Medartis
Annual Report 2010

Plain-text annual report

THE CHOICE IS YOURS 2010 Annual Report Medifast empowers its customers with CHOICES. Through clinically proven weight-loss programs and a wide range of more than 70 meal replacements, Medifast helps build the right path for lasting weight loss and better health. Medifast customers also choose the support they need. With high-touch walk-in centers, free health coaches, medical professional support, and a vibrant, online community, Medifast offers a wide variety of programs that suit the individual preferences of anyone looking to effectively lose weight and get healthy. The Choice is Yours. Choose Medifast. Letter to Shareholders Dear Shareholders, In 2010, Medifast celebrated 30 years as a leading provider of weight-management products and programs to combat the obesity epidemic in the United States. Medifast’s proprietary technology as a medically formulated, portion-controlled meal- replacement program has been time tested and designed not only to help customers lose weight quickly and safely but also to improve and maintain their health for the long term. What truly differentiates Medifast from its competitors is the variety of choices we give our customers in successfully completing their weight-loss journey. With four distinct service channels and a menu of over 70 meal items to choose from, our customers regale in good choices. Since 1980, over 20,000 doctors across the country have recommended Medifast to help their patients lose weight. But today’s Medifast customers also find their weight-management solutions on the Internet, through participation in coaching and counseling programs, and through our weight-management centers, a retail presence in professional office buildings and shopping centers. Today, Medifast meets our customers’ needs in all of these scenarios with the same effective products at the support level that they choose. Medifast offers unique protocols in each channel—reinforcing our commitment to customer satisfaction through customer-oriented choice and customer-oriented results. As a result of meeting our customers’ needs, our company has been named the #1 Best Small Company in America by Forbes magazine for 2010. This honor is based on the past five years’ financial performance of companies that do less than $1 billion in annual revenue. In fact, Medifast has attained a record of over 45 quarters of consecutive profitability and a 44% combined aggregate growth rate in our business since 1999, far exceeding the long-term performance of our national competitors for that time period. The Company in 2010 attained record revenues of $257.6 million, an increase of 52%, and improved profits by 73% to $19.6 million compared to 2009. Over the past dozen years, u Michael S. McDevitt Chief Executive Officer u Bradley T. MacDonald Executive Chairman of Medifast, Inc. u Margaret Sheetz President and Chief Operating Officer stockholder equity has grown from minus $1 million to more than $72 million at the end of last year with a year-end cash and investment balance of $34.4 million. This growth was accomplished primarily by utilizing internal resources and without taking on significant new debt. To accommodate this unprecedented growth, the Company is now embarking on the largest expansion in its history. We expanded facilities and infrastructure, including a new distribution center in Texas to support our West Coast customer base, and leased two additional office facilities in Owings Mills, MD, to support the organic growth of our business units. The significant expansion in manufacturing operations created more than 250 new Medifast jobs in 2010. This commitment to U.S. domestic employment growth is woven into the fabric of our business plan and will continue to bring desperately needed manufacturing jobs to Maryland, Texas, and beyond. Growth, however, is not without challenges. In March 2011, our new independent auditor requested the re-evaluation of whether our historical and then current practices with respect to the timing for recognition of certain expenses were appropriate under generally accepted accounting principles. Given the proximity of their request to the due date for our SEC filings, we requested an automatic extension from the SEC to file Form 10K. This provided the time for our new auditor to confer with our predecessor auditor and management to accurately resolve the questions. After due consideration, we determined to restate our financial statements for the years 2008 and 2009 to reflect the recognition of certain expenses in the year in which they were incurred rather than when they were paid. A restatement was issued on March 31, 2011 for the years ending December 31, 2008 and 2009. The change in recognition, however, was not material to our December 31, 2010 results that reflect profit growth of 73% year over year. The Board’s Audit Committee held numerous meetings during this audit period, and management of the company was actively engaged in the audit process. We continue to invest in our internal audit capability to complement our historical and forecasted growth. We are well aware of the unfortunate volatility in the stock price that, in our judgment, is primarily due to the short selling that occurred despite our record of 45 consecutive profitable quarters for our business. The bottom line is strong. The Company’s earnings report after the extension far exceeded the Board’s approved forecast for both revenues and profits, and continued our lengthy record of outperformance. We continue to be fully committed to combating the national obesity epidemic and helping to make America healthy by providing the best array of weight-management products and services available. We will continue to put a premium on customer choice and are looking forward to achieving our goal for another banner year of growth and financial success in fiscal year 2011. We whole-heartedly thank our valued customers, Medifast employees, Take Shape For Life Health Coaches, Medifast Weight Control Center Operators, Medifast Medical Providers, Board of Directors, and Shareholders for your continued support of Medifast, Inc. Best Regards, Bradley T. MacDonald Executive Chairman of Medifast, Inc. Michael S. McDevitt Chief Executive Officer 1 Medifast Board of Directors Seated from left to right: Margaret Sheetz, President and Chief Operating Officer; Sr. Catherine T. Maguire, RSM; Jeannette M. Mills; and Jerry D. Reece Standing from left to right: Charles P. Connolly; Harvey C. “Barney” Barnum, Jr; Donald F. Reilly, OSA; George J. Lavin, Jr., Esq; Michael S. McDevitt, Chief Executive Officer; Bradley T. MacDonald, Executive Chairman of the Board; John P. McDaniel; Jason L. Groves, Esq; Barry B. Bondroff, CPA Not Pictured: Michael C. MacDonald 2 Medifast u 2010 Annual Report MULTIPLE DISTRIBUTION CHANNELS, ONE MISSION People who are overweight or obese represent a diverse population; there is no one method of support that works equally well for everyone. Medifast implements its products and programs through four unique distribution channels to accommodate different needs and preferences and ensure that as many people as possible can reach and maintain their weight loss goals. Direct-to- Consumer Direct Selling Retail Presence in Professional Office Buildings and Shopping Centers Licensed Health Care Providers 3 Medifast Direct Medifast Direct is a popular choice for self-starters who are highly motivated and who may prefer to pursue their weight loss goals privately and independently. In this direct-to-consumer channel, customers order Medifast products directly through the Company’s website or through its in-house contact center. The products are then shipped directly to the customer. This business is driven by an aggressive multimedia customer acquisition strategy that includes print, radio, television, and Web advertising, direct mail, and public relations and social media initiatives. The Medifast Direct channel focuses on targeted marketing programs and provides customer support through its in-house contact center and team of registered, licensed dietitians, certified personal trainers, and a behavior specialist through toll-free phone access, email, and online discussion boards. In addition, Medifast continues to build on its solid Web technology, providing customized meal planning and client support. Medifast’s online community, MyMedifast, provides support forums and a library of articles on weight loss, health, and nutrition, as well as meal planning tools and social media functions. JESSICA WESTMORELAND Medifast Direct client “I chose Medifast because since I got healthy, my relationships have changed in a positive way. I am happier, more confident, and, for once, I feel deserving of love and friendship.” 4 Medifast u 2010 Annual Report “I chose Medifast and Take Shape For Life because of my Health Coach. The other day a newbie at my gym actually asked me if I was a trainer! In May 2009, that would never have entered anyone’s mind! I love what Take Shape For Life has done for me!” Linda Sue Hundley TSFL Health Coach Take Shape For Life Take Shape For Life is the direct selling division of Medifast. At the heart of this physician-led business model is the Take Shape For Life Health Coach, who is trained and educated to support clients on the Medifast 5 & 1 Plan® with encouragement, education, and mentoring. Three unique components make up a “triad of health” that is the basis for the Take Shape For Life program. The combination of the Medifast Program, the support of the Health Coach, and co-founder Dr. Wayne S. Andersen’s Habits of Health system is what sets Take Shape For Life apart and helps create lasting well-being. Take Shape For Life offers the BeSlim® lifestyle as a way to facilitate long-term weight maintenance. Take Shape For Life also shows clients how to achieve a balance of physical, mental, and financial well-being, which is referred to as the Trilogy of Optimal Health®. In addition to the encouragement and support of their Health Coaches, clients of Take Shape For Life can avail themselves of program support calls and access to doctors, nurses, and registered, licensed dietitians through toll-free phone access, email, and online discussion boards. Take Shape For Life provides an exciting home-business opportunity for those clients who wish to share their success with others by becoming Health Coaches themselves. Since 2003, Take Shape For Life has been a member of the Direct Selling Association (DSA), a national trade association representing over 200 direct selling companies doing business in the United States. Leo V. Williams, III Chairman of Take Shape For Life 5 Medifast Weight Control Centers “I chose Medifast because the support I received from my Medifast Weight Control Center staff was incredible. I never felt judged—they truly wanted to see me succeed and did everything in their power to see that I did.” CHRISTINA ROBERTO MWCC member For customers who prefer a more structured approach with greater personal accountability, Medifast Weight Control Centers is the ideal choice. Members receive the nutritional and full-scale behavioral support tools needed for enduring health and well-being, based on their individual goals. Medifast Weight Control Centers bring a retail presence in professional office buildings and shopping centers, offering comprehensive Medifast plans for weight loss and maintenance, a medical review, customized member counseling, and InBody™ composition analysis. Medifast Weight Control Centers’ local advertising includes radio, print, television, billboard, and Web initiatives; the business channel also benefits from the nationally advertised Medifast brand, which encourages walk-ins and referrals from other Medifast business channels. 6 Medifast u 2010 Annual Report Medifast Medical Providers Medifast Medical Providers are those licensed health care providers who have implemented the Medifast Program within their practices. They carry an inventory of Medifast products that they resell to their patients. Medifast Medical Providers provide appropriate medical monitoring, testing, and support for their patients who are on the Medifast Program. This is especially vital for those Medifast clients with co-morbidities such as diabetes, heart disease, and hypertension. The Company offers an additional in-house support program to assist Medical Providers and their staff, including access to registered, licensed dietitians, certified personal trainers, and a behavior specialist through toll-free phone access and email, as well as Web- and phone-based training sessions and informative program guides. GARY MANKO, M.D. Medical Provider “I chose Medifast because my overweight patients have heard they ‘need to lose weight’ thousands of times, but no one has given them something that works like the Medifast Program. For the first time, I have a solution that gives people a likelihood of success, and a program that’s easy to do.” 7 Obesity Percentage in America (BMI > 30) in U.S. Adults 1985 1999 2009 No Data < 10% 10% - 14% 15% - 19% 20% - 24% 25% - 29% > 30% 8 Medifast u 2010 Annual Report A SAFE AND EFFECTIVE SOLUTION TO AMERICA’S OBESITY EPIDEMIC The consequences of obesity and poor nutrition in America are sobering: The obesity epidemic was much less urgent in 1980 when Medifast started, but today, according to the Centers for Disease Control and Prevention, two-thirds of Americans are overweight or obese and at increased risk for heart disease, diabetes, and other health problems. u Less than one-third of U.S. adults are at a healthy weight.1 u Obesity-related illness costs America 39.3 million lost work days.2 u For decades, the U.S. has been slipping in international rankings of life expectancy, while other countries have improved health care, nutrition, and lifestyles.3 u According to the U.S. Surgeon General and the Harvard School of Public Health, obesity poses a major public health challenge. Each year, obesity and/or overweight contribute to an estimated 112,000 – 216,000 preventable deaths, respectively.4,5 1 National Institute of Diabetes and Digestive and Kidney Diseases (NIDDK), of the U.S. National Institutes of Health. 2 Environ Health Prospect. 2004 August, 112 (11): A616 – A618 3 Olshansky SJ, Passaro DJ, Hershow RC, et al. A potential decline in life expectancy in the United States in the 21st century. New England Journal of Medicine 2005; 352:1138 – 1145. 4 The Surgeon General’s vision for a healthy and fit nation. [Rockville, MD]: U.S. Department of Health and Human Services, Public Health Service, Office of the Surgeon General; 2010. http://www.surgeongeneral.gov/library/obesityvision/obesityvision2010.pdf 5 Danaei G, Ding EL, Mozaddarian D, Taylor B, Rehm J, Murray CJL, & Ezzati M. The preventable causes of death in the United States: Comparative risk assessment of dietary, lifestyle, and metabolic risk factors. PLoS Medicine 2009; 6 (4): e1000058. 9 Medifast Meals Medically formulated, portion-controlled meal replacements meet consumer demand for a safe and effective weight-loss solution, helping them lose weight quickly and safely, and also improve and maintain their health for the long term. When part of a thoughtfully created nutritional and behavioral program, Medifast Meals provide balanced nutrition, fast weight loss, and lasting results, unique in a market where researchers have estimated that approximately 70% of dieters who lose weight will gain it back within one to five years. Medifast offers products with a formulation that is nutritionally balanced, making them satisfying and safe for individuals with type 2 diabetes. The Medifast 5 & 1 Plan is simple and easy to follow, even for those clients with busy lifestyles. Medifast Meals come in portion-controlled, individual servings that clients can eat right out of the package, or mix with water and either microwave or chill. Clients do not have to count calories, carbs, or “points.” The product line includes over 70 different meals and flavors, including shakes, soups, stew, chili, oatmeal, eggs, fruit drinks, iced teas, hot beverages, bars, pudding, pretzel sticks, cheese puffs, soft serve, pancakes, and brownies. Each Medifast Meal shares a similar nutritional “footprint,” providing a special balance of protein and good carbohydrates like fiber, plus fortification with vitamins and minerals. Medifast’s special formula helps to ensure clients get the nutrition their bodies need while providing a feeling of fullness to facilitate compliance and more comfortable weight loss. 10 Medifast u 2010 Annual Report The Weight Loss Phase The Medifast 5 & 1 Plan for weight loss is simple. Each day, the client eats six times, once every two to three hours. The Medifast 5 & 1 Plan puts the body in a mild fat-burning state to help facilitate fast, safe weight loss. Clients choose five Medifast Meals (the “5”) and one self-prepared Lean & Green™ Meal (the “1”) consisting of measured portions of lean protein and non-starchy vegetables. Medifast’s team of registered, licensed dietitians has developed variations on the Medifast 5 & 1 Plan to support healthy weight loss for vegetarians, teens, nursing mothers, seniors, people with type 2 diabetes, people with gout, bariatric surgery patients, and those taking prescribed anticoagulant drugs, among others. Before JACKIE POWELL lost 100 lbs Results not typical. Typical weight loss on the Medifast 5 & 1 Plan is up to 2 to 5 lbs per week. 11 Transition and Maintenance Phases Up to 70% of people who lose weight on diets regain that weight within one to five years, often with additional pounds. To counteract this trend, Medifast is refining its comprehensive approach to prevent weight regain in clients who have reached their healthy weight goal. The transition phase gradually reintroduces additional healthy food groups and increases the client’s caloric intake over the course of several weeks. The maintenance phase uses principles of proper nutrition and portion control, along with behavior modification techniques, to retrain the brain and body to be satisfied with appropriate quantities of healthy food choices. In this way, clients can learn to enjoy the benefits of a healthier weight and improved well-being for the long term. NANCY PETTIT TSFL Health Coach “I chose Medifast because as Health Coaches for Take Shape For Life, my husband and I can play a role in so many people becoming healthy, while creating a business that provides us with personal satisfaction.” 12 Medifast u 2010 Annual Report CREATING A HEALTHIER FUTURE THROUGH GOOD SCIENCE, GOOD PEOPLE, AND GOOD BUSINESS 13 THE MEDIFAST VISION In 2010, Medifast celebrated 30 years of developing, manufacturing, and marketing medically formulated, portion-controlled meal replacements for weight loss. These products—Medifast Meals—have established the heart of the Medifast Program that helps people lose weight quickly, easily, and safely, and also improve and maintain their health for the long term. Now, as always, every Medifast Meal is manufactured in the United States. Medifast also offers Essential 1®, a line of supplements to support areas of wellness such as cardiovascular health and digestive health.* *These statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure, or prevent any disease. 14 Medifast u 2010 Annual Report Science Medifast continues to build its products, programs, and brand on reliable science and quantitative data. platform that provides a long-term look at client weight loss outcomes, demographics, and program-related data. Our Scientific Advisory Board continually reviews the effectiveness, safety, and nutritional benefits of Medifast’s products and programs. The work of this cross-displinary group builds on Medifast’s heritage of medically sound approaches to weight loss and the incorporation of leading-edge clinical research into the Company’s products and programs. In March 2010 Nutrition Journal published a study demonstrating the efficacy and health benefits of the Medifast 5 & 1 Plan.1 Three clinical trials are now in progress to substantiate the Company’s product and program claims even further. Medifast Weight Control Centers are now equipped with RemedyMD®, a meta-registry These data allow us to continually improve client experience and results, differentiating Medifast in the weight loss marketplace with a new level of efficiency and accountability that further substantiates the Company’s product and program claims. Our Product Development team is focusing on future products to answer clients’ requests for additional convenience items, savory Medifast Meals, and products suitable for breakfast. 1 Davis LM, Coleman C, Kiel J, Rampolla J, Hutchisen T, Ford L, Andersen WS, Hanlon-Mitola A. Efficacy of a meal replacement diet plan compared to a food-based diet plan after a period of weight loss and weight maintenance: a randomized controlled trial. Nutrition Journal 2010, 9:11. MEDIFAST SCIENTIFIC ADVISORY BOARD From left to right: Walter Eugene Egerton III, M.D., Chief Medical Officer, Maryland General Hospital; John P. Foreyt, Ph.D., Professor, Baylor College of Medicine, Department of Psychiatry and Behavioral Sciences, Department of Medicine; Guy H. Johnson, Ph.D., President, Johnson Nutrition Solutions, LLC, Executive Director, the McCormick Science Institute; Debra L. Miller, Ph.D., Director of Nutrition, The Hershey Company; Lawrence J. Cheskin, M.D., F.A.C.P., Director, Johns Hopkins Weight Management Center; Jeff S. Volek, Ph.D., RD, Human Performance Laboratory, Associate Professor, Department of Kinesiology, University of Connecticut Not pictured: Sylvia B. Rowe, MA, President, SR Strategy, Adjunct Professor, Tufts Freidman School of Nutrition Science & Policy, Adjunct Professor, University of Massachusetts Amherst 15 People 2010 was a year for major developments in human capital infrastructure, as the Company laid the groundwork for accelerated growth through its employees. In particular, the addition of experienced executives to several teams further strengthened our ability to serve our clients, both internal and external. Overall, the Company supported business growth by creating more than 250 new jobs in Texas and Maryland in the midst of a difficult 2010 economy. Seeing the potential of the Company to emerge as a national leader in successful, lasting weight loss, Medifast consolidated its core values, mission, and vision in 2010. The Board of Directors reviewed the Company’s heritage and outlined a direction for the future, subsequently distilling a set of enduring ideals that represent Medifast’s unique culture. Together with its scientific and technical achievements, the Company’s human resources are well-equipped to change the course of health in America. 16 Medifast u 2010 Annual Report Business: Sales Channel Technology In March 2011, Medifast successfully launched both a new e-commerce platform for its Medifast Direct and Take Shape For Life channels and a new in-store operating system for its Medifast Weight Control Centers. The e-commerce launch was the largest redesign and upgrade of e-commerce platforms in the Company’s history. The Company re-launched websites for Medifast Direct, its direct-to- consumer channel, and Take Shape For Life, its personal coaching channel. The overhaul reflects the Company’s dedication to delivering high-quality websites along with state-of-the- art e-commerce platforms. The newly designed co-branded Take Shape For Life websites provide Health Coaches the ability to customize an “About Me” section and create an integrated online presence, including personal blogs and links to their social media sites such as Facebook, Twitter, and YouTube. The new operating system for Medifast Weight Control Centers, complete with customer data tracking tools, is designed to provide both a consumer-facing and an employee-facing system. It is created with analytic tools that communicate the members progress during their weight loss and weight-maintenance journeys. Medifast sees this system providing comprehensive support and data tracking functions to assist the member in reaching their personalized weight-loss goals, while providing efficiency and scalability for the business and in- center employees. On the communications front, a full system upgrade of the Company’s phone system improved continuity in the contact center, as well as scalability for future expansion. Through the acquisition of additional office space, a new headquarters for Take Shape For Life was established at the Owings Mills campus. 17 Business: Supply Chain Technology Extensive systems integration upgrades to our order processing structure enabled Medifast to accelerate from 300 to 700 orders handled per hour (12,000 orders per day with three shifts), effectively eliminating order back-up in the Company’s distribution centers during high-volume ordering periods. On July 6, 2010, Medifast opened a 50,000-square-foot distribution center in Coppell, Texas, just outside of Dallas, to support West Coast shipping and customer service for Medifast Direct, Take Shape For Life, and Medifast Weight Control Centers. The Texas Distribution Center, equipped with an automation conveyer pick-and-pack system, provides disaster and recovery backup for the company’s fulfillment operation, as well as for the Maryland-based customer contact center. The Company also upgraded its interoffice network to accommodate the new Texas Distribution Center and additional office space on the Owings Mills campus in Maryland. A new enterprise computer patch management system and anti- virus platform ensure increased security and efficiency across all teams. 18 Medifast u 2010 Annual Report The Medifast Formula These ideals were released to employees as The Medifast Formula in late 2010. The Medifast Formula serves as a blueprint for the Company’s employees, outlining our vision, mission, and purpose—a unique asset in the industry—and a set of criteria for developing personnel. Vision We provide hope, health, and happiness for millions of Americans through clinically proven weight-management products, programs, and support. Mission Medifast combats the obesity epidemic and improves the health of our nation in two ways: first, through clinically proven weight-management products and protocols; and second, through multiple, innovative support programs. Values Committed to core values u Our integrity and ethics are based on moral values and the Golden Rule. u Leadership means setting high standards and a positive personal example. u Focused, results-driven teamwork by Medifast employees collaborating to achieve shared goals improves our Company more than any one individual or entity. u We trust one another and forgive honest mistakes. u We promote learning and education as a vehicle for personal development. u We are committed to personal health and wellness. u We reward innovation and initiative. Guided by our core values, we create the ultimate client experience through performance management. u We value diversity as a strength and asset—to Medifast and to our world. u We are good citizens and active members of our community. Dedicated to performance management u We are committed to the efficiency and profitability of the Company. u Successful growth requires honest and robust communication throughout our organization. u Professional development is the responsibility of both the Company and the individual. u Measurement and feedback are essential to the continuous improvement of our people and processes. u Our agility and flexibility are keys to meeting the evolving needs of our clients and the challenges of our changing environment. 19 2010 BUSINESS ACHIEVEMENTS Medifast is named: u #7 – Fortune’s Top companies: Best investments u #29 – Fortune’s 100 Fastest Growing Companies u #43 – Fortune’s Top companies: Sales growth u #75 – Fortune’s Top companies: Profit growth 20 Medifast u 2010 Annual Report FUTURE SUCCESS: CUSTOMER EXPERIENCE DEFINED BY CHOICE u Four channels that ensure each client can choose the best means to achieve their individual and personal success u A wide selection of high quality products and protocols throughout each of our multiple, innovative support programs u Close attention to individuals’ goals and needs, and careful listening that yields deeper understanding and supports optimal choices for each client u Employee empowerment at all levels to serve our clients’ every need and offer them more options to create health 21 Medifast Peer Comparison Charts With record revenues in 2010, Medifast has been able to post best in class performance metrics for growth, liquidity, and shareholder earnings. Medifast will continue its commitment to the sound business practice that has brought 45 consecutive quarters of business profitability and a 44% combined aggregate growth rate in our business since 1999—far exceeding the long-term performance of our national competitors for the same time period. The financial comparison charts have been put together using reliable third-party private and public financial information. Medifast, Inc. does not warrant the accuracy or reliability of this information but makes this comparison as a best effort to show the financial performance indicators of Medifast compared to other public companies in the weight-loss industry. 22 Medifast u 2010 Annual Report 23 Medifast Peer Comparison Charts The “Quick Ratio,” aka “Liquid Ratio” or “Acid Test,” measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. 24 Medifast u 2010 Annual Report 25 57 THE CHOICE IS YOURS 11445 Cro nhill Dr ive u Owi ngs Mills, Ma r yland 21117 u 2010 Annual Report 

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