A n n u a l
R
e p o r
2005
t
m edi fast 2005 a nnua l rep or t 1
focus on
SHAREH OLD ERS
Bradley T. MacDonald
Chairman, CEO
Michael S. McDevitt
President, CFO
To our valued shareholders,
20 05 was another ex traord inar y ye ar for M e d i fas t, I nc wi t h reven ues
up 47 % from the pr ior year. O u r ag gress ive m ar keting s trate g y i s
expanding the mes sage of the M e d i fa s t brand a cros s Ame r i ca and ou r
firs t-rate c lient su pp or t p rogram s a re bui l di ng a s ati s fi e d and d evoted
custome r base. We are grow ing our comp any on s oli d core val ues an d
the steadfa st philosophy of nutr i ti onal i nte r vent i on to com bat obes i t y
an d rel ated he alth conditions. O ur di sciplined and focused
man ageme nt a pproac h and unwi l li ngnes s to com prom i se i n an
industr y full of fad s ha s helped u s to maintain both fi na nci a l s tren g th
an d significant growth year af te r ye ar.
2 me difast 2005 ann ual rep o r t
The most recent statistics from the Framingham Heart Study show that, even
if we are of normal weight at age 50, half of us will become overweight, and 1
in 4 of us are doomed to become obese. There is no question that the
need in our society for safe and effective weight loss programs is vast.
is
bu t
also
weight;
uniq uely
improvements
remar k able weigh t
M edifast
po sit ion ed
in this growing mar k etplace b ec au se
our programs not only he lp p eop le
mak e
lose
signific ant
in over al l
l oss
health. The
and he alth outcomes of the M ed if ast
scie nt if ica lly
program
validated
in numerous clinic al st ud ies
by major research institution s a n d we
have maintained our deep
i n
the m edical communit y ac ro ss ou r
business platfor m.
ro ot s
been
have
Today, Medifast is evolving from a product development, manufacturing
and distribution company to a modern sales, marketing, and ser vice
compa ny a s well. We have develope d a di ver se di s tr i b uti on s trateg y
inclu ding our M edi fast Direc t chan ne l supp or ted by cons um er
mar keting a nd a uniqu e a nd hig hl y su ppor ti ve d i rec t s elli n g co m p any,
Take Shape for L ife. We also conti n ue to b ui ld la s tin g pa r t ne rs h i p s
with ou r growi ng net wor k of me d i cal prac ti ti oner s th roug h our
Lifest yles program that offers pat i ent s hom e d e li ver y. Fi na lly, ou r
H i-E ne rgy Weig ht Control Centers provide an innovative approach to
weight loss in a center-based environment.
m edi fast 2005 a nnua l rep or t 3
The company continues to support the expansion of these models with our
manufacturing and distribution divisions, Jason Pharmaceuticals, Inc. and
Sunrise Distributing. We are constantly upgrading and expanding our
infrastructure in these areas to support dynamic growth.
As we look to the f uture, we conti nu e to focu s on our core va lues
an d nutr itional solutions for we i g ht los s and i m proved he alth.
We are prou d of our management tea m and e mp loye e s for the i r
dedication and loyalt y to developi ng our platfor m i n the compet i t i ve
lands ca pe of the 21st century. We would like to thank our Medifast
Employees, Medifast Practitioners, Take Shape for Life Health Advisors,
Hi-Energy Center Operators, Customers, Vendors and our Shareholders
f o r y o u r c o n t i n u i n g s u p p o r t o f M e d i f a s t , I n c .
Wa r mest R e gards,
Bradl ey T. M acD onald
Chairman of the Board
M icha el S. M cD evitt
President and Chief Financial O fficer
4 me difast 2005 ann ual rep o r t
focus on
VALUES
M e d i f a s t t e s t i m o n i a l s : ( l e f t t o r i g h t ) C a t h y , P a m , M i c h e l l e ,
N n e d i , M a r y J a n e a n d J e n n i f e r .
For a qu ar te r of a centur y, M edi fas t, I nc. has s ust ai ne d s trong
core values ac ros s an evolvi ng bu si n es s platfor m that
encompasses multiple cha nnels of di s tr i buti on .
Our focused commitment to a
philosophy of nutr itional inter vent ion
for c om bating obesit y and other related
health c onditions continu es to thr ive
and grow.
Tod ay, the public health b urden ass oci ate d wi t h b ei ng ove r we ight ha s
a magnitu de similar to that of tobacco. S ome re se a rch er s e ve n
believe that the r i sing rate of chi ld hood obe s i t y m ay m ake our you ng-
est generations the fi rst to have a s h or ter li fe ex pec ta nc y than t hei r
parents, despite major a dvancem e nts i n mod e r n m ed i ci ne.
M e difast belie ves that peop le are res pons i ble for thei r own ac ti ons
and pe rsona l environment s; however, t he y have li ttle or no cont rol
m edi fast 2005 a nnua l rep or t 5
over the ex ter nal environment, whi ch i s f ra me d by poli ti cal,
so cio economic and comm erc ial force s. Thes e fac tor s larg e ly explai n
why Amer ica is exper ienc ing unpre ced ented le ve ls of obe s i t y. I n
tod ay ’s realit y, we are s ur rounde d by poor food choi ce s and forced to
live hec tic, yet sedentar y li fes t yle s.
M edifas t makes c hoosing meals and controlli ng
por tion s simple by encou ragi ng 6 s ma ll m eal s
throughout the day, helpi ng peop le avoi d
difficult food situations and break i ng the c ycle
of overeating.
Th o u sands of people,
lik e Pamela No ord a, are
f ina lly finding the answer to
a li fetime o f struggles with
th eir weight an d health.
Th at answer is M edifast.
M e d i f a s t P r e s i d e n t , C F O M i c h a e l M c D e v i t t
w i t h c u s t o m e r P a m e l a N o o r d a
“M y family provided me ever y oppor tu ni t y for s ucce s s i n my li fe. I was
given great schooling, great trave li ng exp er i e nce s a nd ta ug ht how to
give back to the comm uni t y. The one bi g thi ng that I had ne ver b een
taught wa s how to eat cor rec tly and mai ntai n a he althy we i g ht. When
both of my parents were diagnos e d wi th Typ e I I Dia betes e ar ly i n t he
year, the re alit y of my parents’ eati ng choi ce s was thrown i n my face.
Heredit y said that I could have the s am e proble m- I s hare the i r genes
an d their bad eati ng habi ts. I ne ed ed to cha nge. M y ray of hope came
from seeing my girlfriend who had been recommended Medifast by her
do c to r. I star te d M ed ifas t and consi d e r i t the begi nni ng of my n ew
life. I l ear ne d that with exerci se, g ood eati ng habi ts and proper
p o r t i o n s i z e s , I c o u l d l o s e a n d m a i n t a i n a h e a l t h y w e i g h t .
I am in cha rge of my li fe now and i t ’s am az i ng. Wi th M ed i fas t, I lost 65
pou nds in the f irst 4 months and the n an ad di t i onal 20 for a tot al of
85 p ound s.” Pamel a No orda
Medifast is a clinically proven and science-based food technology that offers
the highest quality, lowest calorie meal replacements in the industr y.
6 me difast 2005 ann ual rep o r t
The produc t line cur rently boa s ts ove r 5 0 food i te ms. M e di f ast
prou dly introd uced a new Banan a Crè me Shak e i n 20 0 5 th at
quic k ly be came one of the m ost popula r i te ms i n the li ne. The
ex tensi ve var i et y of M edifas t m ea ls he lps customers stick to the
program.
The company
focuses on
formulating
only the highest
quality products
and is constantly
exploring new
food choices and
flavors based
on customer
feedback.
Physicians have
recommended
the Medifast
program since
the company ’s
inception in 1981. At that time, the products were only available through
a physician’s office. Today, the Company ’s technology-based business
models continue to ser ve the medical community and provide home
deliver y and ex tensive suppor t programs to consumers.
M e difast not only helps people los e wei g ht, but can hel p the m m ake
signif icant improvements in the i r ove rall h ea lth . A re ce nt s tud y
c o n d u c t e d b y r e s e a r c h e r s a t J o h n s H o p k i n s u n i v e r s i t y p r o v e d t h a t
participants lost twice as much weight on
Medifast and were twice as likely to stick to the
Medifast program than a standard ADA* food diet.
Add itionally, significant reduc ti ons we re se e n i n s ys toli c a nd di as tolic
blood pressure, total cholesterol and triglycerides and blood pressures
were normalized in 90% of hyper tensive patients.
* American Diabetes Association
me d ifast 2005 annual rep or t 7
This ph ilosophy of nutr itional inte r vent i on i s s up por ted n ot on ly
by res ea rch, but also the thou sa nds of M edi f ast cli ent s wh o have
cha nged their lives and redu ced t he i r m ed i cati on s be caus e of
M edifast qualit y prod uc ts and su ppor t progra ms.
While many fad diets have come and gone over the years, the Medifast
brand has sur vived the tumultuous climate of the weight loss industr y.
The onl y way to lose weight and ke ep i t of f i s to re duce tota l ca lor i es
and adopt a healthier lifestyle. Restricting the popular macronutrient of the
moment, like the low-carb diet or taking the magic pill that promis es a
quick fix, will never be the answer to long-term weight loss.
Medifast believes that nutritional therapy should
be the preferred method for treating obesity
and associated conditions and that drug therapy
should be used only when medically necessary.
Medifast has only just begun to spread this message to
consumers. Moving forward, the Company will continue
to expand the awareness of the Medifast brand through
increased advertising, public awareness campaigns,
peer reviewed research, relationships with the medical
community, and growing customer support networks.
The same core values that have driven the Medifast
brand for a quarter of a century also drive the
corporate culture. Medifast has developed a unique
management team consisting of young entrepreneurial
executives, a world-class medical team and seasoned
professionals with a wealth of industry experience.
It is this team that is transforming Medifast, Inc. from
Clockwise from left:
Meg MacDonald, Senior VP Operations
Brendan Connors, CPA, VP Finance
Leo V. Williams, III, Executive VP
a manufacturing and distribution company into a cutting-edge marketing,
techn o logy, and cus tomer sup por t com pany a s well. M ov i n g for wa rd,
M edifast will remain foc used on the val ues that have m a de t he
Medifast brand what it is today. Medifast will never lose sight of the intrinsic
medical heritage of the Medifast brand while continuing the strong commitment
to constantly evolve and provide new tools and services for customers.
8 m edifast 2005 ann ual rep or t
focus on
CUSTOM ERS
At M edif ast, I nc., we recogn ize that cus tom er s come to u s for
e s s e n t i a l l y t h e s a m e r e a s o n , t o l o s e w e i g h t a n d i m p r o v e t h e i r
health. What sets M edifast apar t f rom th e comp et i ti on are our
c l i n i c a l l y p r o v e n p r o d u c t s a n d p r o g r a m s a s w e l l a s
a business model that recognizes w hil e
most customers usually have common
goals, e ver y customer is different .
M any of our c ustomers prefer to order produc t an ony mou sly
online while others use the web to share their most personal stories in
chat rooms and message boards. Some customers prefer to talk to a caring
representative from the company over the phone while some customers
benefit from having the one-on-one support and mentoring provided by
a personal health advisor. Many of our customers feel they are best served
under a physician’s supervision or in a clinic environment.
m edi fast 2005 a nnua l rep or t 9
M e d i f a s t , I n c . i s u n i q u e l y
p o s i t i o n e d i n t h e m a r k e t p l a c e
b e c a u s e o f t h e w a y w e s e r v e
c u s t o m e r s. T h e Co m p a ny o f fe r s
a m e n u o f o p t i o n s f o r s u p p o r t
o n t h e p r o g r a m t h r o u g h t h r e e p r i m a r y c h a n n e l s o f
d i s t r i b u t i o n , e a c h f o c u s i n g o n t h e i n d i v i d u a l n e e d s o f a g r o w i n g
c u s t o m e r b a s e .
Medifast’s primary distribution channel is the Medifast Direct web and toll-free
business. Here, customers have access to qualified nutritional practitioners, customer
care representatives and a robust web library for support and information.
This business is driven by an aggressive
multi-media customer acquisition strategy
that includes print, television, radio, a nd web advertising as well as
public relations initiatives. In 2005, as a result of
extensive customer research and focus groups,
the Company enhanced its marketing message
focusing on the true needs and desires of
customers. The marketing message emphasized
the ease and convenience of the Medifast
program and the website was upgraded with a
new shopping cart and message board community
page. The message boards quickly became one of
the most visi ted areas of th e web si te, mak i n g
it a destination for dai ly sup por t by allow i ng
cu stomers to sh are thei r s ucces s s tor i es and
tips online.
The Company introduced a new Easy, Fast, Medifast
logo and fresh product pac k a ging desi gn. Si multaneo us ly, t he Compa ny
an nounced that all M edif ast me al rep lacem e nt p rod uc ts could b e us ed
interch ange ably in the “5 & 1” we i g ht los s program offe r i ng mo re
flexibilit y and options for c usto me r s. M e d i fas t ’s targ ete d adve r t i si ng
effo r ts continued to b e highly prof i ta ble dr i vi ng
web sales up 300 percent over 2004.
10 medifa st 2005 an nual re po r t
L a t e i n t h e y e a r, M e d i f a s t s e c u r e d a f e a t u r e i n
People M agazine’s “Half my Size” is s ue a s
one of the top 5 d iets in the indus tr y.
This was a result of s trong p ubli c rel ati ons cam pai gns throug hou t t he
year. Medifast continues to refine and improve its customer acquisition
and retention strategies.
In 2006, the Medifast Direc t division will continue to focus on targeted
marketing initiatives and enhancements to its customer suppor t systems
by u pgrading its call center a nd n utr i ti on s uppor t te am to be tter
ser ve i ts clie nts. Addi tiona lly, a state of the ar t web technology
fe atu r ing cu stomized meal planning and community components will be
unveiled to better serve the growing number of consumers who are choosing
the web as their preferred method for shopping and program support.
M e d i f a s t ’s s e c o n d c o r e c h a n n e l o f
d i s t r i b u t i o n i s t h e T a k e S h a p e f o r L i f e
d i r e c t s a l e s b u s i n e s s , w h i c h i s
a suppor t program that
moves beyond the scope
of weight loss to show custom ers
how to achi eve optim al health th roug h th e
balance of body, mind, and fina nce s. Take
Sha pe for Life offers competit ive H ea lth Adv i s or ca ree r oppor t uni t i es
to su ccessful cu stomers a nd entre pre ne u rs who prov i de one - on- one
personalized coachi ng and sup por t to custome r s on the progra m .
T h i s p h y s i c i a n l e d r e l a t i o n s h i p m a r k e t i n g m o d e l h a s
excellent customer retention because of
the personal suppor t of fered by Healt h
Advisors and the B eSlim philosop hy ,
w h i c h i s a w e i g h t m a i n t e n a n c e p r o g r a m b a s e d o n g a t h e r e d
re search re garding effec tive long -te r m we i g ht los s.
me d ifast 2005 annual rep or t 1 1
2005 was a year of significant accomplishment in the Take Shape for Life division.
The Company focused on the development and training of Health Advisors in
addition to its unique customer support programs. Early in the year, the Company
released the comprehensive Health Advisor
training program “Your Guide to Success”
covering topics such as client acquisition
and support, and sponsoring and leadership
development.
Take Sh ape for Life held the highes t at tend ed s um me r conve nti on i n
the his tor y of the Comp any in Pa r k Ci t y, U tah. Af te r the conve nt i on,
the Company introduced a power ful cli e nt a s s es s me nt tool t hat
al lows H ealth Ad vi sors to q uic k ly a nd ea si ly ex plai n the Tak e Sh ap e
for Life program to pros pec tive c li e nts a nd oth er H ea lth Adv i s or s. Take
Shape for Life continued to enhance support systems by redes igni ng the Tak e
Shape for Life cor p orate and co - b ran ded webs i te s, and by offe r i ng
a dedicated he lp line for the BeSlim Club (autoship) and a toll-free,
pre -recorded message exp la ining the mi ss ion and vis ion of Ta k e Shape
for Life.
I n th e fall of 2005, Tak e Shape for Life released
“ The Future is Now.” This i nitiative was the culmi nat i on
of creative efforts resulting in a new presentation, website, leads program,
suppo r t featu res and up dated tools for H ea lth Adv i sor s. “ The Future
is Now ” was s u p p o r t e d
b y a nationwide training
tour covering seven key
markets for Take Shape for
Life. As a result of these
efforts, new Health Advisor
sponsoring and enrollments
increased and relationship
m a r k e t i n g f i e l d
development accelerated
at a record pace.
12 medifa st 2005 an nual re po r t
I n 2 0 0 6 , Ta k e S h a p e f o r L i f e w i l l b e
e x e c u t i n g a s t r a t e g i c p l a n t o
transfo r m TSF L into an industr y lead er
with the vision of mak ing Amer ica and
the wor ld healthy .
D ed icated m ar keti ng ac tiv ities wi ll focus
more attention on the unique needs of the TSFL
direct selling network in order to facilitate its
expansion to its fullest potential. The division is
planning a major upgrade to its branding and
c o r p o r a t e m e s s a g e b y l a u n c h i n g a
redesign of the company logo
and tagline su ppor ted by a new
comprehensive “Business in a Box” that
will contain DVDs, audio CDs and manuals used for
the training, developme nt and re cr uiting of new
Hea lth Advi sors. Health Advis or b usi ne ss
ma na gem ent tools will be enha nced acros s t he
platform to make starting and managing a business in Take Shape for Life
even ea sier and more attra c ti ve. Th e cor p orate we bs i te wi ll a ls o be
redesigned with enhanced features to improve the cu stome r exper ience
with a new shopping cart and online meal planner tied to Take Shape
for Life’s exclusive BeSlim philosophy.
remains focused
on exceptional patient outcomes with the
traditional medical practitioner distribution
channel . M e difast medi cal p rac ti tioner s a re prov i ded wi th a
we ight management program that complements their existing medical
practice. Combining produc ts and protocol s w i th the comp any ’s
me d ifast 2005 annual rep or t 1 3
Internet capabilities allows Medifast medical
prac titioners to provide an exceptional weight
management program to their patients. The spectrum
of services offered to medical practitioners includes
professional account management, marketing and
co - o p adver tising su pp or t, web re fe r rals,
in- ser vice training, and a revenu e s ha re for
practitioner-to-patient counseling and support.
The Medifast Lifestyles Program is a medically-supported
net wo r k of health c are professiona ls who
support their patients on the Medifast program.
Patients order products directly from the Medifast
website or toll-free number for home delivery,
referencing their Lifestyles code. Medifast also offers a wholesale purchasing
service to medically-licensed program providers such as hospitals, weight-loss
clinic operators, and health care institutions. The Company also supports
medical practitioners with extended business development services through
the Professional Division of Take Shape for Life.
D ur ing 2005, M ed ifas t ac tively s uppor te d t he Am er i ca n D i ab etes
Ass ociation, The Amer i can Assoc i at i on of Di ab ete s Educator s a n d
T h e A m e r i c a n S o c i e t y o f B a r i a t r i c P h y s i c i a n s . W e a l s o
developed and sponsored a 1.5 credit hour ACPE
Continuing Education program for pharmacists
call ed The Emerging Cr i sis of Ob e s i t y i n Am e r i ca : A Pre ve ntati ve
Cha llenge to Phar macists and H e althca re Profes s i ona ls. Th i s on li n e
continuing education program has been very well received acros s the
countr y with over 2500 phar maci s ts en rolle d s o far.
The Company remains at the leading edge of clinical excellence. Medifast
products and suppor t se r vices are well pos i t i one d to comp lem ent
a wide var iet y of med ical weight l os s protocols. M edi f as t i s a lso a n
excell ent low calorie supplement that may be used in conjunc tion with
existing and promising ne w a ppetite sup pressa nt pres cr i p ti on
med ications in a medi cal environme nt. I n 2 00 6 , M e di f as t wi ll be
focused on fur ther developing i ts cli n i cal protocols a nd re se arch
studies to continue to validate t he M edi f a st p rogram i n the treatment
of obesity and related health conditions such as Diabetes.
14 medifa st 2005 an nual re po r t
The H i -Energ y Weig ht Control
Cente r divi sion s pecializes in
medical ly monitored
weight management programs to prom ote
we ig ht loss and imp roved hea lth . Th i s br i ck an d m or t ar cli ni c m odel
offers the suppor t of weight loss counselors and a H i- Energ y private
label produc t. The H i -Energ y system i s s up por te d by a com preh en si ve
DJ radio and testimoni al p r i nt a dver t i s i ng s t rateg y to dr i ve lea ds
to the ce nters.
In 2005, the Company successfully
expanded its network of licensees and
opened corporately owned and operated
Hi-Energy centers in Orlando, Florida
and Dallas, Texas. The Company
moved corporate headquar ters to
Owings Mills, Maryland and consolidated
the management team to better serve the
system of licensees. The Company focused
on improving customer acquisition
strategies and center management to
create a replicatable model for expansion.
M oving for wa rd in 2006, H i -Ene rg y wi ll la unch a new propr i et ar y a nd
compre hensi ve patient- couns eli ng p rogram de ve lope d by a l ea di n g
behavioral psychologist in obesity research. The Company is also
testing innovative approaches to tra ining and s elli ng as well as the use
of an enhanced medical model within the center system.
me d ifast 2005 annual rep or t 1 5
focus on
GR O W TH
A s o f D e c e m b e r 3 1 , 2 0 0 5 , M e d i f a s t , I n c . h a s e x p e r i e n c e d
2 5 co nsecutive q u ar ters of profitab ilit y .
This tremendous succes s has be e n a chi e ve d be caus e of the growi ng
reco gnition of the wor ld - c lass M edi f as t brand. The Com pany ha s b een
ex tremely ef fe c tive in maintaini ng a low cus tom e r acqui s i ti on cos t
thro ugh e ffec tive and targeted mar ke ti ng cam pai gns, whi ch h i ghli ght
real success stor ies f rom the c lini ca lly prove n and ef fe c ti ve products.
These campaigns were successful in driving over 70 percent of customers
to the Company ’s medifastdiet. com we bs i te i n 20 0 5 . As the Company
continues to increase the adver tising budget, more people are hearing
ab out M edifast and star ting the program , whi ch i s fue li ng uni ver sal
growth in all busines s c hannels.
16 medifa st 2005 an nual re po r t
In 2005, revenues increased by 47% from the prior year due to
the continued success of direct-to-consumer sales and the expansion of the Take
Shape for Life direct sales network. Take Shape for Life continued to improve
support tools and training in an effort to make supporting customers and
recruiting new heath advisors easier. This effort resulted in the extension of the
health network into new cities as well as expansion in current locations.
The continued growth of the Medifast brand can be attributed to the Company’s
disciplined management strategy and the extraordinary commitment from
executives and employees who drive the business every day. In 2005, Medifast
placed increased emphasis on a modern multi-channeled distribution strategy
for the Medifast brand and continues to exploit the immense opportunities in the
direct-to-consumer, direct sales network and clinical business models. Medifast
will continue to hire talented employees in all areas of the Company to contribute
additional insight and expertise to the business.
In 2006, we anticipate significant growth across our platform. The first quarter
of 2006, as compared to the first quarter of 2005, saw an increase in revenues to
$19 million up 130%. After-tax diluted earnings per share increased from $.04 at
March 31, 2005 to $.13 at March 31, 2006. As a result of this growth, the Company
will continue to maintain production and call center functions in-house, however,
the Company has begun preparing for the over-sourcing of these functions in
order to achieve scalability for continued expansion in the future.
The Company will also be implementing an Enterprise Resource Planning solution
to upgrade technology infrastructure and improve manufacturing and business
processes. The new IT infrastructure will enable the Company to handle
additional growth and improve operating efficiencies across the business platform.
In addition, the Company is implementing new software in the Take Shape for Life
direct sales network that will facilitate the support and success of health advisors
and clients, which is expected to fuel additional growth in this channel.
Medifast’s vision has always been to help people combat obesity and become
healthier through sound nutritional intervention. Today, more than ever, our
original vision remains vibrant and strong. Medifast is committed to accelerating
growth by constantly evolving our business models, providing world class
products and services, exploiting the use of new technology and building internal
infrastructure to sustain substantial expansion.
me d ifast 2005 annual rep or t 1 7
B oard
O f
Direc tors
Bradley T. MacDonald
Chairman of the Board
Chief Executive Officer
Medifast Inc.
Rev. Joseph D.
Calderone, OSA
Director
Associate Director of
Campus Ministry,
Villanova University
George Lavin Jr. ESQ
Director
Senior Partner
Lavin, Oneil, Ricci,
Ceprone and Disipio
Michael C. MacDonald
Director
President of Global
Accounts and Marketing
Operations,
Xerox Corporation
Michael J. McDevitt
Director
Senior Executive (retired),
Federal Bureau of
Investigation
Rev. Donald F. Reilly,
OSA
Director
Provincial, Augustinian
Order of Villanova, PA
Mary T. Travis
Director
Senior Vice President of
Wholesale Operations,
Sunset Mortgage
Company, LP
H e a d q ua r t e r s : M e difast, I nc. • 1 1445 Cronhill Dr i ve • O wi n g s M i lls, MD 2 1 11 7
800. 223. 1809 • w w w.medi fastdi et.com
corporate officers: Bradley T. MacDonald (Chairman of the Board, CEO)
• Michael S. McDevitt (President, CFO) • Leo V. Williams, III (Executive Vice President)
• Richard J. Law (Vice President) • Brendan Connors, CPA ( Vice President Finance)
• Meg MacDonald (Senior Vice President Operations)
i n v e s to r r e l at i o n s co n tac t: Kelli e Piz zico (As sis tant S ecretar y)
sto ck excHange list in g: American Stock Exchange
Trading Symbol: MED
i n d e p e n d e n t p u b l i c acco u n ta n t s : Bage ll, Josephs & Comp any, LLC
Gibbsboro, New Jersey • BDO S e i dm an Af fi l i ate
t r a n s f e r ag e n t a n d r e g i s t e r : Ame r ican Stock Transfer and Tru st Com pany
59 M aiden Lane • Plaz a Level • Ne w Yor k Ci t y, NY 10 0 38 • 8 0 0. 937. 5449
a n n ua l M e e t i n g : S eptem ber 8, 2006
18 medifas t 2005 ann ual re por t
For m 10-K
MEDIFAST INC - MED
Fi led: M arch 15, 2006 (per iod : D ec embe r 31 , 20 0 5)
T A B L E O F C O N T E N T S
PAR T I
ITEM 1 . BU SINESS.
ITEM 2 . DESCR IP TIO N OF P R OP ER T Y
ITEM 3 . LEG AL PR O C EE DI NGS
ITEM 4 . SUB MISSI ON OF MAT TERS TO A V OT E OF SE C U RIT Y HO L DE RS
PAR T II
ITEM 5 . MAR KE T FO R COMM ON E QUI T Y AN D RE L ATE D
STO C KHO LDER MAT T ERS
ITEM 6 . SELEC TED FI NANC IA L DATA
ITEM 7 . MANAG EMENT ’S DIS CUS S ION AND A N A LYS IS OF FI NA N C I A L
CON DITIO N AND RE SULTS
ITEM 8 . FINAN CIAL S TATE ME NTS
ITEM 9 . CH ANGES AND DIS AGRE EMENTS W I TH ACCOU N TA N TS ON
ACCO UNT ING
ITEM 9 A. CON TR O L S AND PR OC EDURE S
PAR T III
ITEM 1 0. DIR EC TO RS AN D EXECUT I VE DIR EC TOR S OF RE GI ST R A NT
ITEM 1 1. EX ECU TIV E COMPE NSATI ON
ITEM 1 2. SECU RIT Y O WN ERSH IP OF C ER TAI N B E NE F IC IA L O W NE R S
AND MA NAGEMENT
PAR T IV
ITEM 1 4. EX HIBITS AND RE POR TS ON FORM 8 -K .
SIG NATUR ES
Index to Exhibits
EX-31.1
EX-31.2
EX-32.1
medifast 2005 annual rep or t 19
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File No. 000-23016
MEDIFAST, INC.
DELAWARE 13-3714405
Incorporation State
Tax Identification number
11445 CRONHILL DRIVE, OWINGS MILLS, MD 21117
Principal Office Address
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
20 medifa st 2005 an nual re po r t
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark 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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common equity held by
non-affiliates of the registrant as of June 30, 2005, based upon the closing
price of $3.04 per share on the American Stock Exchange on that date, was
$32,985,000.
As of March 14, 2006, the Registrant had 12,786,124 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders, which will be filed within 120 days after the end of the fiscal
year, are incorporated by reference into Part III.
medifast 2005 annual rep or t 2 1
M E D I FA S T , I N C . A N D S U B S I D I A R I E S C O N T E N T S
CON SOLIDATE D FINANCI AL STAT EMENTS
PAGE
R epor t of I ndependent R egistere d Pu bl i c
Accounting Fir m
Ba lan ce sheets as of D ecember 31 , 20 0 5 a n d 2 0 04
St atements of incom e for the yea r s e n d e d
D ece mber 31, 2005, 2004 and 20 0 3
St atement of changes in stoc k h o l d e r s’ e qu i t y a n d
accumulated other comprehensive income (loss) for the
years ended D ecem ber 31, 2005 , 2 0 0 4 , a n d 20 0 3
St atements of c ash flow for the ye a r s e n d e d
D ece mber 31, 2005, 2004, and 20 0 3
22
23
24
25 - 27
28
Note s to consolidated financia l s tatem e nt s
29 - 44
22 medifas t 2005 ann ual re por t
REPOR T OF INDEPENDENT R EGIS T ERE D
PUBLIC ACCO UNTI NG FIRM
Board of Directors and Stockholders
Medifast, Inc.
Owings Mills, Maryland
We have audited the accompanying consolidated balance sheets of Medifast, Inc.
and subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders equity, and cash flow for each of the three
years in the period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards established by the Public
Company Accounting Oversight 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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 2005 and 2004, 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, Levine & Company, LLC
Gibbsboro, New Jersey
March 2, 2006
medifast 2005 annual rep or t 2 3
MEDIFAST, INC. AND SUBS IDIARIE S
CONSOLIDATED BA LANC E SHEE TS
As of D ecembe r 31, 2005 a nd 200 4
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable-net of allowance for doubtful accounts
of $100,000 and $87,000
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
2005 2004
$ 1,484,000 $ 612,000
985,000 1,063,000
5,475,000 4,251,000
2,700,000 2,626,000
525,000 321,000
3,273,000 1,079,000
- 19,000
14,442,000 9,971,000
9,535,000 8,698,000
6,508,000 7,138,000
- 91,000
60,000 70,000
TOTAL ASSETS
$30,545,000 $25,968,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,263,000 $ 940,000
899,000 674,000
Income taxes payable
- 65,000
Dividends payable
633,000 369,000
Line of credit
Current maturities of long-term debt
561,000 458,000
Deferred tax liability - current 90,000 -
TOTAL CURRENT LIABILITIES
4,446,000 2,506,000
OTHER LIABILITIES AND DEFERRED CREDITS
Long-term debt, net of current portion
3,977,000 4,256,000
Deferred tax liability - non-current 101,000 -
TOTAL LIABILITIES
8,524,000 6,762,000
STOCKHOLDERS’ EQUITY:
Series B Convertible Preferred Stock; par value $1.00;
600,000 shares authorized; 0 and 300,614
shares issued and outstanding
Series C Convertible Preferred Stock; stated value $1.00;
1,015,000 shares authorized; 0 and 200,000 shares issued and outstanding
Common stock; par value $.001 per share; 20,000,000 shares authorized;
12,782,791 and 11,001,070 shares issued and outstanding 13,000 11,000
Additional paid-in capital 21,759,000 20,556,000
Accumulated other comprehensive income (loss)
282,000 (39,000)
Retained earnings (deficit) 1,149,000 (1,287,000)
- 301,000
- 200,000
23,203,000 19,742,000
(1,075,000) (536,000)
Less: cost of 210,902 and 78,160 shares of common stock in treasury
Less: Unearned compensation (107,000)
TOTAL STOCKHOLDERS’ EQUITY
22,021,000 19,206,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$30,545,000 $25,968,000
The accompanying notes are an integral part of these consolidated financial statements
24 medifas t 2005 ann ual re por t
MEDIFAST, INC. AND S UBS IDIAR IE S
CONSOLIDATE D STATEMENTS OF I NCOM E
Ye ars En ded D ecemb er 3 1, 20 0 5, 20 0 4 and 2 003
2005 2004 2003
Revenue
Cost of sales
$40,129,000 $27,340,000 $25,379,000
(10,161,000) (6,746,000) (6,825,000)
GROSS PROFIT
29,968,000 20,594,000 18,554,000
Selling, general, and administration
(25,894,000) (17,590,000) (14,956,000)
INCOME FROM OPERATIONS
4,074,000 3,004,000 3,598,000
OTHER INCOME (EXPENSE):
Interest expense
Interest income
Other income (expense)
(317,000) (245,000) (150,000)
158,000 154,000 110,000
15,000 (7,000) -
(144,000) (98,000) (40,000)
NET INCOME BEFORE PROVISION FOR INCOME TAXES
Provision for income taxes
3,930,000 2,906,000 3,558,000
(1,203,000) (1,159,000) (1,148,000)
NET INCOME
2,727,000 1,747,000 2,410,000
Less: Preferred stock dividend requirement
(291,000) (18,000) (58,000)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$2,436,000 $1,729,000 $2,352,000
Basic earnings per share
Diluted earnings per share
$0.20 $0.16 $0.25
$0.19 $0.14 $0.22
Weighted average shares outstanding -
Basic
12,258,734 10,832,360 9,305,731
Diluted
12,780,959 12,413,424 10,952,367
The accompanying notes are an integral part of these consolidated financial statements
medifast 2005 annual rep or t 2 5
MEDIFAST, INC. AND S UBSIDIAR IES
CONSOLIDATED STATEMENT OF CHA N GE S IN
STOCK HOLDERS’ EQUIT Y AND ACCUMU LATE D OTH E R
COMPREHENSIVE INCO ME (LO SS )
Ye ars En ded D ecem be r 31, 2005, 2 00 4 a nd 20 03
Series B
Preferred Stock
Series C
Preferred Stock
Number
of Shares
Stated Value
Amount
Number
of Shares
Stated Value
Amount
Balance, December 31, 2002 521,290 $521,000 985,000 $985,000
Preferred converted to Common Stock (117,556) (117,000) (718,000) (718,000)
Options exercised to Common Stock
Warrants Converted to Common Stock
Common Stock issued to Directors,
consultants, and acquisitions
Common Stock issued for Series “C” dividend
Dividend paid in stock
Net Income
Balance, December 31, 2003 403,734 404,000 267,000 267,000
Preferred converted to Common Stock (103,120) (103,000) (67,000) (67,000)
Options exercised to Common Stock
Warrants Converted to Common Stock
Conversion of debt to equity
Conversion of debt to equity out of Treasury
Common stock issued to Consultants
Shares issued out of Treasury
Common Stock issued for Series “C” dividend
Dividend paid in stock
Net Income
Balance, December 31, 2004 300,614 301,000 200,000 200,000
Preferred converted to Common Stock (300,614) (301,000) (200,000) (200,000)
Warrants Converted to Common Stock
Options excercised to common stock
Common Stock issued for Series “C” dividend
Dividend paid in stock
Common stock issued for Series “B” dividend
Common stock issued to Employees
Treasury shares issued to employees
Shares issued to officer with two year vesting period
Treasury shares repurchased
Net income
Balance, December 31, 2005 - $ - - $ -
The accompanying notes are an integral part of these consolidated financial statements
26 medifas t 2005 ann ual re por t
MEDIFAST, INC. AND S UBS IDIAR IE S
CONSOLIDATED STATEMENT OF CHA N GE S IN
STOCKHOLDERS’ EQUIT Y AND ACCU MULAT ED OT HE R
COMPREHENSIVE INCOME (LOSS ) - (CO N TIN UE D )
Ye ars E nded D ec ember 31, 200 5, 2 00 4 a nd 2 0 03
Common Stock
Number
of Shares
Par Value
$0.00
Amount
Additional
Paid-in
Capital
Retained
Earnings
(deficit)
Balance, December 31, 2002 7,204,693 $7,000 $9,613,000 ($5,381,000)
Preferred converted to Common Stock 1,671,108 2,000 833,000
Options exercised to Common Stock 615,714 590,000
Warrants Converted to Common Stock 288,724 350,000
Common Stock issued to Directors, 665,970 1,000 8,716,000
consultants, and acquisitions
Common Stock issued for Series “C” dividend 36,400 18,000
Dividend paid in stock (45,000)
Net Income 2,410,000
Balance, December 31, 2003 10,482,609 10,000 20,120,000 (3,016,000)
Preferred converted to Common Stock 340,240 170,000
Options exercised to Common Stock 47,221 1,000 34,000
Warrants Converted to Common Stock 46,700 125,000
Conversion of debt to equity 55,400 28,000
Conversion of debt to equity out of Treasury 114,000
Common stock issued to Consultants 15,500 93,000
Shares issued out of Treasury (135,000)
Common Stock issued for Series “C” dividend 13,400 7,000 (7,000)
Dividend paid in stock (11,000)
Net Income 1,747,000
Balance, December 31, 2004 11,001,070 11,000 20,556,000 (1,287,000)
Preferred converted to Common Stock 1,001,228 1,100 500,000
Warrants Converted to Common Stock 2,000 - 2,000
Options excercised to common stock 138,335 100 190,000
Common Stock issued for Series “C” dividend 38,000 - 19,000 (19,000)
Dividend paid in stock (11,000)
Common stock issued for Series “B” dividend 521,158 600 260,000 (261,000)
Common stock issued to Employees 81,000 100 271,000
Treasury shares issued to employees 100 (39,000)
Shares issued to officer with two year vesting period
Treasury shares repurchased
Net income 2,727,000
Balance, December 31, 2005 12,782,791 $13,000 $21,759,000 $1,149,000
The accompanying notes are an integral part of these consolidated financial statements
medifast 2005 annual rep or t 2 7
MEDIFAST, INC. AND S UBSIDIAR IES
CONSOLIDATED STATEMENTS OF C HA N GE S IN
STOCK HOLDERS’ EQUIT Y AND ACCUMU LATE D OTH E R
COMPREHENSIVE INCOME (LOSS ) - (CO N TIN UE D)
Ye ars En ded D ecem be r 31, 2005, 2 00 4 a nd 20 03
Accumulated
other
comprehensive
income (loss)
Total
Treasury
Stock
Unearned
Compensation
Balance, December 31, 2002 $ - $5,745,000 ($167,000) $ -
Preferred converted to Common Stock
Options exercised to Common Stock 590,000 (516,000)
Warrants Converted to Common Stock 350,000
Common Stock issued to Directors, consultants and acquisitions 8,717,000
Common Stock issued for Series “C” dividend 18,000
Dividend paid in stock (45,000)
Net Income (25,000) 2,385,000
Balance, December 31, 2003 (25,000) 17,760,000 (683,000) -
Preferred converted to Common Stock
Options exercised to Common Stock 35,000 (31,000)
Warrants Converted to Common Stock 125,000 (123,000)
Conversion of debt to equity 28,000
Conversion of debt to equity out of Treasury 114,000 166,000
Common stock issued to Consultants 93,000 135,000
Shares issued out of Treasury (135,000) 135,000
Common Stock issued for Series “C” dividend
Dividend paid in stock (11,000)
Net Income (14,000) 1,733,000
Balance, December 31, 2004 (39,000) 19,742,000 (536,000) -
Preferred converted to Common Stock (124,000)
Warrants Converted to Common Stock 2,000
Options excercised to common stock 190,000
Common Stock issued for Series “C” dividend
Dividend paid in stock (11,000)
Common stock issued for Series “B” dividend
Common stock issued to Employees 271,000
Treasury shares issued to employees (39,000) 38,000
Shares issued to officer with two year vesting period (122,000)
Vesting of unearned compensation 15,000
Treasury shares repurchased (453,000)
Net income 321,000 3,048,000
Balance, December 31, 2005 $282,000 $23,203,000 ($1,075,000) ($107,000)
The accompanying notes are an integral part of these consolidated financial statements
28 medifas t 2005 ann ual re por t
MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF CASH FLOW Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,727,000 $ 1,747,000 $2,410,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES FROM OPERATIONS:
Depreciation and amortization 1,741,000 1,210,000 648,000
Realized (gain) loss on investment securities 10,000 19,000 (1,000)
Common stock issued for services 150,000 93,000 207,000
Vesting of unearned compensation 15,000 - -
Net change in other accumulated comprehensive income (loss) 321,000 (14,000) -
Provision for bad debts 13,000 - -
Deferred income taxes 301,000 486,000 1,138,000
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable 65,000 (422,000) (357,000)
(Increase) in inventory (1,225,000) (1,263,000) (1,729,000)
(Increase) in prepaid expenses and other current assets (2,194,000) (143,000) (687,000)
(Increase) in deferred compensation (204,000) - (321,000)
Decrease (increase) in other assets 10,000 (25,000) 44,000
Increase (decrease) in accounts payable and accrued expenses 1,323,000 (460,000) 525,000
Increase in income taxes payable 160,000 674,000 -
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,213,000 1,902,000 1,877,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of investment securities, net (84,000) 1,338,000 (3,564,000)
Purchase of building - (566,000) (1,823,000)
Purchase of property and equipment (1,672,000) (1,490,000) (1,309,000)
Purchase of intangible assets (276,000) (2,792,000) (2,458,000)
NET CASH (USED IN) INVESTING ACTIVITIES (2,032,000) (3,510,000) (9,154,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, options and warrants 66,000 7,000 6,722,000
Increase (decrease) in line of credit, net 561,000 314,000 (36,000)
Purchase of treasury stock (452,000) - -
Proceeds from long-term debt - 475,000 2,669,000
Principal repayments of long-term debt (473,000) (1,089,000) (346,000)
Dividends paid on preferred stock (11,000) (11,000) (45,000)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (309,000) (304,000) 8,964,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 872,000 (1,912,000) 1,687,000
Cash and cash equivalents - beginning of the year 612,000 2,524,000 837,000
Cash and cash equivalents - end of year $ 1,484,000 $ 612,000 $ 2,524,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 317,000 $ 245,000 $ 154,000
Income taxes $ 1,983,000 $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITY:
Conversion of preferred stock B and C to common stock $ 501,000 $ 170,000 $ 835,000
Common stock for services $ 150,000 $ 93,000 $ 207,000
Common stock for intangibles and fixed assets $ - $ - $1,949,000
Conversion of debt to equity $ - $ 307,000 $ -
Preferred B and C Stock Dividends $ 287,000 $ 7,000 $ 18,000
Line of credit converted to long-term debt $ 369,000 $ - $ -
Common stock issued for compensation to be earned upon vesting $ 122,000 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements
medifast 2005 annual rep or t 2 9
MEDIFAST, INC. AND S UBSIDIAR IES
N OTES TO CONS OLIDATED FINANC IA L STATE ME N TS
D ecember 3 1, 200 5, 2 004 and 20 03
NOTE A - BUSINESS
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Medifast, Inc. (the “Company”, or “Medifast”)
Significant accounting policies followed
is a Delaware corporation, incorporated in 1980.
in the preparation of the consolidated financial
The Company’s operations are primarily conducted
statements are as follows:
through five of its wholly owned subsidiaries, Jason
Pharmaceuticals, Inc. (“Jason”), Take Shape for Life,
[1] PRINCIPLES OF CONSOLIDATION AND BASIS OF
Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC
PRESENTATION:
and Seven Crondall, LLC. The Company is engaged
in the production, distribution, and sale of weight
The consolidated financial statements
management and disease management products
include the accounts of the Company and its
and other consumable health and diet products.
wholly owned subsidiaries, Jason Pharmaceuticals,
Medifast, Inc.’s product lines include weight and
Inc., Take Shape For Life, Inc., Seven Crondall
disease management, meal replacement and sports
Associates, LLC, Jason Properties, LLC and
nutrition products manufactured in a modern, FDA
Jason Enterprises, Inc. All inter-company accounts
approved facility in Owings Mills, Maryland.
have been eliminated.
The Company is engaged in the manufactur-
[2] CASH AND CASH EQUIVALENTS:
ing and distribution of Medifast® and Hi-Energy®
branded and private label weight and disease
For the purposes of the consolidated state-
management products. These products are sold
ments of cash flow, the Company considers all
through various channels of distribution, to
highly liquid debt instruments purchased with
include web, call center, independent health
maturity of three months or less to be cash
advisors, medical professionals, weight loss clinics,
equivalents. At December 31, 2005, the Company
direct consumer marketing supported via the
had $789,000 in a money market account, $365,000
phone and the web. The processing, formulation,
in miscellaneous short-term investments through
packaging, labeling and advertising of the Company’s
Merrill Lynch that are considered cash equivalents
products are subject to regulation by one or more
due to terms of maturity, and $330,000 in operating
federal agencies, including the Food and Drug
checking accounts.
Administration, the Federal Trade Commission,
the Consumer Product Safety Commission, the
At December 31, 2004, the Company had
United States Department of Agriculture, and the
invested in four $100,000 certificates of deposit,
United States Environmental Protection Agency.
of which three were considered cash equivalents.
In 2005, all certificates of deposit matured and
were rolled into a money market account.
30 medifas t 2005 ann ual re po r t
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
[3] ACCOUNTS RECEIVABLE AND ALLOWANCE FOR
the estimated useful lives of the assets acquired
DOUBTFUL ACCOUNTS
as follows:
Accounts receivable are recorded net of
Building and building improvements 39 years
reserves for sales returns and allowances, and
Equipment and fixtures 3 - 15 years
net of provisions for doubtful accounts. Allow-
Vehicles 5 years
ances for sales returns and discounts are based
on an analysis of historical trends, and allowances
The carrying amount of all long-lived assets
for doubtful accounts are based primarily on an
is evaluated periodically to determine whether
analysis of aging accounts receivable balances
adjustment to the useful life or to the unamortized
and on the creditworthiness of the customer as
balance is warranted. Such evaluation is based
determined by credit checks and analysis, as well
principally on the expected utilization of the
as the customer’s payment history.
long-lived assets and the projected undiscounted
cash flows of the operations in which the long-
[4] INVENTORY:
lived assets are used.
Inventory is stated at the lower of cost or
[7] INCOME TAXES:
market, utilizing the first-in, first-out method. The
cost of finished goods includes the cost of raw
The Company accounts for income taxes in
materials, packaging supplies, direct and indirect
accordance with Statements of Financial Accounting
labor and other indirect manufacturing costs.
Standards No. 109, “Accounting for Income Taxes,”
[5] ADVERTISING:
which requires an asset and liability approach to
financial accounting and reporting for income
taxes. Deferred income taxes and liabilities are
Advertising costs such as preparation, layout,
computed annually for differences between the
design and production of advertising are deferred.
financial statement and the tax basis of assets
They are expensed when the advertisement
and liabilities that will result in taxable or deductible
is first used, except for the costs of executory
amounts in the future based on enacted tax laws
contracts, which are amortized as performance
and rates applicable to the periods in which the
under the contract is received. Advertising costs
differences are expected to affect taxable income.
deferred at December 31, 2005 and 2004, were
Valuation allowances are established when
$585,000 and $478,000 respectively. Advertising
necessary to reduce deferred tax assets to the
expense for the years ended December 31,
amount expected to be realized.
2005 and 2004 amounted to $3,784,000 and
$1,055,000, respectively.
[8] EARNINGS PER COMMON SHARE:
[6] PROPERTY, PLANT AND EQUIPMENT:
Basic earnings per share is calculated by
dividing net profit attributable to common
Property, plant and equipment are stated at
stockholders by the weighted average number of
cost less accumulated depreciation and amortization.
outstanding common shares during the year.
The Company computes depreciation and
Basic earnings per share exclude any dilutive
amortization using the straight-line method over
effects of options, warrants and other stock-based
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
compensation, which are included in diluted
accepted in the United States of America requires
m ed ifa st 2005 annual repor t 31
earnings per share.
[9] REVENUE:
management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and
Revenue is recognized for product sales
expenses during the reporting periods. Actual
upon shipment and passing of risk to the customer
results could differ from those estimates.
and when estimates of discounts, rebates, promo-
tional adjustments, price adjustments, returns,
[11] FAIR VALUE OF FINANCIAL INSTRUMENTS:
and other potential adjustments are reasonably
determinable, collection is reasonably assured
The carrying amounts reported in the
and the Company has no further performance
consolidated balance sheets for cash, certificates
obligations. These estimates are presented in the
of deposit, accounts receivable, accounts payable
financial statements as reductions to net revenues
and accrued liabilities approximate fair value
and accounts receivable. Estimated sales returns,
because of the immediate or short-term maturity
allowances and discounts are provided for.
of the financial instruments.
Outbound shipping charges to customers and
approximates fair value based on current yields
outbound shipping-related costs are netted and
for debt instruments with similar terms.
The Company believes that its indebtedness
included in “cost of sales.”
Returns - Consistent with industry practice, the
[12] CONCENTRATION OF CREDIT RISK:
Company maintains a return policy that allows its
customers to return product within a specified
Financial instruments that potentially subject
period (30 days). Because the period of payment
the Company to credit risk consist of cash,
generally approximates the period revenue
certificates of deposit, investment securities and
was originally recognized, refunds are recorded as
trade receivables. Cash, money markets and
a reduction of revenue when paid. The Company’s
investments exceed the federal insurance coverage
estimate for returns is based upon its historical
by $2,248,000 and $3,525,000, respectively. The
experience with actual returns. While such experience
Company securities at December 31, 2005 and
has allowed for reasonable estimation in the past,
2004, include amounts deposited with multiple
history may not always be an accurate indicator of
financial institutions markets its products primarily
future returns. The Company continually monitors its
to medical professionals, clinics, and Internet
estimates for returns and makes adjustments
medical sales and has no substantial concentrations
when it believes that actual product returns may
of credit risk in its trade receivables.
differ from the established accruals.
[10] ESTIMATES:
As of December 31, 2005 and 2004, the
Company had two customers that individually
represented over 10% of the accounts receivable
The preparation of financial statements in
and in the aggregate, approximately 36% and
conformity with accounting principles generally
49% of the accounts receivable, respectively.
32 medifas t 2005 ann ual re por t
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
[13] STOCK-BASED COMPENSATION:
Company’s common stock to officers, employees,
directors and consultants. Incentive options are to
The Company has adopted Statement of Financial
be granted at fair market value. Options are to be
Accounting Standards No. 123, “Accounting for Stock
exercisable as determined by the stock option
Based Compensation” (“SFAS 123”). The provisions of
committee.
SFAS 123 allow companies to either expense the
estimated value of stock options or to continue to
In November 1997, June 2002 and July 2004, the
follow the intrinsic value method set forth in
Company amended the Plan by increasing the number
Accounting Principles Bulletin Opinion No. 25,
of shares of the Company’s common stock subject to
“Accounting for Stock Issued to Employees” (“APB 25”),
the Plan by an aggregate of 200,000 shares, 300,000
but disclose the pro forma effects on net income (loss)
shares and 250,000 shares respectively.
had the fair value of the options been expensed. The
Company has elected to continue to apply APB 25 in
The Company has elected to continue to account
accounting for its employee stock option incentive
for stock option grants in accordance with APB 25 and
plans. Under APB 25, where the exercise price of the
related interpretations. Under APB 25, where the
Company’s employee stock options equals the market
exercise price of the Company’s employee stock
price of the underlying stock on the date of grant, no
options equals the market price of the underlying stock
compensation is recognized.
on the date of grant, no compensation is recognized.
STOCK OPTION PLAN
If compensation expense for the Company’s
On October 9, 1993 and as amended in May 1995,
consistent with SFAS 123, the Company’s net income
the Company adopted a stock option plan (“Plan”)
and net income per share including pro forma results
authorizing the grant of incentive and nonincentive
would have been the amounts indicated below:
options for an aggregate of 500,000 shares of the
stock-based compensation plans had been determined
Ye ars End ed D ecem be r 31
2005 2004 2003
Net income:
As reported $2,727,000 $1,747,000 $2,410,000
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects
(280,000) (108,000) (403,000)
Pro forma $2,447,000 $1,639,000 $2,007,000
Net income per share:
as reported:
Basic $ 0.20 $ 0.16 $ 0.25
Diluted $ 0.19 $ 0.14 $ 0.22
Pro forma:
Basic $ 0.20 $ 0.15 $ 0.21
Diluted $ 0.19 $ 0.13 $ 0.18
m ed ifa st 2005 annual repor t 33
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 granted is estimated as of the
date of grant using the Black-Scholes option-pricing model with the following assumptions:
2005 2004 2003
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 0.70 0.40 0.40
Risk-free interest rate 4.50% 4.50% 3% - 5%
Expected life in years 1-5 1-5 1-5
The weighted average fair value at date of grant for options granted during the years 2005, 2004,
and 2003 were $2.64, $8.60, and 5.32, respectively, using the above assumptions.
The following summarizes the stock option activity for the years ended December 31:
2005 2004 2003
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 389,397 1.51 439,455.00 1.76 891,669.00 0.69
Options granted 333,333 2.64 30,000.00 8.60 163,500.00 5.32
Options reinstated - 0.00 - 0.00 - 0.00
Options exercised (138,335) (1.83) (47,221) (1.19) (615,714) (1.16)
Options forfeited or expired (299,668) (1.17) (32,837) (7.01) - 0.00
Outstanding at end of year 284,727 2.41 389,397.00 1.51 439,455.00 1.76
Options exercisable at year end 254,725 3.17 350,336.00 1.11 302,668.00 0.76
Options available for grant at
end of year 965,273 860,603 810,545
The following table summarizes information about stock options outstanding and exercisable
at December 31, 2005:
Options Outstanding Options Exercisable
Weighted
Average
Contractual Weighted Weighted
Range of Life Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding (in Years) Price Exercisable Price
$0.25 6,669 1.0 $0.25 6,669 $0.25
$0.32 3,334 .40 $0.32 3,334 $0.32
$0.80 16,666 1.5 $0.80 16,666 $0.80
$2.67 178,334 4.1 $2.67 178,334 $2.67
$3.83 40,000 4.8 $3.83 13,332 $3.83
$4.80 19,724 2.3 $4.80 19,724 $4.80
$8.60 10,000 3.0 $8.60 6,666 $8.60
$11.15 10,000 2.5 $11.15 10,000 $11.15
284,727 $2.41 254,725 $3.17
34 medifas t 2005 ann ual re por t
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
[15] RECENT ACCOUNTING PRONOUNCEMENTS
categories: held-to-maturity, available-for-sale
and trading. The Company’s investments consist
In December 2004, the FASB issued Financial
of debt and equity securities classified as
Accounting Standards No. 123 (revised 2004) (FAS
available-for-sale securities. Accordingly, they are
123R), “Share-Based Payment, “ FAS 123R replaces
carried at fair value in accordance with FAS
FAS No. 123, “Accounting for Stock-Based
No. 115. Further, according to FAS No. 115 the
Compensation”, and supersedes APB Opinion No.
unrealized holding gains and losses for available-
25, “Accounting for Stock Issued to Employees.”
for-sales securities are excluded from earnings
FAS 123R requires compensation expense, measured
and reported, net of deferred income taxes, as a
as the fair value at the grant date, related to share-
separate component of stockholders’ equity,
based payment transactions to be recognized
unless the loss is classified as other than a tempo-
in the financial statements over the period that
rary decline in market value.
an employee provides service in exchange for
the award. The Company intends to adopt FAS
[17] GOODWILL AND OTHER INTANGIBLE ASSETS
123R using the “modified prospective” transition
method as defined in FAS 123R. Under the modified
In June 2001, the Financial Accounting Standards
prospective method, companies are required to
Board (“FASB”) issued Statement No. 142 “Goodwill
record compensation cost prospectively for the
and Other Intangible Assets”. This statement
unvested portion, as of the date of adoption, of
addresses financial accounting and reporting for
previously issued and outstanding awards over the
acquired goodwill and other intangible assets
remaining vesting period of such awards. FAS 123R
and supersedes APB Opinion No. 17, “Intangible
is effective January 1, 2006. The Company is
Assets”. It addresses how intangible assets that
evaluating the impact of FAS 123R on the Company’s
are acquired individually or with a group of other
results and financial position.
assets (but not those acquired in a business
combination) should be accounted for in
In November 2004, the FASB issued Financial
financial statements upon their acquisition. This
Accounting Standards No. 151 (FAS 151), “Inventory
Statement also addresses how goodwill and other
Costs - an amendment of ARB No. 43, Chapter
intangible assets should be accounted for after
4”. FAS 151 clarifies the accounting for abnormal
they have been initially recognized in the financial
amounts of idle facility expense, freight, handling
statements. The Company, in its acquisitions,
costs and spoilage. In addition, FAS 151 requires
recognized $893,850 of goodwill. The Company
companies to base the allocation of fixed production
performs its annual impairment test for goodwill
overhead to the costs of conversion on the nor-
at year-end. As of December 31, 2005, the Company
mal capacity of production facilities. FAS 151 is
has determined that there is no impairment of
effective for fiscal years beginning after June 15,
its goodwill.
2005. FAS 151 did not have a material impact on
its results or financial statements.
In addition, the Company has acquired other
[16] INVESTMENTS
intangible assets, which include: customer lists,
non-compete agreements, trademarks and patents.
The non-compete agreements are being amortized
In accordance with FAS No. 115, “Accounting
over the legal life of the agreements ranging
for Certain Investments in Debt and Equity
between 3 to 7 years. The customer lists are being
Securities”, securities are classified into three
amortized over a period ranging between 5 to 10
m ed ifa st 2005 annual repor t 35
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
years based on management’s best estimate of
NOTE C - INVENTORY
the expected benefits to be consumed or
otherwise used up. Trademarks and patents are
Inventory consists of the following at
December 31, 2005 and 2004:
regularly reviewed to determine whether the
2005 2004
facts and circumstances exist to indicate that the
Raw materials $1,906,000 $1,085,000
useful life is shorter than originally estimated
Packaging 1,142,000 958,000
or the carrying amount of the assets may not be
Finished goods 2,427,000 2,208,000
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.
[18] COMPREHENSIVE INCOME (LOSS)
$5,475,000 $ 4,251,000
NOTE D - PREPAID EXPENSES AND OTHER
CURRENT ASSETS
Prepaid expense and other current assets as of
December 31, 2005 and 2004, consist of the following:
2005 2004
Marketing and advertising $800,000 $478,000
Taxes 779,000 25,000
Commissions 792,000 -
Supplies 393,000 -
Comprehensive income (loss) is defined as the
Insurance 294,000 273,000
change in equity of a business enterprise during
Services 50,000 73,000
a period from transactions and other events and
Other 165,000 230,000
circumstances from non-owner sources, including
$3,273,000 $1,079,000
unrealized gains and losses on marketable
securities. The Company presents comprehensive
NOTE E - PROPERTY, PLANT AND EQUIPMENT
income in its consolidated statements of
stockholders equity.
[19] RECLASSIFICATIONS
Certain amounts for the years ended
December 31, 2004 and 2003 have been reclassified
to conform to the presentation of the December
31, 2005 amounts. The reclassifications have no
effect on net income for the years ended
December 31, 2004 and 2003.
Property, plant and equipment as of December 31,
2005 and 2004, consist of the following:
2005 2004
Land $ 650,000 $ 650,000
Building and building
improvements 6,871,000 6,728,000
Equipment and fixtures 5,583,000 4,062,000
Vehicle 19,000 11,000
13,123,000 11,451,000
Less accumulated depreciation
and amortization 3,588,000 2,753,000
Property, plant and
equipment - net $ 9,535,000 $ 8,698,000
Substantially all of the Company’s property, plant
and equipment are pledged as collateral for various
loans (see Note J).
Depreciation expense for the years ended
December 31, 2005, 2004, and 2003 were $835,000,
$804,000 and $421,000, respectively.
36 medifas t 2005 ann ual re por t
NOTE F - TRADEMARKS AND INTANGIBLES
AS OF DECEMBER 31, 2005 AS OF DECEMBER 31, 2004
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Customer lists $ 4,514,000 $ 873,000 $ 4,355,000 $ 394,000
Non-compete agreements 840,000 566,000 840,000 248,000
Trademarks and patents 1,821,000 121,000 1,703,000 12,000
Goodwill 894,000 - 894,000 -
Total $ 8,069,000
$ 1,560,000 $ 7,792,000 $ 654,000
AMORTIZATION EXPENSE FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 WAS AS FOLLOWS:
2005 2004 2003
Customer lists $ 479,000 $ 244,000 $ 127,000
Non-compete agreements 369,000 162,000 86,000
Trademarks and patents 58,000 - 14,000
Total trademarks and intangibles $ 906,000 $ 406,000 $ 227,000
Amortization expense is included in selling, general and administrative expenses.
The estimated future amortization expense of trademarks and intangible assets is as follows:
For the years ending December 31, Amount
2006 $1,125,000
2007 755,000
2008 640,000
2009 462,000
2010 462,000
medifast 2005 annual rep or t 3 7
NOTE G - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2005 and 2004 consist of the following:
2005 2004
Trade payables $ 1,695,000 $ 343,000
Accrued expenses and other - 116,000
Accrued payroll and related taxes 314,000 215,000
Sales commissions payable 254,000 266,000
Total $ 2,263,000 $940,000
NOTE H - 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 with leases commencing 2004 and 2005. 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, 2005:
For the Years Ending
December 31,
2006 $ 227,000
2007 191,000
2008 147,000
2009 142,664
2010 53,000
Total minimum payments required $ 760,664
38 m edi fas t 2005 ann ual re por t
NOTE I - INCOME TAXES
Significant components of the income tax benefit for the years ended December 31 are as follows:
2005 2004 2003
Current:
Federal $ 685,000 $ 600,000 $ 973,000
State 217,000 90,000 175,000
Total Current 902,000 690,000 $ 1,148,000
Deferred:
Federal $ 261,000 $ 408,000 $ -
State 40,000 61,000 -
Total deferred 301,000 469,000 -
Income tax expense $ 1,203,000 $ 1,159,000 $ 1,148,000
A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income
tax rate and the consolidated income tax benefit in the consolidated statements of income for the years
ended December 31 is as follows:
2005 2004 2003
Provision at the U.S. federal statutory rate $ 1,272,000 $ 1,087,000 $ 973,000
State taxes, net of federal benefit 198,000 145,000 175,000
Intangible assets (153,000) (73,000) -
Other temporary differences (98,000) - -
Permanent differences (16,000) - -
Income tax expense $ 1,203,000 $ 1,159,000 $ 1,148,000
medifast 2005 annual rep or t 3 9
NOTE I - INCOME TAXES (CONTINUED)
Medifast, Inc.’s deferred income taxes reflect the net tax effect of temporary differences between the
bases of assets and liabilities for financial reporting purposes and their bases for income tax purposes.
Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as
follows:
2005 2004
Deferred tax assets
Net operating loss carryforwards $ - $ -
Intangible assets - 110,000
Accounts receivable - -
Inventory overhead and write downs - -
Section 263A - -
Total deferred tax assets $ - $ 110,000
Deferred Tax Liabilities
Intangible assets $ (113,000) $ -
Accounts receivable (37,000) -
Inventory overhead and write downs (41,000) -
Total deferred tax liabilities $ (191,000) $ -
The 2005 effective income tax rate of 30.6% differed from the federal statutory rate of 34% due to the
amortization of intangible assets, timing differences for other temporary and permanent differences,
and state income taxes.
The 2004 effective income tax rate differed from the federal statutory rate due to state taxes, amortization
of intangible assets, and for a net operating loss deduction carried forward from 2003.
The 2003 effective income tax rate differed from the federal statutory rate due to state taxes.
40 medifas t 2005 ann ual re por t
NOTE J- LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt as of December 31, 2005 and 2004, consist of the following:
2005 2004
$2,850,000 fifteen year term loan secured by the building and land
at a variable rate which was 7.13% at December 31, 2005 $ 2,201,000 $ 2,391,000
$1,760,000 ten-year reducing revolver line of credit rate at LIBOR
plus 220 bps , which was 6.58% on December 31, 2005 1,506,000 1,623,000
$186,976 three-year term loan secured by 20,000 restricted common
shares variable rate which was 10.25% at December 31, 2005 59,000 111,000
$200,000 five-year term loan secured by equipment
fixed rate was 3% at December 31, 2005 90,000 130,000
$475,000 seven-year loan secured by the building and land at a
variable rate at LIBOR plus 250 bps, which was 6.885% on
December 31, 2005 428,000 459,000
$366,000 three-year term loan secured by certain assets at LIBOR plus
250 basis points, which was at 6.885% at December 31, 2005 254,000 -
$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, 2004. - -
4,538,000 4,714,000
Less current portion 561,000 458,000
$ 3,977,000 $ 4,256,000
Future principal payments on long-term debt for the next 5 years are as follows:
2006 $561,000
2007 503,000
2008 356,000
2009 339,000
2010 339,000
Thereafter 2,440,000
$4,538,000
The Company has established a $5 million revolving line of credit at the LIBOR rate plus 1.30% with
Mercantile Safe Deposit and Trust Company secured by substantially all of the assets of Jason
Pharmaceuticals, Inc. Effective January 17, 2004, $650,000 of the line of credit was converted to a note
payable secured by all assets of Jason Pharmaceuticals excluding trademarks at a variable rate at libor
plus 250 basis points which was 6.38% on December 31, 2005. The outstanding balance on this line was
$633,000 and $369,000 at December 31, 2005 and 2004, respectively.
The outstanding balance on this line was $633,000 and $369,000 at December 31, 2005 and 2004,
respectively. The line of credit is renewed annually in October.
medifast 2005 annual rep or t 4 1
NOTE K - EMPLOYMENT AGREEMENTS
share of common stock for each share of convertible
preferred stock. In 2001, 157,000 shares opted to
The CEO of Medifast, Inc., Bradley T. MacDonald,
convert to Series “C” Preferred Convertible Stock
has a two-year employment agreement for an
and 85,000 shares were redeemed under the partial
aggregate annual base salary of $225,000 with a
settlement and conversion to Series “C” preferred
bonus potential of 50% of base salary provided
convertible stock offered to Series “A” preferred
the Company makes its profit plan per the Board
stockholders as approved by the Board of Directors.
approved forecast. This contract has been extended
In 2002 the remaining 75,000 shares were redeemed.
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 Company, the Board of
Directors approved a Selective Executive
Retirement Compensation Plan funded by the
form of deferred compensation. The Deferred
Compensation Plan will be funded up to $350,000
by a dollar for dollar match program, having Mr.
MacDonald defer $175,000, followed by a
Company match of $175,000. In June 2004,
the Board of Directors authorized an additional
$50,000 to be deferred by Mr. MacDonald
followed by a Company match of $50,000. In
2005, the Board of Directors approved the funding
of $100,000 into Mr. MacDonald’s Selective
Executive Retirement Compensation Plan. This
brought the Selective Executive Retirement
Compensation Plan total funded value to
$550,000. Beginning January 1, 2006 the
agreement was modified whereby the deferred
compensation will be earned over a 5-year vesting
period due January 1, 2011. Mr. MacDonald exercised
13,333 options at $2.67 in July of 2005 and executed
2,000 warrants at $.35 in March 2005.
NOTE L - REDEEMABLE PREFERRED STOCK
In August 1996, the Company sold 432,500 shares
of Series “A” nonvoting preferred stock that generated
gross proceeds of $865,000, or $2.00 per share.
Each share was entitled to a dividend of 8% ($.16)
per share. The shares were convertible into the
Company’s common stock on the basis of one
NOTE M - SERIES “B” CONVERTIBLE PREFERRED
STOCK
In January 2000, the Company was authorized
to issue 600,000 Series “B” Convertible Preferred
Stock (“Preferred Stock B”) par value $1.00 per
share. Each share is entitled to a dividend of 10%
of liquidation value $1.00 ($.10) per share and is
to be converted on January 15, 2005 unless converted
prior thereto. Each holder of Preferred Series “B”
stock is entitled to four votes per share in all matters
in which holders of the Company’s common stock
are entitled to vote. On January 15, 2005, 300,614
shares of Series “B” Convertible Preferred Stock
were converted into 601,228 shares of Common
Stock. Additionally, a 10% common stock dividend
was paid out upon conversion that resulted in
521,158 shares being issued to the Series “B”
Convertible Preferred stock investors. As of
December 31, 2005 there were no shares of Series
“B” Convertible Preferred Stock remaining.
Each share of Preferred Series “B” stock is
convertible, at the option of the holder after one
year from the issuance date into common stock of
the Company. The initial conversion price will be
75% of the market value of the Company’s common
stock on the day prior to conversion with a maximum
conversion price of $.50 per share subject to
adjustment as defined. In March 2002, the Board
amended 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
42 medifas t 2005 ann ual re por t
conversions of Series “B” preferred at $0.50 per
per year over a five-year period. These are
share in common stock and eliminated the spiral
five-year warrants to purchase common shares at
conversion provision and reduced voting to 2
an exercise price of $4.80 per share. These
votes per share.
warrants may be cancelled, with a 90-day notice,
if the consultants fail to perform to the satisfaction
NOTE N - SERIES “C” PREFERRED CONVERTIBLE
of the Company. During 2005, 120,000 unvested
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
warrants issued to James Paradis and Anthony
Burrascono were cancelled. In addition, the Company
canceled 120,000 unvested warrants issued to
David Scheffler.
$1.00 per share. Each share is entitled to a dividend
During 2003, the Company issued 50,000
of 10% of liquidation value $1.00 ($.10) per share
warrants to Consumer Choices Systems, Inc.
and is to be converted on December 31, 2006
(“CCS”) as part of the payment for the purchase of
unless converted prior thereto. Each Holder of
the assets of CCS. These warrants are three-year
Preferred Series “C” Stock is entitled to one (1)
warrants to purchase common shares at an
vote per share in all matters in which holders of
exercise price of $10.00 per share. Of this amount,
the Company’s Common Stock are entitled to
25,000 warrants were exercised in 2004.
vote. Each share of Preferred Series “C” Stock is
convertible, at the option of the holder, after one
year from the issuance date into Common Stock
of the Company. The conversion price will be $.50
a share. In 2002, 11,500 warrants issued at $0.35
per share were distributed proportionately to
Series “C’ preferred holders.
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
On August 2, 2005, 200,000 shares of Series
average price, all pursuant to the terms of that
“C” Preferred Convertible Stock were converted
certain Securities Purchase Agreement by and
into 400,000 shares of Common Stock. As of
between the Company and Mainfield Enterprises,
December 31, 2005 there were no shares of Series
Inc. and Portside Growth & Opportunity Fund
“C” Preferred Convertible Stock remaining and no
dated as of July 24, 2003.
additional dividend payments are owed.
NOTE O - WARRANTS
at $.35.
During 2005, there were 2,000 warrants exercised
During 2003, the Company issued 200,000
The fair value of these warrants were estimated
warrants to James Paradis and Anthony Burrascono,
using the Black-Scholes pricing model with the
both affiliated with Villanova University and
following assumptions: interest rate 4.5%,
200,000 warrants to Mr. David Scheffler, an
dividend yield 0%, volatility 0.40 and expected
investment banker, for advisory and consulting
life of five years.
services provided to the Company. The warrants
vest in five equal installments of 40,000 warrants
medifast 2005 annual rep or t 4 3
NOTE O - WARRANTS (CONTINUED)
The Company has the following warrants outstanding for the purchase of its common stock:
Years Ended
Exercise December 31,
Price Expiration Date 2005 2004 2003
$0.35 August, 2004 - - 40,100
$0.35 March, 2005 - 2,000 -
$0.63 September, 2004 - - 2,500
$4.80 April, 2008 160,000 360,000 400,000
$10.00 June, 2006 25,000 25,000 25,000
$16.78 July, 2008 82,500 82,500 82,500
267,500 469,500 550,100
Weighted average exercise price $8.98 $7.16 $6.49
As of December 31, 2005, 267,500 of the warrants are exercisable.
NOTE P - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company, like other manufacturers and distributors of products that are ingested, faces an
inherent risk of exposure to product liability claims in the event that, among other things, the use of its
products results in injury.
NOTE Q - LITIGATION
There was no material pending or threatened litigation against Medifast, Inc. or its subsidiaries as
of December 31, 2005.
44 medifas t 2005 ann ual re por t
NOTE R - QUARTERLY RESULTS (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
2005
Revenue $8,326,000 $10,555,000 $10,985,000 10,263,000
Gross Profit 6,253,000 7,932,000 8,310,000 7,473,000
Operating Income 912,000 1,154,000 1,266,000 742,000
Net Income 507,000 753,000 607,000 860,000
Earnings per common share - diluted (1) 0.04 0.06 0.05 0.07
2004
Revenue 6,817,000 7,357,000 7,268,000 5,898,000
Gross Profit 5,467,000 5,411,000 5,382,000 4,334,000
Operating Income 919,000 982,000 527,000 576,000
Net Income 647,000 656,000 391,000 35,000
Earnings per common share - diluted (1) 0.05 0.06 0.03 0.00
(1) -Earnings per common share is computed independently for each of the quarters presented; accordingly,
in the sum of the quarterly earnings per common share may not equal the total computed for the year.
On January 17, 2006, Jason Enterprises, Inc., a wholly owned subsidiary of Medifast, Inc. sold certain assets of
its Consumer Choice Systems division. Consumer Choice Systems distributes products focused on women’s
well being to include supplements for menopause relief and urinary tract infections. The sale price was $1.82
million which included $358,000 in inventory, $131,000 in receivables, and $1,337,000 in net intangible assets.
Consumer Choice Systems was sold to a former Medifast, Inc. board member. The sale price was $1.8 million
and will be recorded as a note receivable by Medifast, Inc. over a 10-year term. The loan is collateralized by
50,000 shares of Medifast, Inc. stock. The following table illustrates segment information from the date
Consumer Choice Systems was purchased by Medifast, Inc. on June 11, 2003 through December 31, 2005.
2005 2004 2003
Revenues, net $958,000 $1,498,000 $851,000
Cost of Sales 733,000 686,000 343,000
Gross Profit 225,000 812,000 508,000
Compensation and Professional Fees 290,000 213,000 254,000
Selling, General and Administrative Expenses 208,000 256,000 212,418
Depreciation and Amortization 209,000 90,000 95,000
Interest (net) 8,000 17,000 8,000
Net income (loss) (490,000) 236,000 (61,418)
Earnings per share - basic (0.04) 0.02 (0.01)
Earnings per share - diluted (0.04) 0.02 (0.01)
Segment Assets 2,216,000 2,625,000 2,497,000
Fixed assets, net of depreciation 54,000 71,000 91,000
Inventory 293,000 391,000 470,000
Prepaid expenses 327,000 - 53,000
Accounts receivable 171,000 629,000 221,000
Intangible assets 443,000 635,000 635,500
Goodwill 893,500 893,500 893,500
medifast 2005 annual rep or t 4 5
PAR T I
ITEM 1. BUSINESS.
SUMMARY
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, 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 increased dramatically.
The Centers for Disease Control (CDC) estimate
that 64% of the U.S. adult population is over-
weight, and 30% of these individuals (60
million) are obese which is defined as having a
Body Mass Index >30. 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.
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 physical
inactivity account for more than 300,000 premature
deaths per year in the U.S.
A 2003 market research study concluded
consumers spend about $39 billion per year trying to
lose weight or prevent weight gain. This includes
consumer spending on diet foods, medically
supervised and commercial weight loss programs,
diet books, appetite suppressants, fitness clubs,
diet sodas, and videos and cassettes.
DISTRIBUTION CHANNELS
THE MEDIFAST LIFESTYLES PROGRAM- The Medifast
Lifestyles 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 program.
Management estimates that more than 15,000
physicians nationwide have prescribed Medifast
as a treatment for their overweight patients since
1980, and over an estimated 1 million patients
have used its’ products to lose and maintain their
weight. Direct-to-consumer sales represent
approximately 45% of Medifast, Inc.’s total sales.
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 support. The Company
also offers an additional in-house support
program to assist customers that are consulting
their primary care physician. Customers have
access to qualified nutritional counselors for
program support and advice via a toll free
telephone help line or by e-mail.
46 medifas t 2005 ann ual re por t
TAKE SHAPE FOR LIFE™ - Take Shape for Life is
HI-ENERGY WEIGHT CONTROL CENTERS - In 2003,
a physician led network of independent health
the Company acquired Hi-Energy Weight Control
coaches who are specifically trained to provide
Centers, a national company specializing in
emotional support and are conduits to give
weight management programs, with weight loss
clients the strategies and skills to successfully
centers in over 50 locations. Hi-Energy Weight
reach a healthy weight and then provide a road
Control Centers offer a competitive marketing
map to empower the individual to take control of
edge through a regional advertising program,
their health. Take Shape for Life is a support
exclusive territories and marketing support. The
program that moves beyond the scope of weight
Company continues to seek out qualified licensees
loss to show customers how to achieve optimal
to add to its growing number of weight control
health through the balance of body, mind, and
clinics nationwide. Additionally, the Company is
finances. Take Shape for Life uses the high quality,
operating 11 corporately owned clinics that serve
medically validated products of Medifast as the
as models to attract qualified licensees. Hi-Energy
platform to launch an integrity based lifelong
clinics account for approximately 7% of Medifast,
health optimization program.
Inc.’s total sales.
Program entrants are encouraged to consult
with their primary care physician and a Take
THE MEDIFAST® BRAND
Shape for Life Health Advisor to determine the
Medifast program that is right for them. Physician
Medifast is a medically supervised weight
directed Health Advisors are supported, educated
management program, which specializes in multi-
and qualified by The Health Institute, a training
disciplinary patient education programs using the
group staffed by Medifast professionals. Health
highest quality meal replacement supplements. In
Advisors obtain Medifast qualification based
recent years Medifast’s core products and programs
upon testing of their knowledge on Medifast
have continued to expand over a wellness spectrum
products and programs.
to include health management products. Medifast
offers products specially formulated for diabetics
Take Shape for Life accounts for approximately
as well as products for women’s health, joint
35% of Medifast, Inc.’s total sales.
health and coronary health.
MEDIFAST PHYSICIANS AND CLINICS - Many
In 2003, Medifast began a two-year study
Medifast physicians have chosen to implement
with The Johns Hopkins Bloomberg School of
the Medifast program within their practice. These
Public Health to evaluate the efficacy of its
physicians carry an inventory of Medifast products
Medifast Plus for Diabetics compared to basic
and resell them to patients. They also provide
nutrition recommendations by the American
appropriate testing, medical support and evaluations
Diabetes Association (ADA). Final results showed
for patients on the program. Physicians can also
that participants using Medifast Plus for Diabetics
direct their patients to order directly from
lost twice as much weight and were twice as able
Medifast, if they do not have space to stock
to stay on the program as those following the
inventory. Physician sales account for approximately
ADA’s guidelines. Additionally, two-thirds of those
10% of Medifast, Inc.’s total sales.
on the Medifast program lost at least 5% of their
weight, which is a standard measure of the Food
and Drug Administration’s (FDA)
medifast 2005 annual rep or t 4 7
threshold to indicate clinically significant weight
diseases such as diabetes and coronary health.
loss, versus one-quarter of those on the ADA diet.
In addition to weight loss, the initial study results
COMPETITION
indicate that Medifast participants sustained an
There are many different kinds of diet products
average 9% decrease in blood fasting glucose and
and programs within the weight loss industry. These
an average 19% decrease in insulin levels.
include a wide variety of commercial weight loss
programs, pharmaceutical products, weight loss
Many Medifast Plus for Diabetics products
books, self-help diets, dietary supplements,
have earned the coveted Seal of Approval from
appetite suppressants and meal replacement
the Glycemic Research Institute. The line,
shakes and bars.
designated as Low Glycemic, does not overly
stimulate blood glucose and insulin and does not
The Company has proven it can compete
stimulate fat-storing enzymes. Products included
in this competitive market because its products
in the Medifast Plus for Diabetics line consist of
have been clinically tested and proven at Johns
three delicious patented shakes, home style chili,
Hopkins University and have been safely and
apple cinnamon, French vanilla berry oatmeal,
effectively used by customers for over 20
maple and brown sugar oatmeal, creamy chicken
years. Medifast has been on the cutting edge of
soup, creamy broccoli soup, chicken noodle soup,
product development with soy based nutritional
minestrone soup and two snack bars.
and weight management products since 1989.
These products are formulated with high-quality,
Most Medifast products qualify to make the
low-calorie, low-fat ingredients that provide
FDA’s heart healthy claim, “May Reduce the Risk
alternatives to fad diets or medicinal weight
of Heart Disease.” In order to make this claim, a
loss remedies.
product must contain at least 6.25 grams of soy
protein per serving and be low in fat, saturated
The Medifast program has been recommended
fat, and cholesterol. Unlike popular fad diets and
by physicians for more than 25 years and some
herbal supplements, Medifast products are a safe,
Medifast practitioners choose to prescribe
nutritionally balanced choice, offering gender
appetite suppression diet drugs to patients in
specific formulas containing high protein and low
conjunction with a Medifast based diet. Diet drug
carbohydrates, a soy protein source rather than
therapies such as those that suppress appetite
animal protein source, and vitamin and mineral
usually require a restricted calorie diet in order
for tification. It is ver y difficult to meet the
to obtain desired results. Medifast is a
minimum recommended nutritional requirements on
dosage/portion controlled weight management
a low-calorie diet, but a dieter can easily meet these
solution that is effective in conjunction with
requirements using the nutrient dense Medifast
drug therapy as prescribed by physicians working
brand of meal replacement food supplements.
within the individual needs of their patients. The
Medifast program alone is a mild ketogenic diet that
Medically supervised, low calorie diets are
naturally suppresses appetite and eliminates hunger
continuing to gain popularity, as consumers search
without other therapies for most people.
for a safe and effective solution that provides
balanced nutrition, quick weight loss and valuable
behavior modification education. In addition,
consumers are becoming more aware of chronic
48 medifas t 2005 ann ual re por t
PRODUCTS
NEW PRODUCTS
The Company offers a variety of weight and
The Company expanded the Medifast product
disease management products under the Medifast®
line in 2005 by introducing Medifast® Banana Creme
brand and for select private label customers. The
Shake, Medifast® Peach Oatmeal, Medifast® Beef
Medifast line includes Medifast® 55, Medifast® 70,
Vegetable Stew, Medifast® Red Bell Pepper Italian
Medifast® Plus for Appetite Suppression, Medifast®
dressing, and Medifast® Ranch dressing. Medifast
Plus for Diabetics, Medifast® Plus for Joint Health,
also introduced a line of diabetic products that
Medifast® Plus for Women’s Health, Medifast® Plus
includes shakes and bars under the Medifast®
for Coronary Health, Medifast® Fit!, Medifast® Take
Maintain line.
Shape™, Medifast® Supplement Bars, Medifast®
Creamy Soups, Medifast® Minestrone Soup,
MARKETING
Medifast® Hot Cocoa, Medifast® Oatmeals, Medifast®
Pro Teas, Medifast® Chicken Noodle Soup, Medifast®
The Company continued to build and leverage
Fast Soups, Medifast® Homestyle Chili and Medifast®
its core Medifast brand through multiple marketing
Multigrain Crackers.
strategies to its target audiences. Print advertising,
television, and radio were all used to target new
Medifast nutritional products are formulated
customers by stressing Medifast’s quick, easy and
with high-quality, low-calorie, low-fat ingredients.
safe approach to weight management. Also, direct
Many Medifast products are soy based and contain
mail has been utilized to encourage and support
24 vitamins and minerals, as well as other nutrients
existing customers.
essential for good health. The Company uses
DuPont Protein Technologies’ Supro® brand soy
Online advertising began to be used in 2004
protein, which is a high-quality complete protein
and it included keyword search, banner ads, affiliate
derived from soybeans.
programs, and targeted direct email campaigns. The
online advertising has been supported by Medifast’s
Medifast brand awareness continues to
well designed, user-friendly website, which provides
expand through the Company’s marketing campaigns,
a wealth of information and customer support for
product development, line extensions, and the
easy ordering functionality.
Company’s emphasis on quality customer service,
technical support and publications developed by
SALES
the Company’s marketing staff. Medifast products
have been proven to be effective for weight and
The Company’s Sales division handles three primary
disease management in clinical studies conducted
areas:
by the U.S. government and Johns Hopkins University.
The Company has continued to develop its sales
Physician and Clinic Sales-- The sales team is
an d ma r keting operations with qu ali f i ed
responsible for prospecting larger medical
man agement and innovative programs. The
accounts, clinics, hospitals, and HMOs. During
Company’s facility in Owings Mills, MD manufactures
2005, the sales team attended a number of medical
powders and a portion of its supplement bars and
professional trade shows, which expanded Medifast’s
subcontracts the production of its Ready-to-Drink
penetration of the clinical business segment.
products and additional bars.
Hi-Energy Weight Control Centers-- During 2005
medifast 2005 annual rep or t 4 9
Hi-Energy provided ongoing support to its licensees
GOVERNMENTAL REGULATION HISTORY
as well as to the Company’s 11 corporately owned
centers which opened at the end of 2004. This
support included marketing 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 physicians to
provide Hi-Energy programs and services to local
hospitals and private practices.
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
Take Shape for Life-- Provides a sales force of
in its literature and labeling that its products produce
independent Health Advisors who support patients
or create medicinal effects or possess drug-related
and their primary care physicians with a defined
characteristics. The FDA could, in certain circumstances,
support program. Take Shape for Life is a support
require the reformulation of certain products to meet
program that moves beyond the scope of weight
new standards, require the recall or discontinuation
loss to show customers how to achieve optimal
of certain products not capable of reformulation, or
health through the balance of body, mind, and finances.
require additional record keeping, expanded
MANUFACTURING
documentation of the properties of certain products,
expanded or different labeling, and scientific
Jason Pharmaceuticals, Inc., the Company’s
substantiation. If the FDA believes the products are
wholly owned manufacturing subsidiary, produces
unapproved drugs or food additives, the FDA may
over 80% of the Medifast products in a state-of-the-art
initiate similar enforcement proceedings. Any or
food and pharmaceutical-grade facility in Owings
all such requirements could adversely affect the
Mills, Maryland. Management purchased the plant
Company’s operations and its financial condition.
in July 2002 for $3.4 million.
The FDA also requires “medical food” labeling to list
The manufacturing facility has the capacity for
the name and quantity of each ingredient and identify
significant increases to its production output with
the product as a “weight management/modified fasting
minimal capital expenditures. Adding additional
or fasting supplement” in the labeling.
shifts, along with minor capital expenditures for
machinery would enable the Company to produce
enough products to generate over $200 million
in sales.
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
Manufacturing processes, product labeling,
regulations and enforcement powers of the Federal
quality control and equipment are subject to
Trade Commission (“FTC”), and the Consumer Product
regulations and inspections mandated by the
Safety Commission. The Company’s activities are also
Food & Drug Administration (FDA), the Maryland
regulated by various agencies of the states and localities
State Department of Health and Hygiene, and the
in which the Company’s products are sold. The Company’s
Baltimore County Department of Health. The plant
products are manufactured and packaged in accordance
strictly adheres to all GMP practices and has
with customers’ specifications and sold under their
maintained its status as an “OU” (Orthodox Union)
private labels both domestically and in foreign
kosher-approved facility since 1982.
countries through independent distribution channels.
50 medifas t 2005 ann ual re por t
PRODUCT LIABILITY AND INSURANCE
its corporately owned Hi-Energy Weight Control
The Company, like other producers and distributors
and Texas. The leases range in terms from one to
clinics throughout Florida, Arkansas, Mississippi
of ingested products, faces an inherent risk of
five years.
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
IT EM 3. LE GA L PR OCEE DING S.
product liability claims with respect to the products
it manufactures. With respect to the retail and direct
There were no material pending legal matters
marketing distribution of products produced by
as of 12/31/05.
others, the Company’s principal form of insurance
consists of arrangements with each of its suppliers of
those products to name the Company as beneficiary
on each of such vendor’s product liability insurance
policies. The Company does not buy products from
suppliers who do not maintain such coverage.
EMPLOYEES
As of December 31, 2005, the Company
employed 164 full-time and contracted employees,
of whom 62 were engaged in manufacturing,
IT EM 4. SU BM IS SI ON OF MAT TE RS
TO A V OT E OF S ECUR IT Y H OLDERS
The Medifast Annual Shareholder Meeting was
held on September 16, 2005 at the Roland E. Powell
Convention Center in Ocean City, Maryland. The
shareholders voted Michael C. MacDonald (96%),
Mary T. Travis* (98%) and Joseph D. Calderone,
O.S.A* (98%) as Class II Directors that will hold office
until 2008, and Michael J. McDevitt (97%), and
warehouse management, and shipping, and 102 in
George Lavin, Jr., Esq* (98%) as Class III Directors.
marketing, administrative, call center and corporate
Class III Directors will hold office until the next
support functions. None of the employees are subject
to a collective bargaining agreement with the Company.
ITEM 2. DESCRIPTION OF PROPERT Y
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 & Company, LLC,
an independent member of the BDO Seidman
The Company owns a 49,000 square-foot
Alliance, as the Company’s independent auditors
facility in Owings Mills, Maryland, which contains its
for the fiscal year ending December 31, 2005. Lastly,
Corporate Headquarters and manufacturing plant.
the shareholders voted to increase the number of
In 2003, the Company purchased a state-of-the-art
authorized shares of common stock by 5 million
119,000 square-foot distribution facility in Ridgely,
shares to 20 million shares authorized.
Maryland. The facility gives the Company the ability
to distribute over $200 million of Medifast product
* Independent Director
sales per year. In 2004, the Company purchased a
3,000 square foot conference and training facility
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
medifast 2005 annual rep or t 5 1
Th e following are the B oard of Direc tor s:
Date First
Name Age Position Became Director
Bradley T. MacDonald 58 Chairman of the Board, 1996
Chief Executive Officer
and Director
Donald F. Reilly 58 Director 1998
Michael C. MacDonald 52 Director 1998
Mary T. Travis 55 Director 2002
Joseph D. Calderone 57 Director 2003
George Lavin, Jr 76 Director 2005
Michael J. McDevitt 57 Director 2002
bradleY t. Macdonald became Chairman of the
Board of Directors of the Marine Corps Reserve Toys
Board and Chief Executive Officer of Medifast, Inc.
for Tots Foundation.
on January 28, 1998. Prior to joining the Company,
he was appointed as Program Director of the U.S.
reverend donald francis reillY, o.s.a., a
Olympic Coin Program of the Atlanta Centennial
Director, holds a Doctorate in Ministry (Counseling)
Olympic Games. Mr. MacDonald was previously
from New York Theological and an M.A. from
employed by the Company as its Chief Executive
Washington Theological Union as well as a B.A.
Officer from September 1996 to August 1997. From
from Villanova University. Reverend Don Reilly was
1991 through 1994, Colonel MacDonald returned to
ordained a priest in 1974. His assignments included
active duty to be Deputy Director and Chief Financial
Associate Pastor, Pastor at St. Denis, Havertown,
Officer of the Retail, Food, Hospitality and
Pennsylvania, Professor at Villanova University,
Recreation Businesses for the United States Marine
Personnel Director of the Augustinian Province
Corps. Prior thereto, Mr. MacDonald served as Chief
of St. Thomas of Villanova, Provincial Counselor,
Operating Officer of the Bonneau Sunglass Company,
Founder of SILOAM Ministries where he ministers
President of Pennsylvania Optical Co., Chairman and
and counsels HIV/AIDS patients and caregivers. He
CEO of MacDonald and Associates, which had major
is currently on the Board of Directors of Villanova
financial interests in a retail drug, consumer candy,
University, is President of the board of “Bird Nest” in
and pilot sunglass companies. Mr. MacDonald was
Philadelphia, Pennsylvania and is Board Member of
national president of the Marine Corps Reserve
Prayer Power. Fr. Reilly was recently elected Provincial
Officers Association and retired from the United
of the Augustinian Order at Villanova, PA. He
States Marine Corps Reserve as a Colonel in 1997,
oversees more than 300 Augustinian Friars and their
after 27 years of service. He has been appointed to
service to the Church, teaching at universities and
the Defense Advisory Board for Employer Support
high schools, ministering to parishes, serving as
of the Guard and Reserve (ESGR). Mr. MacDonald
chaplain in the Armed Forces and hospitals,
serves on the Board of Directors of the Wireless
ministering to AIDS victims, and serving missions in
Accessories Group (AMEX:XWG). He is also on the
Japan and South America.
52 medifas t 2005 ann ual re por t
MicHael c. Macdonald, a Director, is a corporate
MicHael J. Mcdevitt, a Director, is a retired FBI
officer and President of Global Accounts and
Special Agent with over 29 years of government
Marketing Operations, for the Xerox Corporation.
service with the United States Marine Corps and the
Mr. MacDonald’s former positions at Xerox Corporation
FBI. He had attained Senior Executive status within
include executive positions in the sales and marketing
the FBI’s Investigative Technology Branch and is
areas. He is currently on the Board of Trustees of
currently providing consulting services, focusing on
Rutgers University and a Director of the Jimmy V
phys ical threat and r isk as sess m ent s an d
Foundation. Mr. MacDonald is the brother of
cond uc ti ng speciali zed trai ni ng for law
Bradley T. MacDonald, the CEO of the Company.
enforcement and US Government entities.
george lavin, Jr. esq., of Philadelphia, is a
MarY t. travis, a Director, is currently employed
nationally-known trial attorney. After serving as
with Sunset Mortgage Company, L.P. in Pennsylvania
an FBI Special Agent for several years, he began a
as the Senior Vice President of wholesale operations
private legal career in Philadelphia
and was formerly the Vice President of operations
with a prominent law firm, where he quickly
for the Financial Mortgage Corporation. Mrs. Travis
developed a national reputation as a defense
is an expert in mortgage banking with over 36
lawyer in civil litigation. Since the 1970’s, he has
years of diversified experience. She is an approved
defended national corporations at trials in many
instructor of the Mortgage Bankers Association
parts of the country. In 1985, he founded his own
Accredited School of Mortgage Banking. Mrs. Travis
Philadelphia law firm, which has developed into
was also formally a delegate and 2nd Vice president
a group of more than 65 lawyers who engage in
of the Mortgage Bankers Association of Greater
a multi-faceted general practice while remaining
Philadelphia and the Board of Governors of the State
strong in the defense of civil litigation. Mr. Lavin,
of Pennsylvania. She is the key financial executive on
who has successfully tried hundreds of cases, is
the Company’s Audit Committee providing
a Fellow of the American College of Trial Lawyers,
oversight of the Company’s external auditors.
a committee member of the National Judicial
College, a lecturer and adjunct professor at several
reverend JosepH d. calderone, o.s.a., a
law schools, and an honored member of a number
Director, is the Associate Director of Campus Ministry
of other national legal organizations. Mr. Lavin
at Villanova University. He formerly spent over eight
and Chilton D. Varner, a nationally-prominent
years with the Loyola University Medical Center as
woman civil trial attorney, are the co-authors
the hospital Chaplain and taught multiple courses
of a new book that will appear later this year,
including Introduction to the Practice of Medicine
entitled Silent Advocacy: A Practical Primer
and Business Ethics. Rev. Calderone is currently a
for the Trial Attorney.
Captain in the US Navy Reserves and serves as the
Wing Chaplain for the 4th Marine Aircraft Wing.
medifast 2005 annual rep or t 5 3
PAR T 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 2005 and 2004:
2005
Low High
Quarter ended March 31, 2005 2.67 3.62
Quarter ended June 30, 2005 2.82 3.30
Quarter ended September 30, 2005 3.01 7.08
Quarter ended December 31, 2005 3.83 5.70
2004
Low High
Quarter ended March 31, 2004 8.60 14.05
Quarter ended June 30, 2004 4.78 9.33
Quarter ended September 30, 2004 3.05 5.09
Quarter ended December 31, 2004 3.20 5.24
(b) The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and
may not represent actual transactions.
(c) There were approximately 7,112 record holders of the Company’s Common Stock, as of December 31,
2005. The Company had no preferred holders of the Company’s stock as of December 31, 2005.
(d) No dividends on common stock were declared by the Company during 2005 or 2004.
54 me dif ast 2005 annu al re p or t
ITEM 6. SELECTED FINANCIAL DATA
The selected condensed consolidated financial data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as
Part II, Item 7 of this Annual Report on Form 10-K, and the consolidated financial statements and notes
thereto of the company included in Part II Item 8 of this Annual Report on Form 10-K. The historical
results provided below are not necessarily indicative of future results.
2005 2004 2003 2002 2001
Revenue 40,129,000 27,340,000 25,379,000 12,345,000 5,022,000
Operating income 4,074,000 3,004,000 3,598,000 1,752,000 745,000
Income from continuing operations 3,930,000 2,906,000 3,558,000 1,698,000 566,000
EPS - basic 0.20 0.16 0.25 0.36 0.08
EPS - diluted 0.19 0.14 0.22 0.30 0.07
Total assets 30,545,000 25,968,000 24,230,000 9,888,000 3,357,000
current portion of long-term debt and
revolving credit facilities 1,194,000 827,000 819,000 395,000 98,000
Total long-term debt 3,977,000 4,256,000 4,564,000 2,701,000 234,000
Weighted average shares outstanding
Basic 12,258,734 10,832,360 9,305,731 6,722,505 6,524,969
Diluted 12,780,959 12,413,424 10,952,367 8,737,292 8,069,646
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS.
2005 COMPARISON WITH 2004
OPERATING
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.
Consolidated net sales for 2005 were
$40,129,000 as compared to 2004 sales of
$27,340,000, an increase of $12,789,000, or 47%.
A major reason for the revenue increase for the
Company is attributed to the continued success
of direct sales to consumers as well as the expansion
of the Take Shape for Life division. The increase in
direct sales was attributed to an expanded direct
marketing campaign via print, mail, web and television
to drive customers to the call center and website.
Through the effectiveness of our online ads and
improved web branding a higher percentage of
customers ordered on the Company’s website
medifast 2005 annual rep or t 5 5
in 2005. In addition, the company expanded it
purposes for intangible assets, and other
remarketing campaign to drive new customers to
temporary and permanent differences. Interest
the call center and website. The Take Shape for
expense increased to $317,000 in 2005, as
Life division added a Take Shape for Life replicating
compared to $245,000 in 2004. This increase was
website option for Health Advisors, an Internet
due to a full year of interest expense paid on a
distribution program for their customers, and
new loan acquired in 2004.
provided health ad vi sors wi th ad di t i onal
sponsoring tools to make training and
The Company reported net income of $2,436,000,
recruiting easier. These have proven to be effective
or $0.20 per basic share ($0.19 per diluted share),
at generating revenues and recruiting Health
versus $1,729,000 or $0.16 per basic share ($0.14
Advisors into the Take Shape for Life Network.
per diluted share), with a dilution increase of
The increased training and recruitment initiatives
368,000 shares. Earnings per share were effected
in 2005 have resulted in the expansion of the
by the interest associated with the conversion
sales network into additional locations as well as
of the Series “B” preferred stock. This conversion
growth in current locations.
included a $260,000 stock dividend on Series
Cost of sales increased from 6,746,000
“B” preferred stock and a $19,000 stock dividend
in 2004 to $10,161,000 in 2005, an increase of
on Series “C” preferred stock. As of December 31,
$3,415,000. As a percentage of sales, cost of
2005 all Series “B” and Series “C” preferred stock
goods sold increased slightly due to increased
have been converted to common stock and
fuel charges charged by the major shipping
included in the weighed average diluted shares.
companies. Gross margin was 75% at December
There will be no additional stock dividend payments.
31, 2005 and 2004.
Selling, general and administrative (SG&A)
LIQUIDITY AND CAPITAL RESOURCES
expenses of $25,894,000 for 2005 were $8,304,000
more than the $17,590,000 in 2004, due to increased
At December 31, 2005, the Company had
costs associated with the increased scale of the
net working capital of $9,996,000, an increase
business. The company increased its advertising
of $2,531,000 from the $7,465,000 net working
expense to include additional print and web
capital balance at December 31, 2004. Cash and
advertising as well as strategic testing of television
investment securities at December 31, 2005 were
advertising. In 2005, Company experienced
$4,184,000. In November 2005, Medifast, Inc.’s
income from operations of $4,074,000. This
wholly owned subsidiary Jason Pharmaceuticals,
compares with income from operations of
Inc. renewed its $5,000,000 Secured Line of Credit
$3,004,000 in 2004, an increase of 36%. The
from Mercantile Safe-Deposit and Trust of Baltimore,
increase in income is primarily due to higher gross
Maryland. The line of credit is at LIBOR plus 1.3
profit from increased revenue offset by higher
percent. The increased line may be used to finance
general and administrative expenses.
equipment, inventory, and receivables of Medifast,
Inc. The Company currently has no off-balance
In 2005, the Company realized a tax expense
sheet arrangements.
of $1,203,000, as compared to a tax expense of
$1,159,000 in 2004. The slight increase in tax
In the year ended December 31, 2005, the
expense despite the increase in sales is due to
Company generated cash flow of $3,213,000 from
timing differences between book and tax
operations, primarily attributable to higher operating
56 medifas t 2005 ann ual re por t
income. This was offset by net changes in operating
A major reason for the revenue increase for the
assets and liabilities that decreased cash flow by
Company is attributed to the continued success
$2,065,000. The largest uses of cash were for the
from the Take Shape for Life division, national
purchase of inventory and prepaid expenses,
advertising, the Hi-Energy acquisition and the
which primarily consisted of prepaid taxes, insurance,
redesigned website. The Take Shape for Life
and advertising.
division added a Take Shape for Life replicating
website option for Health Advisors, an Internet
In the year ended December 31, 2005, net
distribution program for their customers, as well
cash used in investing activities was $2,032,000,
as the new Tasting Party Program. These have
which primarily consisted of the purchase of
proven to be effective at generating revenues and
intangible assets and purchases of property
recruiting Health Advisors into the Take Shape for
and equipment.
Life Network. The national advertising campaign
included print, TV, radio, direct mail and web marketing.
In the year ended December 31, 2005, net
The Company increased its Internet sales in 2004
cash used in financing activities was $309,000,
as compared to 2003, by redesigning its
representing the principal repayments of
website and increasing its web marketing. The
long-term debt and purchase of treasury stock
redesigned website created an easy to use shopping
offset by an increase in the line of credit.
cart and a more user-friendly interface. The
Medifast, Inc. purchased 110,000 shares of its
acquisition of Hi-Energy Weight Control Centers
common stock from October 6, through October
contributed to revenues throughout 2004.
17, 2005 at an average price of $4.03 per share,
aggregating $452,000.
Cost of sales decreased from $6,825,000 in
2003 compared to $6,746,000 in 2004, a decrease
In pursuing its business strategy, the Company
of $79,000. The decrease is attributed to decreases
may require additional cash for operating and
in costs through economies of scale.
investing activities. The Company expects future
cash requirements, if any, to be funded from
Gross margins increased to 75% in 2004
operating cash flow and cash flow from
from 73% in 2003. This was largely due to greater
financing activities.
economies of scale as a result of the acquisition
of the Company’s 119,000 square foot distribution
There are no current plans or discussions in process
facility thereby creating higher margins of the
relating to any material acquisition that is probable
Medifast products through purchasing capabilities.
in the foreseeable future.
The increase is also attributed to the increased
2004 COMPARISON WITH 2003
Shape for Life programs. Selling, general and
margin of Medifast direct and Internet sales
directly to patients via the Lifestyles and Take
OPERATING
administrative (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
Consolidated net sales for 2004 were
endorsements, expenses involved with starting
$27,340,000 as compared to 2003 sales of
and operating new corporately owned Hi-Energy
$25,379,000, an increase of $1,961,000, or 8%.
Weight Control Clinic locations, the expansion
medifast 2005 annual rep or t 57
of the Take Shape for Life commissioned sales
and accrued expenses.
organization, and overall corporate infrastructure
improvements. The Company experienced income
In the year ended December 31, 2004, net
from operations for the year 2004 of $3,004,000.
cash used in investing activities was $3,510,000,
This compares with income from operations of
which primarily consisted of the purchase of
$3,598,000 in 2003, a decrease of 17%.
intangible assets, purchase of property and
In 2004, the Company realized a tax expense
of $1,159,000, as compared to a tax expense of
In the year ended December 31, 2004, net
$1,148,000 in 2003 as a result of the elimination
cash used in financing activities was $304,000,
of the deferred tax asset and the net operating
representing the principal repayments of
equipment, and the purchase of a building.
loss for income tax purposes. Interest expense
long-term debt.
increased to $245,000 in 2004, as compared to
$154,000 in 2003. This increase was due to a complete
In pursuing its business strategy, the Company
year of additional debt, which was acquired in 2003.
may require additional cash for operating and investing
A preferred stock dividend in the amount of
requirements, if any, to be funded from operating
$18,000 was expensed to shareholders in 2004.
cash flow and cash flow from financing activities.
activities. The Company expects future cash
LIQUIDITY AND CAPITAL RESOURCES
There are no current plans or discussions in
process relating to any material acquisition that is
As of December 31, 2004, the Company had
probable in the foreseeable future
net working capital of $7,465,000, a decrease
of $1,933,000 from the $9,398,000 net working
On June 11, 2003 Jason Enterprises, Inc.
capital balance at December 31, 2003. Cash and
acquired the assets of Consumers Choice Systems, Inc.,
investment securities at December 31, 2004 were
a Delaware Corporation. The Company obtained all
$3,238,000. On November 7, 2003 Medifast, Inc.’s
the assets of the business that support their retail and
wholly owned subsidiary Jason Pharmaceuticals,
international business including the distribution
Inc. increased its Secured Line of Credit from
rights in 18,000 retail food and drug stores. Jason
$1,000,000 to $5,000,000 from Mercantile
Enterprises, Inc. acquired the assets for 76,120
Safe-Deposit and Trust of Baltimore, Maryland.
shares of Medifast, Inc. restricted common stock
The line of credit is at LIBOR plus two percent.
and 50,000 five-year warrants at a purchase price
The increased line may be used to finance
of $10.00 per share. The transaction will be accounted
equipment, inventory, and receivables of
for as an asset purchase transaction. The Company
Medifast, Inc. The Company currently has no
is expecting to record limited and selected liabilities
off-balance sheet arrangements.
that amount to approximately $1.35 million.
In the year ended December 31, 2004, the
On July 25, 2003, the Company announced
Company generated cash flow of $1,902,000 from
that it had sold an aggregate of 550,000 shares of
operations, primarily attributable to higher
common stock and warrants to purchase 82,500
operating income, non-cash expenditures for
shares of common stock (the “PIPE Shares”) to
depreciation and amortization and purchases of
Mainfield Enterprises, Inc. and Portside Growth &
inventory and the pay down of accounts payable
Opportunity Fund. The shares of common stock
58 medifas t 2005 ann ual re por t
were sold for a cash consideration of $12.40 per
experience the same degree of seasonality in
share, or a total of $6,820,000, and the warrants,
2005. This is largely due to the increase in the
exercisable for a period of five years from the
consumer’s awareness of the overall health and
date of issuance, at an exercise price equal to one
nutritional benefits accompanied with the use of
hundred fifteen percent (115%) of the five-day
the Company’s product line. As consumers
volume weighted average price (the “PIPE Transaction”),
continue to increase their association of nutritional
all pursuant to the terms of that certain Securities
weight loss programs with overall health,
Purchase Agreement by and between the Company and
seasonality will continue to decrease.
Mainfield Enterprises, Inc. and Portside Growth &
Opportunity Fund dated as of July 24, 2003 (the
INFLATION
“Securities Purchase Agreement”).
To date, inflation has not had a material effect
On September 12, 2003 Medifast, Inc.’s
on the Company’s business.
wholly owned subsidiary Seven Crondall, LLC
purchased a 119,825 sq. foot distribution facility
located at 601 Sunrise Ave., Ridgely, Maryland
INFORMATION SYSTEMS INFRASTRUCTURE
21660 from New Roads, Inc. for $2,200,000. The
Company financed $1,760,000 through Merrill
In November of 2005, the Company began an
Lynch Capital at the 30 day LIBOR interest rate
IT project to implement an Enterprise Resource
plus 220 basis points over seven years.
Planning solution to upgrade our technology
infrastructure and improve manufacturing and
On November 7, 2003 Medifast, Inc.’s wholly
business processes. The new IT infrastructure will
owned subsidiary Jason Properties, LLC purchased
enable the Company to handle additional business
the assets of Hi-Energy Weight Control Centers,
growth and improve the efficiencies across the
located in Gulf Breeze, Florida. The acquisition
business platform. In addition, the Company is
includes equipment, inventory, trademarks, and
implementing new software for the Take Shape
licenses for fifty Hi-Energy clinics. The clinics are
for Life direct selling network. The software will
located primarily in the southeastern region of
transform and empower Take Shape for Life’s direct
the United States. The assets were purchased for
sales model by implementing the infrastructure,
$1,500,000 in cash, which included selected
tools, and support critical to increasing competitive
liabilities, capital expenditures, costs of assets
advantage, improving expansion and proliferation
and miscellaneous fees.
of the direct selling channel, facilitating support,
SEASONALITY
The Company’s weight management products
and programs have historically been subject to
seasonality. Traditionally the holiday season in
success, and growth of the independent Health
Advisor network, and meeting the evolving needs
of Take Shape for Life’s customers.
November/December of each year is considered
IT EM 8. FI NANCIA L S TAT EMENTS.
poor for diet control products and services. January
and February generally show increases in sales, as
See pages 23 through 44.
these months are considered the commencement
of the “diet season.” The Company did not
medifast 2005 annual rep or t 5 9
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, 2005.
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,
ITEM 9A. CONTROLS AND PROCEDURES
and customers.
(a) Evaluation of Disclosure Controls and Procedures
TRADING POLICY
The term “disclosure controls and procedures” is
defined in Rules 13a-15(e) and 15d-15(e) of the
Securities 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 information 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
In March 2003, the Company implemented a
Trading Policy whereby if a director, officer or
employee has material non-public information
relating to the Company, 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 business days after an earnings or
special announcement to include the 10-K, 10-Q
and 8-K in order to insure that investors have
available the same information necessary to make
investment decisions as insiders.
ensuring that required information will be
disclosed on a timely basis in our reports filed
PA R T III
under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial
reporting (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 reasonably likely to
materially affect, our internal control over
financial reporting.
ITEM 10. DIRECTORS AND EXECUTIVE
DIRECTORS OF REGISTRANT
Information pertaining to directors and executive
officers of the Company and the Company’s Code
of Conduct are incorporated herein by reference
to the Company’s Proxy Statement to be filed
with the Securities and Exchange Commission
within 120 days after the end of the year covered
by this Form 10-K with respect to the Annual
M eeting of Stock holders to be he ld on
S eptem ber 8, 2006.
60 medifas t 2005 ann ual re por t
ITEM 11. EXECUTIVE COMPENS ATIO N.
The following table sets forth information as to the compensation of the Chief Executive Officer
of the Company and each other executive officer that received compensation in excess of $100,000 for
2005, 2004, and 2003.
Annual Compensation
Value of
Common/
Preferred
Stock Issued
Salary Bonus in Lieu Option Other Annual
Name Year ($) ($) of Cash Awards Compensation
Bradley T. MacDonald 2005 225,000 - - 40,000 100,000
(Chairman of the Board 2004 225,000 - - - -
& CEO) 2003 225,000 112,000 - - -
Annual Compensation
Value of
Common/
Preferred
Stock Issued
Salary Bonus in Lieu Option Other Annual
Name Year ($) ($) of Cash Awards Compensation
Leo V. Williams, III 2005 125,000 - 12,000 10,000 -
(Executive Vice President) 2004 118,000 - - 10,000 -
medifast 2005 annual rep or t 6 1
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, 2005 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 2005, and a list of aggregated options and the value of these options, is provided.
ALL CURRENT ALL CURRENT
EXECUTIVE INDEPENDENT
BRADLEY T. OFFICERS DIRECTORS
MACDONALD (1) AS A GROUP AS A GROUP
Options granted 255,000 210,000 110,000
Average exercise price $0.86 $2.20 $1.07
Options exercised 228,333 49,999 100,000
Average exercise price $0.97 $0.88 $0.70
Shares sold - - -
Options unexercised as of 12/31/05 - 160,001 10,000
Approximate 5 YR Value of
FY 05 Grants @ Potential Realizable Unexercised Unexercised
Price &Expiration Value at 10% Annual Options Options
Month/Year Stock Appreciation as of 12/31/05 as of 12/31/05
Current Executive
Officers and Directors 135,000@$2.67 2010 $4.30 135,000 $ -
Employees 158,333@$2.69 2010 $4.33 71,666 -
Consultants - - -
206,966 $ -
62 medifas t 2005 ann ual re por t
NUTRACEUTICAL GROUP INDUSTRY COMPARISON OF STOCK PRICES
December 31, December 31,
2005 2004 $ %
Company Stock Price Stock Price Change Change
Medifast (MED) $5.24 $3.52 1.72 48.9%
Natural Alternatives International, Inc. (NAII) 6.48 9.23 (2.75) (29.8)%
Weider Nutrition (WNI) 5.09 4.35 .74 17.0%
Natures Sunshine Products, Inc. (NATR) 18.08 20.36 (2.28) (11.2)%
December 31, December 31,
2005 2004 $ %
Company Stock Price Stock Price Change Change
Medifast (MED) $5.24 $.14 5.10 3642 %
Natural Alternatives International, Inc. (NAII) 6.48 2.19 4.29 196 %
Weider Nutrition (WNI) 5.09 2.12 2.97 140 %
Natures Sunshine Products, Inc. (NATR) 18.08 6.81 11.27 165%
INDEX COMPARISON
$100 invested in 2000 would return:
2000 2005
Nutraceutical Group Index $100 $1,136
Medifast $100 $3,740
Factual material is obtained from sources believed to be reliable, but the publisher is not respon-
sible 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 a total of $56,400 in Director’s fees
and/or expenses in 2005. See “Executive Compensation - Stock Options” for stock options granted under
the 1993 Plan to the Directors.
medifast 2005 annual rep or t 6 3
ITEM 12. SECURIT Y O WNER SHIP
OF CER TAIN BE NEFICI AL O WNER S
A ND 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, 2005 of the Chief Executive Officer,
each Director, each nominee for Director, each
current executive officer named in the Summary
Compensation Table under “Executive Compensation”
and all executive officers and Directors as
is determined under the rules of the Securities
and Exchange Commission and the information is
not necessarily indicative of beneficial ownership
for any other person. Under such rules,
“beneficial ownership” includes shares as to which
the undersigned has sole or shared voting power
or investment power and shares, which the
undersigned has the right to acquire within 60
days of March 15, 2006 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
a group. The number of shares beneficially owned
forth in the table.
NUMBER % OF
NAME AND ADDRESS* OF SHARES OUTSTANDING
Bradley T. MacDonald 1,304,479(1) 10.2%
Donald F. Reilly 72,452 0.6%
Michael C. MacDonald 53,419 0.4%
Mary Travis 17,000 0.1%
Michael J. McDevitt 22,900 0.2%
Joseph Calderone 6,500 0.1%
Executive Officers and Directors as a group
(9 persons) 1,495,250 11.7%
*The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills, Maryland 21117
(1) Mr. MacDonald beneficially owns 1,304,479 shares of common stock. Mrs. Shirley D. MacDonald and
Ms. Margaret E. MacDonald, wife and daughter of Mr. MacDonald, individually or jointly own 716,332
shares of stock.
64 me dif ast 2005 annu al re p or t
PAR T IV
ITEM 14. EXHIBITS AND REPOR TS
ON FORM 8-K .
(a) Exhibits
(b) Reports on Form 8-K
3.1 Certificate of Incorporation of the
September 21, 2005 to report the Annual Meeting
Company and amendments thereto*
of Shareholders September 16, 2005
3.2 By-Laws of the Company*
October 19, 2005, to report the repurchase of
10.1 1993 Stock Option Plan of the
Company as amended*
110,000 shares of common stock
January 17, 2006, to report the sale of Consumer
Choice Systems assets, the promotion of Michael
10.3 Lease relating to the Company’s
S. McDevitt to Chief Financial Officer, and 2006
Owings Mills, Maryland facility**
financial guidance
10.4 Employment agreement with
Bradley T. MacDonald***
IT EM 14 . ACCOU NTING FEES
In 2005, the Company incurred $90,000 in
accounting fees as compared to $70,000 in 2004.
These fees include work performed on quarterly
audits and the preparation of the Company’s 10-Q’s
* Filed as an exhibit to and incorporated by
and 10-K. Tax fees in 2005 and 2004 were $10,000.
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.
medifast 2005 annual rep or t 65
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
Dated: March 15, 2006
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
/s/ BRADLEY T. MACDONALD Chairman of the Board, March 15, 2006
Bradley T. MacDonald Director, Chief Executive
Officer
/s/ GEORGE LAVIN Director March 15, 2006
George Lavin
/s/ MICHAEL C. MACDONALD Director March 15, 2006
Michael C. MacDonald
/s/ MARY T. TRAVIS Director March 15, 2006
Mary T. Travis
/s/ REV. DONALD F. REILLY, OSA Director March 15, 2006
Rev. Donald F. Reilly, OSA
/s/ MICHAEL J. MCDEVITT Director March 15, 2006
Michael J. McDevitt
/s/ JOSEPH D. CALDERONE Director March 15, 2006
Joseph D. Calderone
66 medifas t 2005 ann ual re por t
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 pursuant 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 Sarbanes-Oxley Act
of 2002
medifast 2005 annual rep or t 6 7
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-K of Medifast, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by 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 registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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: March 15, 2006
/s/ Bradley T. MacDonald
Bradley T. MacDonald
Chairman Of the Board and Chief Executive Officer
68 medifas t 2005 ann ual re por t
Exhib it 31.2
CFO Certification
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Michael S. McDevitt, certify that:
1. I have reviewed this report on Form 10-K of Medifast, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by 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 registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange 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
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this 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: March 15, 2006
/s/ Michael S. McDevitt
Michael S. McDevitt
President, Chief Financial Officer
medifast 2005 annual rep or t 6 9
Exhibit 32.1
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-K for the year ended
December 31, 2005 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
March 15, 2006
By: /s/ Michael S. McDevitt
Michael S. McDevitt
Chief Financial Officer
March 15, 2006
M edifast, I nc.
11445 Cronhil l Dr ive
O wings M i ll s, M ar y land 21117
m edi fastdi et. com
800 • 2 23 • 1809
M edi fas t I nc. 2005 Annual R epor t
V . 6 . 9 . 0 6