exchange on
December 31, 2004: $3.52.
Number of shares outstanding of registrant’s Common Stock, as of December 31, 2004: 11,001,070 shares
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
Explanatory Note
This Form 10-KSB/A is being filed for the purpose of adding to or clarifying disclosures to our Controls and
Procedures, Significant Accounting Policies, and footnotes previously included in our Form 10-KSB for the fis-
cal year-ended December 31, 2004. The addition to our Controls and Procedures includes a report on manage-
ment’s internal control over financial reporting required by Item 308(c) of Regulation SB. With respect to our
Significant Accounting Policies, we have added greater detail about our revenue recognition policy. The Trade-
mark footnote has been revised to clarify and supplement disclosures that might be useful to the readers of our
financial statements. In addition, we have added updated certifications at Exhibits 31.1, 31.2 & 32.1 to conform
to Item 601(b)(31) and (32) of Regulation SB.
Except as described above we have not amended or modified the financial information or other disclosures on
Form 10-KSB as originally filed. This Form 10-KSB/A does not reflect events occurring after the filing of the
original Form 10-KSB, nor does it modify or update the disclosures therein in any way other than as required to
reflect the amendments described above and set forth below.
A former consultant continues to claim that he
transferred his personal Medifast stock to a third
party organization in 2000, in an attempt to keep
these assets out of his bankrupt estate and therefore
outside the jurisdiction of the Bankruptcy Court.
The Company contests, and will vigorously defend,
all such claims made by him. The Trustee in Bank-
ruptcy for the former consultant’s bankruptcy estate
has determined that he had no authority to transfer
these shares from his estate, and has concluded that
the attempted transfer was therefore invalid. The
Trustee has demanded that he produce the shares,
and plans to file a petition with the Bankruptcy
Court requesting that the Court order him to do so.
These assets will be made a part of the bankrupt
estate and will be used to pay creditors.
NOTE Q – SUBSEQUENT EVENTS
In January 2005, the remainder of the Series “B”
Convertible Preferred Stock was converted to
Common Stock in accordance with the terms and
conditions of the original offering statement, dated
January 19, 2000. The offering stated that the
holders, at the time of conversion, are to receive a
dividend at a rate of 10% per annum and that
“interest” will be paid in Common Stock.
F-22 Medifast Inc. 2004 Annual Report
PART I
ITEM 1. BUSINESS.
SUMMARY
Medifast, Inc. (the “Company”, or “Medifast”) is a Dela-
ware corporation, incorporated in 1980. The Company’s
operations are primarily conducted through five of its
wholly owned subsidiaries, Jason Pharmaceuticals, Inc.
(“Jason”), Take Shape for Life, Inc. (“TSFL”), Jason En-
terprises, Inc., Jason Properties, LLC and Seven Crondall,
LLC. The Company is engaged in the production,
distribution, and sale of weight management and disease
management products and other consumable health and
diet products. Medifast, Inc.’s product lines include
weight and disease management, meal replacement and
sports nutrition products manufactured in a modern, FDA
approved facility in Owings Mills, Maryland.
MARKETS
Over the past 20 years the obesity rates in the United
States have increases dramatically. The Centers for
Disease Control (CDC) estimate that 64% of the U.S.
adult population is overweight or obese. The amount
of overweight adolescents and children ages 6-19 years
have more than tripled since 1980. Currently, the CDC
estimates that over 30% of adolescents and children are
overweight.
Distribution Channels
The Medifast Lifestyles Program- The Medifast Life-
styles 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 or toll-free number. The Lifestyles
medical practitioner ensures that each patient receives
personalized attention throughout the weight loss pro-
gram. Management estimates that more than 15,000
physicians nationwide have prescribed Medifast as a
treatment for their overweight patients since 1980, and
an estimated 1 million patients have used its’ products to
lose and maintain their weight.
The Company maintains an in-house Lifestyles support
program for customers who have a Medifast physician,
who does not have the time to provide counseling sup-
port. 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. The in-house medical and marketing staff
have developed extensive program support materials on
Medifast products and programs, which are placed free of
charge in customer orders, in addition to being available
on the Company’s website.
The CDC estimates that in the U.S. the associated costs
with overweight and obesity reached $117 billion in
2000. The most common health problems associated
with obesity are type II diabetes, coronary heart disease,
hypertension and stroke, depression and certain forms of
cancer. It’s also estimated that poor nutrition and physi-
cal inactivity account for more than 300,000 premature
deaths per year in the U.S.
Take Shape for Life™ - The Take Shape for Life
program is a comprehensive, medically supervised health
network designed to assist in long-term weight loss,
health management, or nutritional supplementation. The
program features Medifast weight and disease manage-
ment products, along with a team of personal and
professional Health Advisors, to support the individual
through their weight and or health management program.
A 2003 market research study concluded consumers
spend about $39 billion per year trying to lose weight
or prevent weight gain. This includes consumer spend-
ing on diet foods, medically supervised and commercial
weight loss programs, diet books, appetite suppressants,
fitness clubs, diet sodas, and videos and cassettes.
Program entrants are encouraged to consult with their
primary care physician and a Take Shape for Life Health
Advisor to determine the Medifast program that is right
for them. Physician directed Health Advisors are sup-
ported, educated and qualified by The Health Institute, a
training group staffed by Medifast professionals. Health
Advisors obtain Medifast qualification based upon testing
of their knowledge on Medifast products and programs.
Medifast Inc. 2004 Annual Report 1
The Company has developed a Tasting program, which is
similar to a home-based Party Plan model for introduc-
ing new customers to the Medifast products and program.
Physician directed Health Advisors recruit program
entrants and provide them with program information,
Medifast product samples and the opportunity to order
products.
Medifast Physicians and Clinics – Many Medifast
physicians have chosen to implement the Medifast pro-
gram within their practice. These physicians carry an in-
ventory of Medifast products and resell them to patients.
They also provide appropriate testing, medical support
and evaluations for patients on the program. Physi-
cians can also direct their patients to order directly from
Medifast, if they do not have space to stock inventory.
Hi-Energy Weight Control Centers - 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.
During 2004 the number of Hi-Energy Weight Control
Centers grew to over 100 nationally. Hi-Energy Weight
Control Centers offer a competitive marketing edge
through a regional advertising program, exclusive territo-
ries and marketing support. The Company continues to
seek out qualified licensees to add to its growing number
of weight control clinics nationwide. Additionally, the
Company is operating 11 corporately owned clinics that
serve as models to attract qualified licensees.
Consumers Choice System™ - Founded in March
1996, and 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 meno-
pause relief, coronary health and joint health. Products
under the UTI brand address the detection, relief and
prevention of urinary tract and bladder infections. CCS
products are currently distributed in retail outlets nation-
wide. The Company is currently launching Medifast’s
“Maintain,” a pharmacist-directed Diabetic line of
products. 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 MEDIFAST® BRAND
Medifast is a medically supervised weight management
program, which specializes in multidisciplinary patient
education programs using the highest quality meal re-
placement supplements. In recent years Medifast’s core
products and programs have continued to expand over a
wellness spectrum to include disease management prod-
ucts. Medifast offers products specially formulated for
Diabetics as well as products for women’s health, joint
health and coronary health.
In 2003, Medifast began a two-year study with The Johns
Hopkins Bloomberg School of Public Health to evaluate
the efficacy of its Medifast Plus for Diabetics compared
to basic nutrition recommendations by the American
Diabetes Association (ADA). Preliminary results showed
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% of their weight, which
is a standard measure of the Food and Drug Administra-
tion’s (FDA) 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 indi-
cate that Medifast participants sustained an average 9%
decrease in blood fasting glucose and an average 19%
decrease in insulin levels. The final study results are
expected to be released in 2005.
Many Medifast Plus for Diabetics products have earned
the coveted Seal of Approval from the Glycemic Re-
search Institute. The line, designated as Low Glycemic,
does not overly stimulate blood glucose and insulin and
does not stimulate fat-storing enzymes. Products includ-
ed in the Medifast Plus for Diabetics line consist of three
delicious patented shakes, home style chili, apple cin-
namon, French vanilla berry oatmeal, maple and brown
sugar oatmeal, creamy chicken soup, creamy broccoli
soup, chicken noodle soup, minestrone soup and two
snack bars.
The Company expanded the product line of its cutting
edge adolescent weight management program, Fit!™ in
2003. The line, which formerly consisted of only one
ready-to-drink and two chocolate bars, now consists of
2 Medifast Inc. 2004 Annual Report
Throughout the year of 2004, 67,000 shares of Series “C”
Preferred Convertible Stock were converted into 134,000
shares of Common Stock. As of December 31, 2004 there
were 200,000 shares of Series “C” Preferred Convertible
Stock remaining.
NOTE N - 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 com-
mon shares at an exercise price of $4.80 per share. These
warrants may be cancelled, with a 90-day notice, if the con-
sultants fail to perform to the satisfaction of the Company.
During 2003, the Company issued 50,000 warrants to Con-
sumer Choices Systems, Inc. (“CCS”) as part of the pay-
ment 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 2003, 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 Pur-
chase Agreement by and between the Company and Main-
field Enterprises, Inc. and Portside Growth & Opportunity
Fund dated as of July 24, 2003.
During 2004, there were 40,000 warrants exercised at $4.80
and 6,700 warrants exercised at $0.35.
The fair value of these warrants were estimated using the
Black-Scholes pricing model with the following assump-
tions: interest rate 4.5%, dividend yield 0%, volatility 0.40
and expected life of five years.
The Company has the following warrants outstanding for the
purchase of its common stock:
Exercise
Price
$ 0.35
$ 0.35
$ 0.625
$ 4.80
$10.00
$16.78
Year Ended
December 31,
Expiration Date
2004
2003
August, 2004
March, 2005
September, 2004
April, 2008
June, 2006
July, 2008
-
2,000
-
360,000
25,000
82,500
469,500
40,100
-
2,500
400,000
25,000
82,500
550,100
Weighted average exercise price
$7.16
$6.49
As of December 31, 2004, 229,500 of the warrants
were exercisable.
NOTE O - COMMITMENTS, CONTINGENCIES
AND OTHER MATTERS
The Company, like other manufacturers and distribu-
tors 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 P – LITIGATION
On December 16, 2003 John Donavin, on behalf of
the General Public, filed suit, against Jason Pharma-
ceuticals, Inc. in the Superior Court of the State of
California, City and County of San Francisco. The
suit alleges that Medifast bars contain Vitamin D3 or
Vitamin D in violation of Federal laws and regula-
tions, and asks for equitable relief and damages. The
Company’s general council believes that the Compa-
ny’s formulation used in its “meal replacement” bars
for over 20 years has been and is in conformity with
current and past FDA regulations. The Company
believes that the plaintiff’s claim lacks merit and may
even be considered frivolous. The suit has been stayed
upon appeal to the FDA to clarify its regulations.
Medifast Inc. 2004 Annual Report F-21
NOTE J - 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, 2007. Due to the inequities of
funding a retirement plan in the 401K, and in recognition of
the performance responsible for the turnaround of the Com-
pany, the Board of Directors approved a Selective Execu-
tive 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. In June 2004 The Board
of Directors authorized an additional $50,000 to be de-
ferred by Mr. MacDonald followed by a Company match of
$50,000. This brought the Selective Executive Retirement
Compensation Plan total funded value to $450,000. 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 K - 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 con-
vertible 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 conver-
sion 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 L - 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
F-20 Medifast Inc. 2004 Annual Report
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. These shares were converted to common stock in
January 2005. (See note Q).
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 con-
version price will be 75% of the market value of the Com-
pany’s common stock on the day prior to conversion with
a maximum conversion price of $.50 per share subject to ad-
justment as defined. In March 2002, the Board amended 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 provi-
sion and reduced voting to 2 votes per share.
Throughout the year of 2004, 103,120 shares of Series “B”
Convertible Preferred Stock were converted into 206,240
shares of Common Stock. As of December 31, 2004 there
were 300,614 shares of Series “B” Convertible Preferred
Stock remaining.
NOTE M - SERIES “C” PREFERRED
CONVERTIBLE 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 Pre-
ferred 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 dis-
tributed proportionately to Series “C’ preferred holders.
three delicious powdered shakes, vanilla berry oatmeal,
chicken noodle soup, hot cocoa with marshmallows,
chocolate pudding, 3 power-packed bars and one ready-
to-drink.
Medifast has commissioned another study at Johns Hop-
kins that began in 2004 to evaluate the effectiveness of
Medifast Fit! meal replacements in a weight loss program
for overweight children. The study aims to prove that
the Medifast program will generate greater initial weight
loss, greater reductions in body fat and greater improve-
ments in overall health than a standard reference diet.
The study will also evaluate the weight loss outcomes
in a joint parent-child approach versus children dieting
without parental support.
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 popu-
lar fad diets and herbal supplements, Medifast® products
are a safe, nutritionally balanced choice, offering gender
specific formulas containing high protein and low carbo-
hydrates, 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 eas-
ily meet these requirements using the nutrient dense
Medifast® brand of meal replacement food supplements.
Medically supervised, low calorie diets are continuing
to gain popularity, as consumers search for a safe and
effective solution that provides balanced nutrition, quick
weight loss and valuable behavior modification educa-
tion. In addition, consumers are becoming more aware of
chronic diseases such as diabetes and coronary health.
COMPETITION
There are many different kinds of diet products and
programs within the weight loss industry. These include
a wide variety of commercial weight loss programs, phar-
maceutical products, weight loss books, self-help diets,
dietary supplements, appetite suppressants and meal
replacement shakes and bars.
The Company has proven it can compete in this com-
petitive market because its products have been clinically
tested and proven at Johns Hopkins University and have
been safely and effectively used by customers for over 20
years. Medifast has been on the cutting edge of product
development with soy based nutritional and weight man-
agement products since 1989. These products are formu-
lated with high-quality, low-calorie, low-fat ingredients
that provide alternatives to fad diets or medicinal weight
loss remedies.
PRODUCTS
The Company offers a variety of weight and disease
management products under the Medifast® brand and
for select private label customers. The Medifast® line
includes Medifast® 55, Medifast® 70, Medifast® Plus
for Appetite Suppression, Medifast® Plus for Diabet-
ics, Medifast® Plus for Joint Health, Medifast® Plus for
Women’s Health, Medifast® Plus for Coronary Health,
Medifast® Fit!, Medifast® Take ShapeTM, Medifast®
Supplement Bars, Medifast® Creamy Soups, Medifast®
Minestrone Soup, Medifast® Hot Cocoa, Medifast® Oat-
meals, Medifast® Pro Teas, Medifast® Chicken Noodle
Soup, Medifast® Fast Soups, Medifast® Homestyle Chili
and Medifast® Multigrain Crackers.
Medifast nutritional products are formulated with high-
quality, low-calorie, low-fat ingredients. Many Medifast
products are soy based and contain 24 vitamins and min-
erals, as well as other nutrients essential for good health.
The Company uses DuPont Protein Technologies’ Su-
pro® brand soy protein, which is a high-quality complete
protein derived from soybeans.
The Consumers Choice Systems subsidiary sells prod-
ucts under the private label Woman’s Wellbeing. These
products include Menopause Relief Pills, Personal
Cream Lubricant, a UTI Home Screening Test Stick,
UTI Cleansing Wipes, UTI Cranberry-Plus-Blueberry,
Women’s Wellbeing Meal Replacements and all-natural
weight loss pills.
Medifast® brand awareness continues to expand through
product development, line extensions, and the Company’s
emphasis on quality customer service, technical support
Medifast Inc. 2004 Annual Report 3
and publications developed by the Company’s market-
ing staff. 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. The Company has contin-
ued to develop its sales and marketing operations with
qualified management and innovative programs. The
Company’s facility in Owings Mills, MD manufac-
tures powders and supplement bars and subcontracts
the production of its Ready-to-Drink products.
NEW PRODUCTS
The Company expanded the Medifast product line with
twenty-three new products in 2004. Medifast intro-
duced Medifast® Cappuccino, Medifast® Chai Latte,
Medifast® Hot Cocoa with Marshmallows, Medifast®
Maple and Brown Sugar Oatmeal, Medifast® Banana
Cream Pudding, Medifast® Chicken and Wild Rice Soup,
Medifast® Cranberry Mango Fruit Drink, Medifast®
Tropical Fruit Punch Drink and Medifast® Garden Veg-
etable Crackers. Medifast also introduced a line of salad
dressings and three new meal replacement bars. Last, the
Company introduced a line called Essential 1 Meals that
includes grilled chicken breasts, grilled beef patties, tuna
salad and chicken salad.
Consumers Choice Systems reformulated its existing
Menopause Relief capsules, adding a new type of soy
and developing the product into an extended time-release
formula, branded as Menopause Relief 24. Menopause
Relief 24 is the only time release formula for relieving
the symptoms of menopause in the market today. The
Company also introduced two new all natural weight loss
pills in 2004 under the private label Woman’s Wellbeing
called Active Trim and Always Trim. These two new diet
formulas are all-natural capsules that help burn fat, boost
energy and suppress appetite.
MARKETING
The Company continued to build and leverage its core
Medifast brand through multiple marketing strategies to
its target audiences. Print advertising, television, and
radio were all used to target new customers by stressing
Medifast’s quick, easy and safe approach to weight man-
4 Medifast Inc. 2004 Annual Report
agement. Also, direct mail has been utilized to encourage
and support existing customers.
Online advertising began to be used in 2004 and it includ-
ed keyword search, banner ads, affiliate programs, and
targeted direct email campaigns. The online advertising
has been supported by Medifast’s well designed, user-
friendly website, which provides a wealth of information
and customer support for easy ordering functionality.
The Company has expanded its public relations efforts
in order to gain exposure in the media to promote greater
consumer awareness of the Medifast brand. Mr. Dick
Vitale, the famous basketball commentator, continues to
be the Company’s spokesperson, particularly support-
ing the Company’s Take Shape for Life programs and its
Diabetic products and programs.
SALES
The Company’s Sales division handles three primary
areas:
Physician and Clinic Sales— The sales team is respon-
sible for prospecting larger medical accounts, clinics,
hospitals, and HMOs. During 2004, the sales team
attended a number of medical professional trade shows,
which expanded Medifast’s penetration of the clinical
business segment.
Hi-Energy Weight Control Centers— During 2004 Hi-
Energy provided ongoing support to its licensees as well
as to the Company’s 11 corporately owned centers which
opened at the end of 2004. This support included mar-
keting materials, ads, on-site trainings, fitness programs,
nutritional programs and clinical operation materials and
forms. Employees attended professional trade shows,
prospected new licensees, and partnered with area phy-
sicians to provide Hi-Energy programs and services to
local hospitals and private practices.
Take Shape for Life— Provides a sales force of Health
Advisors who support patients and their primary care
physicians with a defined support program.
NOTE I - LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt as of December 31, 2004 and 2003, consist of the following:
2004
2003
$2,850,000 fifteen year term loan secured by the building and land
at a variable rate which was 5.14% at December 31, 2004
$1,760,000 ten-year reducing revolver line of credit rate at LIBOR
plus 220 bps , which was 4.59% on December 31, 2004
$186,976 three-year term loan secured by 20,000 restricted common
shares variable rate which was 8.25% at December 31, 2004
$200,000 five-year term loan secured by equipment
fixed rate was 3% at December 31, 2004
$475,000 seven-year loan secured by the building and land at a
variable rate at LIBOR plus 250 bps, which was 4.91% on
December 31, 2004
$220,000 two-year term loan secured by equipment at a floating rate
which was 6% 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
variable rate, which was prime floating at December 31, 2003.
$ 2,391,000
1,623,000
111,000
130,000
459,000
-
-
-
$ 2,581,000
1,740,000
151,000
172,000
-
73,000
59,000
2,000
- 550,000
Less current portion
4,714,000
458,000
$ 4,256,000
5,328,000
764,000
$ 4,564,000
Future principal payments on long-term debt for the next 5 years are as follows:
2005 ...................................... $ 458,000
2006 ...................................... 475,000
2007 ...................................... 421,000
2008 ……………………….. 376,000
2009……………………….. 379,000
Thereafter…………………... 2,605,000
$4,714,000
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 balance on this line was $369,000 and $55,000 at December 31, 2004 and 2003, respectively. Ef-
fective January 17, 2004, $366,000 of the line of credit was converted to a note payable secured by all assets of
Jason Pharmaceuticals excluding trade marks at a variable rate at libor plus 250 basis points which was 4.4% on
December 31, 2004.
Medifast Inc. 2004 Annual Report F-19
NOTE H - INCOME TAXES
At December 31, 2004 and 2003, the principal components of the net deferred tax assets are as follows:
Net operating loss carry
forwards
Accounts receivable
Inventory overhead and
write downs
Trademarks and intangibles
Total deferred tax assets
Current benefit
2004
$ -
19,000
-
91,000
110,000
19,000
$91,000
2003
$290,000
32,000
274,000
-
596,000
596,000
A reconciliation of the federal statutory rate to income tax expense is as follows:
Year Ended
December 31,
Income tax based on federal
statutory rate
State and local tax, net of
federal benefit
Deferred income tax expense
Income tax expense
2004
$600,000
90,000
469,000
$1,159,000
2003
$973,000
175,000
-
$1,148,000
F-18 Medifast Inc. 2004 Annual Report
MANUFACTURING
Jason Pharmaceuticals, Inc., the Company’s wholly
owned manufacturing subsidiary, produces over 95%
of the Medifast products in a state-of-the-art food and
pharmaceutical-grade facility in Owings Mills, Maryland.
Management purchased the plant in July 2002 for $3.4
million. The Company purchased additional lines for
the internal production of its growing nutritional meal
replacement bar product line in 2003.
The manufacturing facility has the capacity for significant
increases to its production output with minimal capital
expenditures. It is presently operating on a single shift.
Adding an additional shift, along with diminutive ma-
chinery expenses would enable the Company to produce
enough products to generate over $200 million in sales.
Manufacturing processes, product labeling, quality
control and equipment are subject to regulations and
inspections mandated by the Food & Drug Administra-
tion (FDA), the Maryland State Department of Health
and Hygiene, and the Baltimore County Department of
Health. The plant strictly adheres to all GMP practices
and has maintained its status as an “OU” (Orthodox
Union) Kosher-approved facility since 1982.
FINANCING AND STRATEGIC ALTERNATIVES
Management desires to develop strategic marketing
relationships with other third parties having existing
relationships with the medical professional community,
specifically to reach the diabetic population in the United
States and to secure international distribution in Europe
and Asia.
GOVERNMENTAL REGULATION HISTORY
The formulation, processing, packaging, labeling and
advertising of the Company’s products are subject to
regulation by several federal agencies, but principally
by the Food and Drug Administration (the “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. Applicable regulations prevent the
Company from representing in its literature and labeling
that its products produce or create medicinal effects or
possess drug-related characteristics. The FDA could, in
certain circumstances, require the reformulation of cer-
tain products to meet new standards, require the recall or
discontinuation of certain products not capable of refor-
mulation, or require additional record keeping, expanded
documentation of the properties of certain products,
expanded or different labeling, and scientific substantia-
tion. If the FDA believes the products are unapproved
drugs or food additives, the FDA may initiate similar
enforcement proceedings. Any or all such requirements
could adversely affect the Company’s operations and its
financial condition.
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.
To the extent that sales of vitamins, diet, or nutritional
supplements may constitute improper trade practices
or endanger the safety of consumers, 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 Com-
pany’s products are sold. The Company’s products are
manufactured and packaged in accordance with custom-
ers’ specifications and sold under their private labels both
domestically and in foreign countries through indepen-
dent distribution channels.
PRODUCT LIABILITY AND INSURANCE
The Company, like other producers and distributors of
ingested products, 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. 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
of its suppliers of those products to name the Company
Medifast Inc. 2004 Annual Report 5
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.
upon appeal to the FDA to clarify its regulations. The
Company believes recent legislation restricting the ability
of plaintiff’s lawyers from filing local class action suits
should favor the Company’s legal position in this case.
EMPLOYEES
At December 31, 2004, the Company employed 130
full-time and contracted employees, of whom 46 were
engaged in manufacturing, warehouse management, and
shipping, and 84 in marketing, administrative, call center
and corporate support functions. None of the employees
are subject to a collective bargaining agreement with the
Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 49,000 square-foot facility in Ow-
ings Mills, Maryland, which contains its Corporate Head-
quarters and manufacturing plant. In 2003, the Company
purchased a state-of-the-art 119,000 square-foot distribu-
tion facility in Ridgely, Maryland. The facility gives the
Company the ability to distribute over $200 million of
Medifast product sales per year. In 2004, the Company
purchased a 3,000 square foot conference and training fa-
cility in Ocean City, Maryland. The facility will be used
to conduct corporate training meetings, Board of Director
Meetings and employee morale and wellness programs.
The Company has 11 leases for its corporately owned
Hi-Energy Weight Control clinics throughout Florida, Ar-
kansas, Mississippi and Texas. The leases range in terms
from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
On December 16, 2003, John Donavin, on behalf of the
General Public, filed suit, against Jason Pharmaceuti-
cals, Inc. in the Superior Court of the State of California,
City and County of San Francisco. The suit alleges that
Medifast bars contain Vitamin D3 or Vitamin D in viola-
tion of Federal laws and regulations, and asks for equitable
relief and damages. The Company’s General counsel
believes that the Company’s formulation used in its “meal
replacement” bars for over 20 years has been and is in con-
formity with current and past FDA regulations. The Com-
pany believes that the plaintiff’s claim lacks merit and may
even be considered frivolous. The suit has been stayed
6 Medifast Inc. 2004 Annual Report
A former counsel continues to claim that he transferred
his personal Medifast stock to a third party organiza-
tion in 2000, in an attempt to keep these assets out of
his bankrupt estate and therefore outside the jurisdiction
of the Bankruptcy Court. The Company contests, and
will vigorously defend, all such claims made by him.
The Trustee in Bankruptcy for his bankruptcy estate
has determined that he has no authority to transfer these
shares, and has concluded that the attempted transfer
was therefore invalid. The trustee has demanded that he
produce the shares, and plans to file a petition with the
Bankruptcy Court requesting that the Court order him to
do so. These assets will be made a part of the bankrupt
estate and will be used to pay creditors.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The Medifast Annual Shareholder Meeting was held on
September 3, 2004 at Sunrise Distributing, the Compa-
ny’s distribution headquarters. The shareholders voted
Bradley T. MacDonald (98%) and Rev. Donald F. Reilly,
O.S.A.* (98%) as Class I Directors that will hold office
until 2007, Scott Zion* (98%) and Michael C. MacDon-
ald (98%) as Class II Directors, and Mary T. Travis*
(98%), Michael J. McDevitt (98%), and Rev. Joseph
Calderone, O.S.A.* (98%) as Class III Directors. Class
II and III Directors will hold office until the next Annual
Shareholders Meeting at which time their respective class
term expires and their respective successors will be duly
elected and qualified. Additionally, the shareholders
approved the appointment of Bagell, Josephs & Com-
pany, LLC, an independent member of the BDO Seidman
Alliance, as the Company’s independent auditors for the
fiscal year ending December 31, 2004.
Additionally the Board of Directors elected Mr. Bradley
T. MacDonald as Chairman of the Board and CEO and
Mr. Conrad Sump, Esq. as Secretary of the Corporation.
* Independent Director
NOTE G – OPERATING LEASES
The Company leases office space for its eleven corporately owned Hi-Energy Weight Control Clinics under
lease terms ranging from one to five year leases commencing 2004. Monthly payments under the leases range
in price from $1,120 to $2,695. The Company is required to pay property taxes, utilities, insurance and other
costs relating to the leased facilities.
The following is a schedule by years of future minimum rental payments required under operating lease that
have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2004:
For the Years Ending December 31,
2005
2006
2007
2008
2009
$238,737
208,605
166,355
121,871
117,038
Total minimum payments required
$852,606
Medifast Inc. 2004 Annual Report F-17
NOTE E – TRADEMARKS
As of December 31, 2004
As of December 31, 2003
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Customer lists
Non-compete agreements
Trademarks and patents
Goodwill
$ 4,355,000
840,000
1,703,000
894,000
$ 394,000
248,000
12,000
$ 1,724,000
840,000
1,541,000
894,000
$ 150,000
86,000
14,000
Total
$ 7,792,000
$ 654,000
$ 4,999,000
$250,000
Amortization expense for the year ended December 31, 2004 and 2003 was as follows:
Customer lists
Non-compete agreements
Trademarks and patents
2004
$ 244,000
162,000
Total Trademarks and Intangible
$ 406,000
2003
127,000
86,000
14,000
$ 227,000
Amortization expense is included in selling, general and administrative expenses.
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2004 and 2003 consist of the following:
Trade payables
Accrued expenses and other
Accrued payroll and related taxes
Sales commissions payable
Deferred revenue
Total
2004
$ 343,000
2003
$ 969,000
116,000
121,000
215,000
266,000
96,000
360,000
-
168,000
$ 940,000
$1,714,000
F-16 Medifast Inc. 2004 Annual Report
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) 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. The following is a list of the low and high closing prices by fiscal quarters for 2004 and 2003:
2004
-----------------
Low High
----- ------
8.60 14.05
Quarter ended March 31, 2004 ...................
Quarter ended June 30, 2004 ....................
4.78 9.33
Quarter ended September 30, 2004 ............... 3.05 5.09
3.20 5.24
Quarter ended December 31, 2004 ................
2003
-----------------
Low High
----- ------
3.79 6.10
Quarter ended March 31, 2003 ..................
Quarter ended June 30, 2003 ....................
4.80 14.95
Quarter ended September 30, 2003 ............... 11.15 17.21
Quarter ended December 31, 2003 ................ 11.60 18.49
(b) The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not
represent actual transactions.
(c) There were 6,366 record holders of the Company’s Common Stock, as of December 31, 2004. The Com-
pany had 6 preferred holders of the Company’s stock as of December 31, 2004.
(d) No dividends on common stock were declared by the Company during 2004 or 2003.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements which may involve known and unknown risks, uncertainties
and other factors that may cause Medifast, Inc. actual results and performance in future periods to be materially
different from any future results or performance suggested by these statements. Medifast, Inc. cautions investors
not to place undue reliance on forward-looking statements, which speak only to management’s expectations on
this date.
Medifast Inc. 2004 Annual Report 7
2004 COMPARISON WITH 2003
OPERATING
Consolidated net sales for 2004 were $27,340,000 as
compared to 2003 sales of $25,379,000, an increase
of $1,961,000, or 8%. A major reason for the revenue
increase for the Company is attributed to the contin-
ued success from the Take Shape for Life division,
national advertising, the Hi-Energy acquisition and the
redesigned website. The Take Shape for Life division
added a Take Shape for Life replicating website option
for Health Advisors, an Internet distribution program
for their customers, as well as the new Tasting Party
Program. These have proven to be effective at generat-
ing revenues and recruiting Health Advisors into the
Take Shape for Life Network. The national advertising
campaign included print, TV, radio, direct mail and web
marketing. The Company increased its Internet sales
in 2004 as compared to 2003, by redesigning its web-
site and increasing its web marketing. The redesigned
website created an easy to use shopping cart and a
more user-friendly interface. The acquisition of Hi-
Energy Weight Control Centers contributed to revenues
throughout 2004.
Cost of sales decreased from $6,825,000 in 2003 com-
pared to $6,746,000 in 2004, a decrease of $79,000.
The decrease is attributed to decreases in costs through
economies of scale.
Gross margins increased to 75% in 2004 from 73% in
2003. This was largely due to greater economies of
scale as a result of the acquisition of the Company’s
119,000 square foot distribution facility thereby creat-
ing higher margins of the Medifast® products through
purchasing capabilities. The increase is also attributed
to the increased margin of Medifast® direct and Inter-
net sales directly to patients via the Lifestyles and Take
Shape for Life programs. Selling, general and adminis-
trative (SG&A) expenses of $17,590,000 for 2004 were
$2,634,000 more than the $14,956,000 in 2003, due
to increased advertising expenses to include television
advertising, celebrity endorsements, expenses involved
with starting and operating new corporately owned Hi-
Energy Weight Control Clinic locations, the expansion
8 Medifast Inc. 2004 Annual Report
of the Take Shape for Life commissioned sales orga-
nization, and overall corporate infrastructure improve-
ments. The Company experienced income from opera-
tions for the year 2004 of $3,004,000. This compares
with income from operations of $3,598,000 in 2003, a
decrease of 17%.
In 2004, the Company realized a tax expense
of $1,159,000, as compared to a tax expense of
$1,148,000 in 2003 as a result of the elimination of the
deferred tax asset and the net operating loss for income
tax purposes. Interest expense increased to $245,000 in
2004, as compared to $154,000 in 2003. This increase
was due to a complete year of additional debt, which
was acquired in 2003.
A preferred stock dividend in the amount of $18,000
was expensed to shareholders in 2004.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, the Company had net working
capital of $7,465,000, a decrease of $1,933,000 from
the $9,398,000 net working capital balance at Decem-
ber 31, 2003. Cash and investment securities at Decem-
ber 31, 2004 were $3,238,000. On November 7, 2003
Medifast, Inc.’s wholly owned subsidiary Jason Phar-
maceuticals, 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 LIBOR plus two percent. The increased
line may be used to finance equipment, inventory, and
receivables of Medifast, Inc. The Company currently
has no off-balance sheet arrangements.
In the year ended December 31, 2004, the Company
generated a negative cash flow of $2,332,000 from
operations, primarily attributable to purchases of
inventory and the pay down of accounts payable and
accrued expenses.
In the year ended December 31, 2004, net cash used in
investing activities was $3,940,000, which primarily con-
sisted of the purchase of intangible assets, purchase of
property and equipment, and the purchase of a building.
NOTE C - INVENTORY
Inventory consists of the following at December 31, 2004 and 2003:
2004
Raw materials ....................…... $1,085,000
Packaging…………………….. 958,000
Finished goods .......................... 2,208,000
$4,251,000
2003
$ 813,000
694,000
1,481,000
$2,988,000
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2004 and 2003, consist of the following:
Land
Building and building improvements
Equipment and fixtures
Vehicle
11,000
2004
$ 650,000
6,728,000
4,062,000
Less accumulated depreciation and amortization
Property, plant and equipment - net
11,451,000
2,753,000
$ 8,698,000
2003
$ 565,000
5,937,000
2,876,000
20,000
9,398,000
1,949,000
$ 7,449,000
Substantially all of the Company’s property, plant and equipment are pledged as collateral for various loans (see Note I).
Depreciation expense for the years ended December 31, 2004 and 2003 were $804,000 and $421,000, respectively.
Medifast Inc. 2004 Annual Report F-15
Board (“APB”) Opinion No. 28, “Interim Financial
Reporting”, to require disclosure about those effects
in interim financial information. SFAS 148 is effec-
tive 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.
In May 2003, the FASB issued SFAS Statement No.
150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”.
This Statement establishes standards for how an issuer
classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It re-
quires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). This statement is effective for finan-
cial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003,
except for mandatory redeemable financial instruments
of nonpublic entities, if applicable.
It is to be implemented by reporting the cumula-
tive effect of a change in an accounting principle for
financial instruments created before the issuance date
of the Statement and still existing at the beginning of
the interim period of adoption. The adoption of this
statement did not have a significant impact on the
Company’s results of operations or financial position.
In November 2002, the FASB issued Interpreta-
tion No. 45 (“FIN 45”), Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN
45 requires a company, at the time it issues a guaran-
tee, to recognize an initial liability for the fair value
of obligations assumed under the guarantees and
elaborates on existing disclosure requirements related
to guarantees and warranties. The recognition require-
ments are effective for guarantees issued or modified
after December 31, 2002 for initial recognition and
initial measurement provisions. The adoption of FIN
F-14 Medifast Inc. 2004 Annual Report
45 did not have a significant impact on the Company’s
results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation
No. 46 (“FIN 46”), Consolidation of Variable Inter-
est Entities, an Interpretation of ARB No. 51. FIN 46
requires certain variable interest entities to be consoli-
dated by the primary beneficiary of the entity if the
equity investors in the entity do not have the charac-
teristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after
January 31, 2003.
For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning
after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on the Company’ results of
operations or financial position.
[16] 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 Compa-
ny’s investments consist of debt and equity securities
classified as available-for-sale securities. Accord-
ingly, 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 securi-
ties 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.
[17] RECLASSIFICATIONS
Certain amounts for the year ended December 31,
2003 have been reclassified to conform to the presen-
tation of the December 31, 2004 amounts. The reclas-
sifications have no effect on net income for the year
ended December 31, 2003.
In the year ended December 31, 2004, net cash used
in financing activities was $304,000, representing the
principal repayments of long-term debt.
Agreement by and between the Company and Mainfield
Enterprises, Inc. and Portside Growth & Opportunity
Fund dated as of July 24, 2003 (the “Securities Pur-
chase Agreement”).
In pursuing its business strategy, the Company may re-
quire additional cash for operating and investing activi-
ties. The Company expects future cash requirements,
if any, to be funded from operating cash flow and cash
flow from financing activities.
There are no current plans or discussions in process
relating to any material acquisition that is probable in
the foreseeable future
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 transac-
tion will be accounted for as an asset purchase transac-
tion. 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 agree-
ment 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”) 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
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 New Roads, 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 November 7, 2003 Medifast, Inc.’s wholly owned
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-En-
ergy 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.
SEASONALITY
The Company’s weight management/diet control is sub-
ject to seasonality. Traditionally the holiday season in
November/December of each year are considered poor
sales for diet control products and services. January
and February generally show increases in sales.
INFLATION
To date, inflation has not had a material effect on the
Company’s business.
INFORMATION SYSTEMS INFRASTRUCTURE
Throughout 2004 the Company significantly enhanced
the capacity and the functionality of its IT infrastruc-
ture. The enhancements include a more robust email
system and upgraded network operating system. The
Company also added additional servers, as well as
a higher capacity network switch. A Virtual Private
Medifast Inc. 2004 Annual Report 9
Trading Policy
In March 2003, the Company implemented a Trading
Policy whereby if a director, officer or employee has
material non-public information relating to the Compa-
ny, neither that person nor any related person may buy
or sell securities of the Company or engage in any other
action to take advantage of, or pass on to others, that
information. Additionally, insiders may purchase or
sell MED securities if such purchase or sale is made
within 30 days after an earnings or special announce-
ment to include the 10-KSB, 10-QSB and 8-K in order
to insure that investors have available the same informa-
tion necessary to make investment decisions as insiders.
ITEM 8. FINANCIAL STATEMENTS.
See pages F-1 through F-20.
ITEM 9. CHANGES AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
There were no disagreements with the Company’s
independent auditors, regarding accounting and financial
disclosures for the fiscal year ending December 31,
2004.
Network was implemented between the remote office
sites. The Company continued its upgrades and service
enhancements to its Navision (ERP) system to more
effectively and efficiently manage inventory and sales
growth.
ITEM 7. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is
defined in Rules 13a-15(e) and 15d-15(e) of the Securi-
ties Exchange Act of 1934, as amended (the “Exchange
Act”). This term refers to the controls and procedures
of a company that are designed to ensure that infor-
mation required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the
required time periods. Our Chief Executive Officer
and our President have evaluated the effectiveness of
our disclosure controls and procedures as of the end of
the period covered by this annual report. They have
concluded that, as of that date, our disclosure controls
and procedures were effective at ensuring that required
information will be disclosed on a timely basis in our
reports filed under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial report-
ing (as defined in Rules 13a-15(f ) and 15d-15(f ) under
the Exchange Act) occurred during the period covered
by this report that has materially affected, or is reason-
ably likely to materially affect, our internal control over
financial reporting.
Code of Ethics
In September 2002, the Company implemented a Code
of Ethics by which directors, officers and employees
commit and undertake to personal and corporate growth,
dedicate themselves to excellence, integrity and
responsiveness to the marketplace, and work together to
enhance the value of the Company for the shareholders,
vendors, and customers.
10 Medifast Inc. 2004 Annual Report
[14] SEGMENT INFORMATION
In 2004 and 2003, the Company’s international joint
venture arrangements for distribution of goods in the
Asian market were responsible for the revenue
recognition of approximately $488,000 and
$2,000,000, respectively.
In 2004 and 2003, the Company’s retail distribution
through the division of Consumer Choice Systems
recognized revenue of $2,134,000 and $979,000 re-
spectively.
[15] RECENT ACCOUNTING
PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards
Board (“FASB”) issued Statement No. 142 “Goodwill
and Other Intangible Assets”. This statement addresses
financial accounting and reporting for acquired good-
will and other intangible assets and supersedes APB
Opinion No. 17, “Intangible Assets”. It addresses
how 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 State-
ment also addresses how goodwill and other intangible
assets should be accounted for after they have been
initially recognized in the financial statements. The
Company, in its acquisitions, recognized $893,850 of
goodwill. The Company performs its annual impair-
ment test for goodwill at year-end. As of December
31, 2004, the Company has determined that there is no
impairment of its goodwill.
In addition, the Company has acquired other intangi-
ble assets, which include: customer lists, non-compete
agreements, trademarks and patents. The non-com-
pete agreements are being amortized over the legal
life of the agreements ranging between 3 to 7 years.
The customer lists are being amortized over a period
ranging between 5 to 10 years based on management’s
best estimate of the expected benefits to be consumed
or otherwise used up. Trademarks and patents are
regularly reviewed to determine whether the facts
and circumstances exist to indicate that the useful
life is shorter than originally estimated or the carry-
ing amount of the assets may not be recoverable. The
Company assesses the recoverability of its trademarks
and patents by comparing the projected discounted
net cash flows associated with the related asset, over
their remaining lives, in comparison to their respective
carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of
those assets.
On July 20, 2000, the Emerging Issues Task Force
issued EITF 00-14 “Accounting For Certain Sales In-
centives” which establishes accounting and reporting
requirements for sales incentives such as discounts,
coupons, rebates and free products or services. Gener-
ally, reductions in or refunds of a selling price should
be classified as a reduction in revenue. For SEC reg-
istrants, the implementation date is the beginning of
the fourth quarter after the registrant’s fiscal year end
December 15, 1999. EITF 00-14 has been consid-
ered in the preparation of the consolidated financial
statements.
In December 1999, the Securities and Exchange Com-
mission 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 respect to stock-based employee compensation.
Finally, this Statement amends Accounting Principles
Medifast Inc. 2004 Annual Report F-13
The following table summarizes information about stock options outstanding and exercisable at December 31, 2004
Options Outstanding
Options Exercisable
Weighted
Average
Contractual
Life
Remaining
Number
Outstanding (in Years)
Range of
Exercise
Prices
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
Exercisable
$0.25 150,000
$0.32 16,670
$0.50 100,000
$0.65 8,334
$0.80 16,666
$0.86 1,667
$1.23 6,668
$1.26 16,667
$1.60 8,334
$4.80 22,391
$8.26 2,000
$8.60 30,000
$11.15 10,000
1.0
2.5
1.6
3.6
3.3
3.3
3.5
3.5
3.6
4.1
4.2
4.8
4.3
$0.25 150,000
$0.32 16,670
$0.50 100,000
$0.65 8,334
$0.80 16,666
$0.86 1,667
$1.23 6,668
$1.26 16,667
$1.60 -
$4.80 15,999
$8.26 1,000
$8.60 9,999
$11.15 6,666
$0.25
$0.32
$0.50
$0.65
$0.80
$0.86
$1.23
$1.26
$1.60
$4.80
$8.26
$8.60
$11.15
389,397
2.2
$1.51
350,336
$1.11
F-12 Medifast Inc. 2004 Annual Report
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) The following are the Board of Directors:
Name
Age
Position
Date First
Became Director
Bradley T. MacDonald ....…......
57 Chairman of the Board,
1996
Chief Executive Officer
and Director
Donald F. Reilly ........…….......... 57
Director
1998
Michael C. MacDonald ……....
51 Director
1998
Scott Zion...………..………..... 54
Director
1999
Michael J. McDevitt…………. 56
Director
Mary T. Travis……………….... 54
Director
Joseph D. Calderone………… 56
Director
2002
2002
2003
BRADLEY T. MACDONALD became Chairman
of the Board and Chief Executive Officer of Medifast,
Inc. on January 28, 1998. Prior to joining the Com-
pany, he was appointed as Program Director of the
U.S. Olympic Coin Program of the Atlanta Centen-
nial Olympic Games. Mr. MacDonald was previously
employed by the Company as its Chief Executive
Officer from September 1996 to August 1997. From
1991 through 1994, Colonel MacDonald returned
to active duty to be Deputy Director and Chief Fi-
nancial Officer of the Retail, Food, Hospitality and
Recreation Businesses for the United States Marine
Corps. Prior thereto, Mr. MacDonald served as Chief
Operating Officer of the Bonneau Sunglass Company,
President of Pennsylvania Optical Co., Chairman and
CEO of MacDonald and Associates, which had major
financial interests in a retail drug, consumer candy,
and pilot sunglass companies. Mr. MacDonald was
national president of the Marine Corps Reserve Of-
ficers Association and retired from the United States
Marine Corps Reserve as a Colonel in 1997, after 27
years of service. He has been appointed to the De-
fense Advisory Board for Employer Support of the
Guard and Reserve (ESGR). Mr. MacDonald serves
on the Board of Directors of the Wireless Accessories
Group (OTCBB: WIRX). He is also on the Board of
Directors of the Marine Corps Reserve Toys for Tots
Foundation and is a Foundation Trustee of the Marine
Reserve Association.
REVEREND DONALD FRANCIS REILLY,
O.S.A., a Director, holds a Doctorate in Ministry
(Counseling) from New York Theological and an
M.A. from Washington Theological Union as well
as a B.A. from Villanova University. Reverend Don
Reilly was ordained a priest in 1974. His assignments
included Associate Pastor, pastor at St. Denis, Haver-
town, Pennsylvania, Professor at Villanova University,
Personnel Director of the Augustinian Province of St.
Thomas of Villanova, Provincial Counselor, Founder
Medifast Inc. 2004 Annual Report 11
FBI. He had attained Senior Executive status within
the FBI’s Investigative Technology Branch and is cur-
rently employed within the private sector as a physical
security specialist.
MARY T. TRAVIS, a Director, is currently em-
ployed with Sunset Mortgage Company, L.P. in Penn-
sylvania as the Senior Vice President of wholesale
operations and was formerly the Vice President of
operations for the Financial Mortgage Corporation.
Mrs. Travis is an expert in mortgage banking with over
36 years of diversified experience. She is an approved
instructor of the Mortgage Bankers Association Ac-
credited School of Mortgage Banking. Mrs. Travis
was also formally a delegate and 2nd Vice president of
the Mortgage Bankers Association of Greater Phila-
delphia and the Board of Governors of the State of
Pennsylvania. She is the key financial executive on
the Company’s Audit Committee providing oversight
of the Company’s external auditors.
REVEREND JOSEPH D. CALDERONE, O.S.A.,
a Director, is the Associate Director of Campus Min-
istry at Villanova University. He formerly spent over
eight years with the Loyola University Medical Center
as the hospital Chaplain and taught multiple courses
including Introduction to the Practice of Medicine and
Business Ethics. Rev. Calderone is currently a Cap-
tain in the US Navy Reserves and serves as the Wing
Chaplain for the 4th Marine Aircraft Wing.
of SILOAM Ministries where he ministers and coun-
sels HIV/AIDS patients and caregivers. He is currently
on the Board of Directors of Villanova University, is
President of the board of “Bird Nest” in Philadelphia,
Pennsylvania and is Board Member of Prayer Power.
Fr. Reilly was recently elected Provincial of the Au-
gustinian Order at Villanova, PA. He oversees more
than 300 Augustinian Friars and their service to the
Church, teaching at universities and high schools, min-
istering to parishes, serving as chaplain in the Armed
Forces and hospitals, ministering to AIDS victims, and
serving missions in Japan and South America.
MICHAEL C. MACDONALD, a Director, is a
corporate officer and President of Global Accounts and
Marketing Operations, for the Xerox Corporation. Mr.
MacDonald’s former positions at Xerox Corporation
include executive positions in the sales and market-
ing areas. He is currently on the Board of Trustees
of Rutgers University and a Director of the Jimmy V
Foundation. Mr. MacDonald is the brother of Bradley
T. MacDonald, the CEO of the Company.
SCOTT ZION, is a Director and also Assistant
Secretary for Medifast, Inc. He received a Bachelor
of Arts Degree from Denison University, Granville,
Ohio. Mr. Zion is currently a principal in Resources
Development, Inc. a health care consulting company
in Napa, California. Prior to forming Resources
Development, he was Senior Vice President of Sales
and Marketing for Santen, Inc. an ophthalmic phar-
maceutical company. Before Santen, he was Senior
Vice President and General Manager for Akorn, Inc.,
an ophthalmic manufacturing and distribution com-
pany. Pilkington Barnes Hind, a worldwide contact
lens company, as Head of North American Sales and
Marketing, also employed him. Prior to that, he spent
20 years with the Mead Johnson Nutritional Division
of Bristol Myers Squibb in various positions of in-
creasing responsibility in sales management. He has
extensive experience in nutritional products particu-
larly in the areas of sales and marketing.
MICHAEL J. MCDEVITT, a Director, is a retired
FBI Special Agent with over 29 years of government
service with the United States Marine Corps and the
12 Medifast Inc. 2004 Annual Report
The following summarizes the stock option activity for the years ended December 31:
2004
2003
Outstanding at beginning of year
Options granted
Options reinstated
Options exercised
Options forfeited or expired
0
0.00
(47,221)
(32,837)
Weighted
Average
Exercise
Price
Shares
439,455
30,000
$1.76
8.60
Weighted
Average
Exercise
Price
Shares
891,669
163,500
$0.69
5.32
0 0.00
(1.19) (615,714)
(7.01)
(1.16)
(0)
0.00
Outstanding at end of year
389,397
$1.51
439,455
$1.76
Options exercisable at year end
350,336
$1.11
302,668
$0.76
Options available for grant at end of year 860,603
810,545
Medifast Inc. 2004 Annual Report F-11
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 below:
Year Ended December 31
2004
Net income:
2003
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:
$1,747,000
$2,410,000
(108,000)
$1,639,000
(403,000)
$2,007,000
as reported:
Basic
Diluted
Pro forma:
Basic
Diluted
$ 0.06
$ 0.14
$ 0.15
$ 0.13
$ 0.25
$ 0.22
$ 0.21
$ 0.18
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:
2004
2003
Dividend yield ........................
Expected volatility ..................
Risk-free interest rate ............. 4.50%
Expected life in years .............
0.0%
0.40
1-5
0.0%
0.40
3.00%-5.00%
1-5
The weighted average fair value at date of grant for options granted during the years 2004 and 2003 were $8.60
and $5.32, respectively, using the above assumptions.
F-10 Medifast Inc. 2004 Annual Report
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information as to the compensation of the Chief Executive Officer of the Compa-
ny and each other executive officer that received compensation in excess of $100,000 for 2004, 2003, and 2002.
Annual Compensation
Salary ($)
Bonus ($)
Name
Bradley T. MacDonald
Chairman of the
Board & CEO
Year
2004
2003
2002
225,000
225,000
145,000
0
112,000
75,000
Value of
Common/
Preferred Stock
Issued
in Lieu of Cash
0
0
0
Option
Awards
Other Annual
Compensation
0
0
100,000(1)
0
0
0
(1) The Board of Directors reinstated 100,000 options at $1.50 per share granted in 1997 and not exercised.
Mr. MacDonald exercised those options in December 2002 per the Board’s direction.
Annual Compensation
Name
Leo V. Williams, III
Executive Vice President
Year
2004
Salary
($)
118,000
Bonus
($)
0
Value of
Common/
Preferred Stock
Issued
in Lieu of Cash
0
Option
Awards
10,000
Other Annual
Compensation
0
Medifast Inc. 2004 Annual Report 13
STOCK OPTIONS
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 1,250,000 shares of Common Stock.
The Plan 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, 2004 with respect to options granted
under the Plan since its inception 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 2004, and a list of aggregated options and the
value of these options, is provided.
BRADLEY T.
MACDONALD (1)
ALL CURRENT
EXECUTIVE
OFFICERS AS A
GROUP
ALL CURRENT
INDEPENDENT
DIRECTORS
AS A GROUP
Options granted…………………………………………
215,000
75,000
110,000
Average exercise price…………………………………
$ 0.86
$ 1.98
$ 1.07
Options exercised………………………………………
215,000
49,999
100,000
Average exercise price…………………………………
$$ 0.86
$ 0.88
$ 0.70
Shares sold………………………………………………
Options unexercised as of 12/31/04……………………
*
0
*
11,667
*
10,000
FY 04 Grants @
Price & Expiration
Month/Year
Approximate 5 YR
Potential Realizable
Value at 10% Annual-
Stock Appreciation
Unexercised Options as
of 12/31/04
Value of Unexercised
Options as of 12/31/04
Current Executive
Officers and Directors
10,000@$8.60 2009
$13.86
10,000
Employees
20,000@$8.60 2009
$13.86
20,000
Consultants
0
0
30,000
$0
0
0
$0
14 Medifast Inc. 2004 Annual Report
(30 days). Because the period of payment generally
approximates the period revenue was originally recog-
nized, refunds are recorded as a reduction of revenue
when paid. The Company’s estimate for returns is
based upon its historical experience with actual re-
turns. While such experience has allowed for reason-
able estimation in the past, history may not always be
an accurate indicator of future returns. The Company
continually monitors its estimates for returns and
makes adjustments when it believes that actual product
returns may differ from the established accruals.
[10] 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 report-
ed amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the finan-
cial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual
results could differ from those estimates.
[11] FAIR VALUE OF FINANCIAL
INSTRUMENTS:
The carrying amounts reported in the consolidated bal-
ance sheets 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 ap-
proximates fair value based on current yields for debt
instruments with similar terms.
[12] CONCENTRATION OF CREDIT RISK:
ties at December 31, 2004 and 2003, include amounts
deposited with multiple financial institutions that
exceed the federal insurance coverage by $3,525,000
and $3,862,000, respectively. The Company markets
its products primarily to medical professionals, clin-
ics, and Internet medical sales and has no substantial
concentrations of credit risk in its trade receivables.
As of December 31, 2004 and 2003, the Company had
two customers that individually represented over 10%
of the accounts receivable and in the aggregate, ap-
proximately 49% and 26% of the accounts receivable,
respectively.
[13] STOCK-BASED COMPENSATION:
The Company has adopted Statement of Financial Ac-
counting 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 Account-
ing Principles Bulletin Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB 25”) but dis-
close the pro forma effects on net income 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.
MEDIFAST, INC. AND SUBSIDIARIES
STOCK OPTION PLAN
On October 9, 1993 and as amended in May 1995, the
Company adopted a stock option plan (“Plan”) autho-
rizing 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 deter-
mined by the stock option committee.
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 securi-
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
Medifast Inc. 2004 Annual Report F-9
[4] INVENTORY:
Inventory is stated at the lower of cost or market, uti-
lizing 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.
[5] 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 amor-
tized as performance under the contract is received.
Advertising costs deferred at December 31, 2004
and 2003, were $478,000 and $295,000 respectively.
Advertising expense for the years ended Decem-
ber 31, 2004 and 2003 amounted to $1,055,000 and
$2,233,000, respectively.
[6] PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. The Com-
pany computes depreciation and amortization using
the straight-line method over the estimated useful lives
of the assets acquired as follows:
Building and building improvements
Equipment and fixtures
Vehicles
3 - 15 years
5 years
39 years
The carrying amount of all long-lived assets is evaluat-
ed 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.
[7] INCOME TAXES:
The Company accounts for income taxes in accordance
with Statements of Financial Accounting Standards
F-8 Medifast Inc. 2004 Annual Report
No. 109, “Accounting for Income Taxes,” which
requires an asset and liability approach to financial
accounting and reporting for income taxes. Deferred
income taxes and liabilities are computed annually
for differences between the financial statement and
the tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods
in which the differences are expected to affect tax-
able income. Valuation allowances are established
when necessary to reduce deferred tax assets to the
amount expected to be realized.
[8] 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 com-
mon 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.
[9] REVENUE:
Revenue is recognized for product sales upon
shipment and passing of risk to the customer and
when estimates of discounts, rebates, promotional
adjustments, price adjustments, returns, and other
potential adjustments are reasonably determinable,
collection is reasonably assured and the Company
has no further performance obligations. These
estimates are presented in the financial statements
as reductions to net revenues and accounts receiv-
able. Estimated sales returns, allowances and
discounts are provided for.
Outbound shipping charges to customers and out-
bound shipping-related costs are netted and included
in “cost of sales.”
Returns – Consistent with industry practice, the
Company maintains a return policy that allows its
customers to return product within a specified period
Nutraceutical Group Industry Comparison of Stock Prices
Company
Medifast (MED)
Natural Alternatives International, Inc. (NAII)
Weider Nutrition (WNI)
Pure World, Inc (PURW)
Natures Sunshine Products, Inc. (NATR)
Company
Medifast (MED)
Natural Alternatives International, Inc. (NAII)
Weider Nutrition (WNI)
Pure World, Inc (PURW)
Natures Sunshine Products, Inc. (NATR)
December 31, 2004
Stock Price
December 31, 2003
Stock Price
$3.52
9.23
4.35
1.56
20.36
$14.10
6.40
4.45
2.51
8.31
December 31, 2004
Stock Price
December 31, 1999
Stock Price
$3.52
9.23
4.35
1.56
20.36
$0.22
3.25
3.22
3.13
7.42
$
Change
10.58
2.83
(0.10)
(0.95)
12.05
$
Change
3.30
5.98
1.13
(1.57)
12.94
%
Change
(75.0)%
44.22%
(2.3)%
(37.9)%
145.0%
%
Change
1500.0 %
184.0 %
35.1 %
(50.2) %
174.4 %
Index Comparison
$100 invested in 1999 would return:
Nutraceutical Group Index
Medifast (MED)
1999
$100
$100
2004
$469
$1600
Factual material is obtained from sources believed to be reliable, but the publisher is not responsible for any
errors or omissions contained herein.
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 $17,500 in Director’s fees and/or expenses in 2004. See “Executive
Compensation – Stock Options” for stock options granted under the 1993 Plan to the Directors.
Medifast Inc. 2004 Annual Report 15
ITEM 12. 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, 2004 of the Chief Executive Officer, each Director, each nomi-
nee 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 necessar-
ily 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, 2005 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.
NUMBER % OF
NAME AND ADDRESS*
OF SHARES OUTSTANDING
1,270,373 (1)
Bradley T. MacDonald……….…………………………………....
65,452
Donald F. Reilly…………………………………………………...
39,354
Michael C. MacDonald…………………………………………..
192,000
Scott Zion…………………………………………………………
Mary Travis………………………………………………………..
5,340
Michael J. McDevitt…………………………………………….. .. 13,900
11.6%
0.6%
0.4%
1.8%
0.05%
0.1%
Executive Officers and Directors as a group
(8 persons) …………………………………………………….
1,666,005
15.1%
*The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills, Maryland 21117
(1) Mr. MacDonald beneficially owns 1,090,373 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
442,625 shares of stock.
16 Medifast Inc. 2004 Annual Report
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A – BUSINESS
Medifast, Inc. (the “Company”, or “Medifast”) is
a Delaware corporation, incorporated in 1980. The
Company’s operations are primarily conducted
through five of its wholly owned subsidiaries, Jason
Pharmaceuticals, Inc. (“Jason”), Take Shape for Life,
Inc. (“TSFL”), Jason Enterprises, Inc., Jason Proper-
ties, LLC and Seven Crondall, LLC. The Company
is engaged in the production, distribution, and sale of
weight management and disease management prod-
ucts and other consumable health and diet products.
Medifast, Inc.’s product lines include weight and
disease management, meal replacement and sports
nutrition products manufactured in a modern, FDA ap-
proved facility in Owings Mills, Maryland.
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, quali-
fied 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 agen-
cies, including the Food and Drug Administration, the
Federal Trade Commission, the Consumer Product
Safety Commission, the United States Department
of Agriculture, and the United States Environmental
Protection Agency.
NOTE B - SIGNIFICANT ACCOUNTING
POLICIES
Significant accounting policies followed in the prepa-
ration of the consolidated financial statements are as
follows:
[1] PRINCIPLES OF CONSOLIDATION AND BA-
SIS OF PRESENTATION:
The consolidated financial statements include the
accounts of the Company and its wholly owned sub-
sidiaries, 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 consolidated statements of
cash flow, the Company considers all highly liquid
debt instruments purchased with maturity of three
months or less to be cash equivalents. At December
31, 2004, the Company had invested in four $100,000
certificates of deposit, of which three are considered
cash equivalents.
At December 31, 2003, the Company had invested in
four $100,000 certificates of deposit, which are con-
sidered cash equivalents. The Company also invested
$465,000 in miscellaneous investments through Mer-
rill Lynch. These investments are considered cash
equivalents due to terms of maturity.
[3] ACCOUNTS RECEIVABLE:
Accounts receivable are recorded net of reserves for
sales returns and allowances, and net of provisions
for doubtful accounts. Allowances for sales returns
and discounts are based on an analysis of historical
trends, and allowances for doubtful accounts are based
primarily on an analysis of aging accounts receivable
balances and on the creditworthiness of the customer
as determined by credit checks and analysis, as well as
the customer’s payment history.
Medifast Inc. 2004 Annual Report F-7
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Cash flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities from operations:
Depreciation and amortization
Realized (gain) loss on investment securities
Common stock issued for services
Net change in other comprehensive (loss)
Deferred income taxes
Changes in Assets and Liabilities:
(Increase) in accounts receivable
(Increase) in inventory
(Increase) in prepaid expenses and other current assets
(Increase) in deferred compensation
(Increase) Decrease in other assets
(Decrease) increase in accounts payable and accrued expenses
Increase in income taxes payable
Net cash provided by operating activities
Cash Flow from Investing Activities:
Maturities (purchase) of certificates of deposit
Sale (purchase) of investment securities, net
Purchase of building
Purchase of property and equipment
Purchase of intangible assets
Net cash (used in) investing activities
Cash Flow from Financing Activities:
Issuance of common stock, options and warrants
(Decrease) increase in line of credit, net
Proceeds from long-term debt
Principal repayments of long-term debt
Dividends paid on preferred stock
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash and cash equivalents - beginning of the year
Cash and cash equivalents - end of year
Supplemental disclosure of cash flow information:
Interest paid
Income taxes
Supplemental disclosure of non cash activity:
Conversion of preferred stock B and C to common stock
Common stock for services
Common stock for intangibles and fixed assets
Conversion of debt to equity
Preferred Stock Dividends
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31,
2004
2003
$1,747,000
$2,410,000
1,310,000
19,000
93,000
(14,000)
486,000
(422,000)
(1,263,000)
(143,000)
(100,000)
(25,000)
(460,000)
674,000
1,902,000
(112,000)
1,450,000
(566,000)
(1,490,000)
(2,792,000)
(3,510,000)
7,000
314,000
475,000
(1,089,000)
(11,000)
(304,000)
(1,912,000)
2,524,000
$612,000
$245,000
$-
$170,000
$93,000
$-
$307,000
$7,000
677,000
(1,000)
207,000
-
1,138,000
(357,000)
(1,729,000)
(687,000)
(350,000)
44,000
525,000
-
1,877,000
418,000
(3,982,000)
(1,823,000)
(1,309,000)
(2,458,000)
(9,154,000)
6,722,000
(36,000)
2,669,000
(346,000)
(45,000)
8,964,000
1,687,000
837,000
$2,524,000
$154,000
$-
$835,000
$207,000
$1,949,000
$-
$18,000
F-6 Medifast Inc. 2004 Annual Report
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company and amendments thereto*
3.2 By-Laws of the Company*
10.1 1993 Stock Option Plan of the Company as amended*
10.3 Lease relating to the Company’s Owings Mills, Maryland facility**
10.4 Employment agreement with Bradley T. MacDonald***
________
* Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form SB-2 of the Company, File No. 33-71284-NY.
** Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form S-4 of the Company, File No. 33-81524.
***Filed as an exhibit to 10KSB, dated April 15, 1999 of the Company, file No. 000-23016.
(b) Reports on Form 8-K
March 23, 2004, to report the official 2004 financial guidance
July 2, 2004, to report the Company had decreased 2004 guidance
September 10, 2004 to report the Annual Meeting of Shareholders September 3, 2004
ITEM 14. ACCOUNTING FEES
In 2004, the Company incurred $70,000 in accounting fees as compared to $60,000 in 2003. These fees include
work performed on quarterly audits and the preparation of the Company’s 10-QSB’s and 10-KSB.
Medifast Inc. 2004 Annual Report 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDIFAST, INC.
(Registrant)
BRADLEY T. MACDONALD
- ---------------------------------------
Bradley T. MacDonald
Chairman, CEO & CFO
Dated: May 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this Report below.
Name
Title
Date
BRADLEY T. MACDONALD
-------------------------------------------
Bradley T. MacDonald
Chairman of the Board,
May 27, 2005
Director, Chief Executive
Officer and Chief Financial Officer
SCOTT ZION
------------------------------------------
Scott Zion
/s/ MICHAEL C. MACDONALD
------------------------------------------
Michael C. MacDonald
/s/ MARY T. TRAVIS
------------------------------------------
Mary T. Travis
/s/ REV. DONALD F. REILLY, OSA
------------------------------------------
Rev. Donald F. Reilly, OSA
/s/ MICHAEL J. MCDEVITT
------------------------------------------
Michael J. McDevitt
/s/ JOSEPH D. CALDERONE
------------------------------------------
Joseph D. Calderone
Director
May 27, 2005
Director
May 27, 2005
Director
May 27, 2005
Director
May 27, 2005
Director
May 27, 2005
Director
May 27, 2005
18 Medifast Inc. 2004 Annual Report
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Medifast Inc. 2004 Annual Report F-5
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenue
Cost of sales
Gross profit
YEARS ENDED DECEMBER 31,
2004
2003
$27,340,000
(6,746,000)
20,594,000
$25,379,000
(6,825,000)
18,554,000
Selling, general, and administration
(17,590,000)
(14,956,000)
Income from operations
Other income (expense):
Interest expense
Interest income
Other expense
3,004,000
3,598,000
(245,000)
154,000
(7,000)
(98,000)
(150,000)
110,000
-
(40,000)
Net income before provision for income taxes
Provision for income taxes
2,906,000
(1,159,000)
3,558,000
(1,148,000)
Net income
1,747,000
2,410,000
Less: Preferred stock dividend requirement
(18,000)
(58,000)
Net income attributable to common shareholders
$1,729,000
$2,352,000
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding -
Basic
Diluted
$0.16
$0.14
$0.25
$0.22
10,832,360
12,413,424
9,305,731
10,952,367
The accompanying notes are an integral part of these consolidated financial statements
F-4 Medifast Inc. 2004 Annual Report
Index to Exhibits
Exhibit Number
Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursu-
ant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sar-
banes-Oxley Act of 2002
Medifast Inc. 2004 Annual Report 19
Exhibit 31.1
CEO Certification
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Bradley T. MacDonald, certify that:
1.
I have reviewed this report on Form 10-KSB of Medifast, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
2.
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 this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the regis-
trant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Ex-
4.
change Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and proce-
dures to be designed under our supervision, to ensure that material information relating to the registrant, includ-
ing its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 27, 2005
/s/ Bradley T. MacDonald
Bradley T. MacDonald
Chairman Of the Board and Chief Executive Officer
20 Medifast Inc. 2004 Annual Report
MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 2004 December 31, 2003
ASSETS
Current assets:
Cash
Accounts receivable-net of allowance for doubtful accounts of $87,000 and $55,000
Inventory
Investment securities
Deferred compensation
Prepaid expenses and other current assets
Current portion of deferred tax asset
Total Current Assets
Property, plant and equipment - net
Trademarks and intangibles - net
Deferred tax asset, net of current portion
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Income taxes payable
Dividends payable
Line of credit
Current maturities of long-term debt
Total current liabilities
Long-term debt, net of current portion
Total Liabilities
Stockholders’ Equity:
Series B Convertible Preferred Stock; par value $1.00;
600,000 shares authorized; 300,614 and 403,734
shares issued and outstanding
Series C Convertible Preferred Stock; stated value $1.00;
$612,000
1,063,000
4,251,000
2,626,000
321,000
1,079,000
19,000
$2,524,000
641,000
2,988,000
3,983,000
321,000
936,000
596,000
9,971,000
11,989,000
8,698,000
7,138,000
91,000
70,000
7,449,000
4,749,000
-
45,000
$25,968,000
$24,232,000
$940,000
$1,714,000
674,000
65,000
369,000
458,000
2,506,000
4,256,000
6,762,000
-
58,000
55,000
764,000
2,591,000
4,564,000
7,155,000
301,000
404,000
1,015,000 shares authorized; 200,000 and 267,000 shares issued and outstanding
200,000
267,000
Common stock; par value $.001 per share; 15,000,000 shares authorized;
11,001,070 and 10,482,609 shares issued and outstanding
Additional paid-in capital
Accumulated comprehensive loss
Accumulated deficit
Less: cost of 78,160 and 83,863 shares of common stock in treasury
Total Stockholders’ Equity
11,000
10,000
20,556,000
20,120,000
(39,000)
(1,287,000)
19,742,000
(536,000)
(25,000)
(3,016,000)
17,760,000
(683,000)
19,206,000
17,077,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$25,968,000
$24,232,000
The accompanying notes are an integral part of these consolidated financial statements
Medifast Inc. 2004 Annual Report F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors and Stockholders
Medifast, Inc.
Owings Mills, Maryland
We have audited the consolidated balance sheets of Medifast, Inc. and its subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in stockholders’ equity and comprehen-
sive loss and cash flows for the years 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 state-
ments based on our audits.
We conducted our audits in accordance with standards established by the Public Company Accounting Over-
sight Board (United States). Those standards require that we plan and perform the audits 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 finan-
cial 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 audits
provide 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, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Bagell, Josephs & Company, LLC
Gibbsboro, New Jersey
March 4, 2005
F-2 Medifast Inc. 2004 Annual Report
Exhibit 31.2
CFO Certification
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Bradley T. MacDonald, certify that:
1.
I have reviewed this report on Form 10-KSB of Medifast, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
2.
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 this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the regis-
trant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Ex-
4.
change Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and proce-
dures to be designed under our supervision, to ensure that material information relating to the registrant, includ-
ing its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: May 27, 2005
/s/ Bradley T. MacDonald
Bradley T. MacDonald
Chairman Of the Board and Chief Financial Officer
Medifast Inc. 2004 Annual Report 21
CFO Certification
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, 2004 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 Executive Officer
Chief Financial Officer
May 27, 2005
22 Medifast Inc. 2004 Annual Report
MEDIFAST, INC. AND ITS SUBSIDIARIES
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm …..........
Balance sheets as of December 31, 2004 and 2003………................
Statements of income for the years ended
December 31, 2004 and 2003 ..................................……...…...........
Statement of changes in stockholders’ equity and
comprehensive loss for the years ended
December 31, 2004 and 2003 ....…………………………..…...........
Statements of cash flow for the years ended
December 31, 2004 and 2003 ...................................……..…............
Notes to consolidated financial statements .....................……….......
F-2
F-3
F-5
F-4
F-6
F-7