SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File No. 000-23016
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MEDIFAST, INC.
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DELAWARE 13-3714405
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Incorporation State Tax Identification number
11445 CRONHILL DRIVE, OWINGS MILLS, MD 21117
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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
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Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months, and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
The issuer's revenues for the fiscal year ended December 31, 2003 were $25.4
million
Aggregate market value of voting stock held by non-affiliates of registrant
(deemed by registrant for this purpose to be neither a director nor a person
known to registrant to beneficially own, exclusive of shares subject to
outstanding options, less than 5% of the outstanding shares of registrant's
Common Stock) computed by reference to the closing sales price as reported on
the American Stock Exchange on December 31, 2003: $14.10.
Number of shares outstanding of registrant's Common Stock, as of December 31,
2003: 10,482,609 shares
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one)
Yes No X
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PART I
ITEM 1. BUSINESS.
SUMMARY
Medifast, Inc. (the "Company", or "Medifast") is a Delaware
corporation, incorporated in 1993. 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 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.
The Company's focus on clinically proven Medifast(R) weight and disease
management products is the centerpiece of its dominating presences in the $26
billion U.S. Meal Replacement Market. The obesity epidemic in America and the
associated disease states provide Medifast a unique opportunity to assist the
country to reduce the costs associated with obesity and to profit from its
unique products, patented formulas, and proprietary clinicals. The Company
exploited these opportunities as follows:
o The Company primarily focused advertising in national magazines and
newspapers e.g. Parade, USA Weekend, AARP Magazine and Newsweek.
o A private placement was completed on July 25, 2003 to give the
Company the necessary resources to move forward with their future
growth strategies. Included in these strategies are the acceleration
of its advertising initiatives and the expansion of its Corporate
Weight and Disease Management Clinics. A total of $6.82 million was
raised through the sale of 550,000 shares of common stock and the
issuance of warrants to purchase 82,500 shares of its common stock.
A significant portion of these proceeds will be used for television
advertising, enabling the Company to expand its highly successful
advertising campaign featuring basketball sportscaster Dick Vitale.
o Take Shape for Life, Inc.'s health network showed dynamic growth
throughout 2003. The Company is actively signing new members for the
program and continues to grow revenues.
o The Company's product development program has continued to produce
nutritional products positioned to significantly reduce the
incidences and cost of obesity, diabetes, arthritis, appetite
suppression, menopausal symptoms and coronary disease.
o International sales of the Company's Take Shape(TM)/Dr. Diet weight
management products for the Asian Market substantially increased
revenues by over two million dollars throughout 2003. Medifast will
continue to search for international strategic partnerships to
expand the Medifast brand worldwide.
o The Company entered into multiple joint ventures that include: an
agreement with Amazon.com that has placed Medifast's Woman's
Wellbeing product line on Amazon's rapidly growing Women's health
section of its website. Medifast and NovaCare Rehabilitation entered
into a joint marketing agreement to provide weight and disease
management solutions to NovaCare's patients giving Medifast access
to over 200 NovaCare clinics.
Management's vision and objective is to position the Company to become
a leader in the field of medically supervised nutrition, disease and weight
management, and health-related nutrition programs. The following will assist in
achieving this goal through 2004:
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o Expanding its advertising efforts in 2004 with an integrated
nationwide strategy to include television, print and radio. In
addition to 60-second television commercials, a 30-minute
infomercial will be introduced highlighting the Company's clinically
proven weight and disease management product line, with an emphasis
on the patented Medifast Plus for Diabetics product line;
o Expanding its corporate owned and licensed Hi-Energy Weight Control
Centers and MEDSLIM clinics. The sales division intends to
dramatically increase the number of licensed and corporately owned
clinics while introducing new disease management product lines in
each clinic. At the close of 2003 the Company had over 70 licensed
or corporately owned Clinics, and intends to significantly increase
this number in the next year;
o Expanding the Take Shape for Life Health Network through lead
generation created by the Company's marketing and recruiting
efforts. The Company has introduced a Tasting Program, in a
home-based medical setting that has proven to be an excellent way to
introduce new customers to Medifast;
o Continuing to develop the Lifestyles physician compliance program
that supports the practitioner's patient base by having their
patients order directly from the Company via the Medifastdiet.com
website or toll free telephone number;
o Enhancing and expanding its medical practitioner network through a
growing Clinical Affairs department;
o Developing a joint venture with XL Health Inc., one of the leading
diabetes management companies in the United States. The Company's
clinically tested Medifast Plus for Diabetics line will be the
exclusive nutritional product for XL Health's CMS Medicare
Demonstration Project. The joint venture will provide Diabetes,
Coronary Heart Failure (CHF), and Coronary Artery Disease (CAD),
disease management nutritional services and pharmacy benefits to
over 10,000 Medicare Fee-For-Service patients in Texas. The pilot
project will use Medifast Plus for Diabetics as the exclusive
nutritional intervention program to prove the cost effectiveness of
disease management programs for Medicare beneficiaries.
Additionally, the program will use the Medifast Plus for Coronary
Health and Medifast Plus for Joint Health products as part of the
program protocol in patients who have related medical disorders.
Throughout 2003, the Medifast(R) Management Team continued to enhance
the value of the Company by generating significant operating profits, cash
flows, and stockholders equity. The Company's financial strength is documented
by the significant improvement of the Balance Sheet providing a long term
operating platform.
o On June 11, 2003 Medifast, Inc.'s wholly-owned subsidiary Jason
Enterprises, Inc. completed the acquisition of the assets of
Consumer Choice Systems, Inc.("CCS"). CCS is a retail distribution
company focusing on high quality, innovative products for women. CCS
products are currently distributed in over 18,000 retail outlets
nationwide. The CCS business is supported by a website and toll-free
customer service line where customers can inquire about product
information and retail availability.
o On July 25, 2003, the Company announced it had sold an aggregate of
550,000 shares of common stock and warrants to purchase 82,500
shares of common stock (the "PIPE Shares") to Mainfield Enterprises,
Inc. and Portside Growth & Opportunity Fund. The shares of common
stock were sold for a cash consideration of $12.40 per share, or a
total of $6,820,000, and the warrants, exercisable for a period of
five years from the date of issuance, at an exercise price equal to
one hundred fifteen percent (115%) of the five-day volume weighted
average price (the "PIPE Transaction"), all pursuant to the terms of
that certain
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Securities Purchase Agreement by and between the Company and
Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund
dated as of July 24, 2003 (the "Securities Purchase Agreement").
o On September 12, 2003 Medifast, Inc.'s wholly owned subsidiary Seven
Crondall, LLC purchased a 119,825 sq. foot distribution facility
located at 601 Sunrise Ave., Ridgely, Maryland 21660 from NewRoads,
Inc. for $2,200,000. The Company financed $1,760,000 through Merrill
Lynch Capital at the 30 day LIBOR interest rate plus 220 basis
points over seven years.
o On September 12, 2003 the Company also acquired the assets and
expertise of Dunst and Associates, Inc., a 15-year experienced
distributor in Eldersburg, Maryland to operate its new distribution
facility. The Company acquired Dunst and Associates assets for
$400,000 in cash and 3,347 shares of Medifast, Inc. common stock.
o On November 7, 2003 Medifast, Inc.'s wholly-owned subsidiary Jason
Properties, LLC purchased the assets of Hi-Energy Weight Control
Centers, a national company specializing in weight management
programs, with weight loss centers in over 50 locations. Hi-Energy
centers offer a competitive marketing edge through a regional
advertising program, exclusive territories and marketing support.
o On November 7, 2003 Mercantile Safe Deposit and Trust Company
increased Medifast, Inc.'s secured line of credit from $1,000,000 to
$5,000,000. The line of credit is at the LIBOR plus two percent. The
increased line will be used to finance equipment, inventory and
receivables of Medifast, Inc.
o On December 10, 2003 Wooden & Benson, Chartered resigned as the
Company's auditor. Wooden & Benson, Chartered was acquired by
Clifton Gunderson, LLP and will no longer audit public companies.
The Company's new auditor is Bagell, Josephs & Company, LLC, also a
member of the BDO Seidman Alliance.
The Company had stockholders equity of $17,077,000 on December 31, 2003
compared with $5,578,000 at December 31, 2002. The 206% net increase reflects
the profits during the year from operations, acquisition of assets, execution of
options and warrants, conversion of Preferred Stock, and sales of additional
shares. The Company has sufficient cash flow from operations to fund its current
business plan.
MARKETS
Obesity is a complex condition, one with serious social and
psychological dimensions, that affects virtually all ages and socioeconomic
groups. According to the Centers for Disease Control (CDC), roughly two-thirds
of the U.S. adult population is overweight and of that, one-third is obese.
Approximately 15% of children ages 6-19 are obese. Researchers at RTI
International and the CDC have estimated that obesity-attributable medical
expenditures reached $75 billion in 2003. Obesity is reaching epidemic levels
and is a major contributor to the global burden of chronic disease and
disability. The overweight and obese pose a large risk for serious diet-related
chronic diseases, including type II diabetes, cardiovascular disease,
hypertension and stroke, depression and certain forms of cancer.
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According to a recent market data study, consumers spend about $39
billion per year trying to lose weight or prevent weight gain. This figure
includes spending on diet sodas, diet foods, artificially sweetened products,
appetite suppressants, diet books, videos and cassettes, medically supervised
and commercial programs, and fitness clubs. The weight loss meal replacement
supplement market grew by over 9% in 2003, and currently accounts for $6.4
billion of the U.S weight loss market according to a recent market research
study.
Medifast's current business model incorporates four channels of
distribution.
THE MEDIFAST LIFESTYLES PROGRAM- This program is a medically supported network
of health care professionals who support patients on the Medifast program.
Patients order products directly from Medifast's website or toll-free number.
The Lifestyles practitioner ensures that each individual receives personalized
attention throughout the weight loss program. Management estimates that more
than 15,000 physicians nationwide have used Medifast as a treatment for their
overweight patients since 1980, and that an estimated 1 million patients have
used its products to lose and maintain their weight.
The Company maintains an in-house Lifestyles program for customers who
do not have a Medifast physician. These in-house qualified medical practitioners
coordinate supervision of the Medifast program with the patient's primary care
physician. Customers have access to qualified medical practitioners for program
support and advice by calling a toll free telephone help line or by e-mail. The
in-house medical and marketing staff have developed extensive program support
materials on Medifast products and programs, which are placed free of charge in
customer orders, in addition to being provided on the Company's website.
TAKE SHAPE FOR LIFE(TM) - This program is a comprehensive, medically supervised
health network designed to assist in long-term weight loss and disease and
lifestyle management. The program features Medifast weight and disease
management products, along with a team of personal health advisors, to support
the individual through their weight and or disease management program.
Program entrants are encouraged to consult with their primary care
physician and Take Shape for Life health advisors for screening purposes.
Physician directed Health Advisors are supported, educated and qualified by The
Health Institute, a dedicated training institute staffed by Medifast
professionals. Health Advisors obtain Medifast qualification based upon a
testing of their knowledge of Medifast and the Medifast product line.
The Company has developed a Tasting program, which is similar to a
home-based party model for introducing new customers to the Medifast program.
Physician directed Health Advisors recruit program entrants and provide them
with program guidance, Medifast product samples and the opportunity to order
products. Management plans for a very rapid expansion of this program.
TRADITIONAL PHYSICIANS AND CLINICS - Many Medifast physicians chose to implement
the Medifast program within their practice. These physicians carry an inventory
of Medifast products and resell them to patients. They also provide appropriate
testing, medical support and evaluations for patients on the program. The
Company implemented the MEDSLIM(R) Program in 2002, which allows licensing
opportunities for its medically prescribed weight management program.
In 2003, the Company acquired Hi-Energy Weight Control Centers, a
national company specializing in weight management programs, with weight loss
centers in over 50 locations. Hi-Energy centers offer a competitive marketing
edge through a regional advertising program, exclusive territories and marketing
support. The Company intends to increase the number of licensed and corporately
owned
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clinics, to over 125 nationwide by year-end in 2004, while introducing new
disease management product lines in each clinic. The Company also plans to
incorporate its existing MEDSLIM clinics with the new centers to provide
clinically proven products, programs and protocols to attain maximum results.
CONSUMERS CHOICE SYSTEM(TM) - Founded in March 1996, and acquired by Medifast in
2003, CCS is a retail distribution company focusing on high quality, innovative
products for women. CCS products, under the Woman's Wellbeing brand include
supplements addressing menopause relief, regularity, coronary health and joint
health. Products under the UTI brand address the detection, relief and
prevention of urinary tract and bladder infections. CCS products are currently
distributed in over 18,000 retail outlets nationwide. The CCS business is
supported by a website and toll-free customer service line where customers can
inquire about product information and retail availability.
THE MEDIFAST(R) BRAND
Medifast is a medically supervised weight management program, which
specializes in multidisciplinary patient education programs using the highest
quality meal replacement supplements. Medifast's core programs and products are
continuing to expand over a wellness spectrum to include disease management and
sports performance products. Medifast is particularly focused on disease
management with a complete line specially formulated for Diabetics, Medifast
Plus for Diabetics, as well meal replacement shakes, Medifast Plus for Women's
Health, Medifast Plus for Joint Health and Medifast Plus for Coronary Health.
Medifast is focusing on clinical sports nutrition with two gender specific
bio-engineered foods specially designed for athletes, Take Shape(TM) Women's
Sports Drink and Take Shape(TM) Bio-engineered Food for Men.
In early 2002, The Johns Hopkins Bloomberg School of Public's Health
Nutrition and Health Research Clinic began a two-year study to evaluate the
efficacy of the dosage controlled, engineered food, Medifast Plus for Diabetics
compared to basic nutrition recommendations by the American Diabetes Association
(ADA). Preliminary results show that participants using Medifast Plus for
Diabetics lost twice as much weight as those following the ADA's guidelines.
Additionally, two-thirds of those on the Medifast program lost at least 5% of
their weight, which is a standard measure of the Food and Drug Administration's
(FDA) threshold to indicate clinically significant weight loss, versus
one-quarter of those on the ADA diet. In addition to weight loss, the initial
study results are that Medifast participants sustained an average 9% decrease in
blood fasting glucose and an average 19% decrease in insulin levels. Final study
results are expected in December 2004.
Many Medifast Plus for Diabetics products have earned the coveted Seal
of Approval from the Glycemic Research Institute. The line, designated as Low
Glycemic, does not overly stimulate blood glucose and insulin and does not
stimulate fat-storing enzymes. Products included in the Medifast Plus for
Diabetics line consist of three delicious patented shakes, home style chili,
apple cinnamon, French vanilla berry oatmeal, maple and brown sugar oatmeal,
creamy chicken soup, creamy broccoli soup, chicken noodle soup, minestrone soup
and two snack bars.
The Company expanded the product line of its cutting edge adolescent
weight management program, Fit!(TM) in 2003. The line, which formerly consisted
of only one ready-to-drink and two chocolate bars, now consists of three
delicious powdered shakes, vanilla berry oatmeal, chicken noodle soup, hot cocoa
with marshmallows, chocolate pudding, 3 power-packed bars and one
ready-to-drink. Best of all, each Fit! supplement is packaged to appeal to
children.
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Approximately 30% of adolescents (ages 6 to 19) are overweight and
15.5% are obese. Medifast, Inc., recognizes the danger of this trend and has
developed an entire line of low calorie, power packed meal replacements
specially formulated to help children stay healthy, maintain good nutrition and
even manage weight. The Company intends to conduct ground breaking clinical
studies to prove the effectiveness of Medifast meal replacement products in
controlling calories and weight in adolescents.
Most Medifast(R) products qualify to make the FDA's heart healthy
claim, "May Reduce the Risk of Heart Disease." In order to make this claim, a
product must contain at least 6.25 grams of soy protein per serving and be low
in fat, saturated fat, and cholesterol. Unlike popular fad diets and herbal
supplements, Medifast(R) products are a safe, nutritionally balanced choice,
offering gender specific formulas containing high protein and low carbohydrates,
a soy protein source rather than animal protein source, and vitamin and mineral
fortification. It is very difficult to meet the minimum recommended nutritional
requirements on a low-calorie diet, but a dieter can easily meet these
requirements using the nutrient dense Medifast(R) brand of meal replacement food
supplements.
Medically supervised, low calorie diets are making a comeback, as
consumers search for a safe and effective solution that provides balanced
nutrition, quick weight loss and valuable behavior modification education. In
addition, consumers are becoming more aware of chronic diseases such as diabetes
and coronary health.
Medifast(R) Take ShapeTM is a 180 calorie weight maintenance product
which is currently being marketed through the internet and select independently
owned pharmacies across the country. In addition, the Company manufactures the
Take Shape(TM)/Dr. Diet weight management products and programs for the Asian
Market. Take Shape products are recommended by medical practitioners as a
"maintenance meal replacement" which has proven to be highly successful when
used after a patient has reached their goal weight on a lower calorie
Medifast(R) program. Take Shape/Dr. Diet by Medifast, was clinically tested by a
National Institute of Health study conducted by the University of Vermont.
Patients lost 45 - 65 lbs. on these products based on published study results.
The Take Shape(TM) line also includes Take Shape(TM) Women's Sports Nutrition
and Take Shape(TM) Bio-Engineered Food for Men.
COMPETITION
The most significant competition for meal replacements is individuals'
do-it-yourself diet plans. A recent Gallup study found that 71% of people
attempting a diet did so on their own. In view of the fact that such plans
generally fall well short of their goals, this high level of do-it-yourself
activity presents a significant marketing opportunity for the meal replacement
industry.
The meal replacement business is dominated by SlimFast(R) Foods Company
(Unilever), which has a strong foothold in retail markets. Medifast management
estimates that SlimFast(R) retail sales are running at a $1 billion annual rate.
SlimFast(R) products generally have higher caloric and sugar content than
comparative Medifast(R) products.
Dr. Phil's Shape Up! was introduced into the retail market in 2003. The
line of apple and pear body type nutritional supplements consists of shakes and
bars, with a nutritional profile similar to SlimFast(R). Unlike other meal
replacement programs, Shape Up! Claims that different body shapes require
different weight loss approaches.
Weight Watchers International and Jenny Craig, Inc. (privately held)
sell low-calorie, prepackaged meals and focus on the benefits of portion
control. Weight Watchers helps to generate demand for its products and "winning
points" program by hosting pay-as-you-go meetings.
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There are several competitors making use of medical weight management.
These companies include OptiFast (Novartis Nutrition Corporation) and Robards,
Inc. (Food Sciences Corporation, Inc.)
Recently, there has been increased publicity and controversy about the
benefits and efficacy of the high protein, low carbohydrate Atkins Diet, causing
considerable confusion and debate amongst dieters. According to the American
Dietetic Association, these diets tend to be low in calcium, fiber and other
essential vitamins and minerals. An industry report published by Adams, Harkness
and Hill, finds the demand for "low carb" diets is steady increasing, but
believes the long-term trend will focus on carbohydrate control and balance.
Medifast has a significant advantage over its competition because it
has been on the cutting edge of product development with soy protein and weight
management products since 1989. The Company promotes its philosophy of eating a
nutritional meal or replacing it with Medifast. These products are formulated
with high-quality, low-calorie, low-fat ingredients that provide alternatives to
fad diets or medicinal weight loss remedies. The Medifast(R) brand has been
clinically tested and proven at Johns Hopkins University and has been safely and
effectively used in its weight management center for over 15 years.
PRODUCTS
The Company offers a variety of weight and disease management products
under the Medifast(R) brand and for select private label customers. The
Medifast(R) line includes Medifast(R) 55, Medifast(R) 70, Medifast(R) Plus for
Appetite Suppression, Medifast(R) Plus for Diabetics, Medifast(R) Plus for Joint
Health, Medifast(R) Plus for Women's Health, Medifast(R) Plus for Coronary
Health, Medifast(R) Take ShapeTM, Medifast(R) Supplement Bars, Medifast(R)
Creamy Soups, Medifast(R) Minestrone Soup, Medifast(R) Hot Cocoa, Medifast(R)
Oatmeals, Medifast(R) Pro Teas, Medifast(R) Chicken Noodle Soup, Medifast(R)
Fast Soups, Medifast(R) Homestyle Chili and Medifast(R) Multigrain Crackers.
Medifast nutritional products are formulated with high-quality,
low-calorie, low-fat ingredients. Many Medifast products are soy based and
contain 24 vitamins and minerals, as well as other nutrients essential for good
health. The Company uses DuPont Protein Technologies' Supro(R) brand soy
protein, which is a high-quality complete protein derived from soybeans.
Medifast(R) brand awareness continues to evolve through product
development, line extensions, and the Company's emphasis on quality customer
service, technical support and publications developed by the Company's marketing
staff. Medifast(R) products have been proven to be effective for weight and
disease management in clinical studies conducted by the U.S. government and
Johns Hopkins University. The Company has continued to develop its sales and
marketing operations with qualified management and innovative programs. The
Company's facility in Owings Mills, MD manufactures powders and supplement bars
currently and subcontracts the production of its Ready-to-Drink products.
NEW PRODUCTS!
The Company introduced Medifast(R) Cappuccino, Medifast(R) Chocolate
Pudding, Medifast(R) Raspberry Flavored Pro Tea, Medifast(R) French Vanilla
Berry Oatmeal, and Maple and Brown Sugar Oatmeal. In addition, the company
expanded its adolescent weight management product line called Fit! to include
nutrition and energy bars, shakes, chicken noodle soup, hot cocoa with
marshmallows, chocolate pudding and vanilla berry oatmeal. The Fit! line is
specially formulated to improve the health and general nutrition of adolescents.
The Company also introduced a variety of non-nutritional, health
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related items under the Take Shape label to support its weight management
business. These products include a blood pressure monitor, digital thermometer,
digital ear thermometer, a body composition analyzer and a digital scale.
The acquisition of Consumers Choice Systems added many products in 2003
under the private label Women's Wellbeing, including Menopause Relief Pills,
Personal Cream Lubricant, a UTI Home Screening Test Kit, UTI Cleansing Wipes,
UTI Cranberry-Plus-Blueberry, and Women's Wellbeing Meal Replacements.
SALES AND MARKETING
The Company has made tremendous strides in its sales and marketing
operations as it continues to build upon a core strategic plan and proven
advertising strategy that has led the Company's teleweb operation to drive the
sales of its medically supervised weight and disease management products and
programs.
The Company launched a completely redesigned website in late 2003
providing consumers and business associates with an up-to-date, state-of-the-art
resource for information about Medifast, Inc., and its products. The website
features a Company Profile and History along with an in-depth look at the
manufacturing and production facility, a Customer Support section that provides
detailed contact information as well as answers to frequently asked questions, a
For Investors section that provides stock quotes, press releases and the latest
financial information, a national database of Medifast physicians, an
easy-to-use product shopping cart with complete order history, a For Physicians
page that will allow physicians to operate their Medifast business completely
on-line and featured success stories with before and after pictures. Visitors
will find the aesthetics of the new site inviting and sophisticated. Along with
having a more modern feel, the design will allow for significant growth and
updating in the years to come.
The Company is committed to the continuous improvement of its business
model which provides physicians a variety of dynamic programs ranging from
buying and reselling products out of their offices to directing patients to
order from the Company while receiving generous compliance fees for program
supervision.
The Company's Sales division was streamlined in 2003 focusing on
Clinical Affairs, Business Development and Retail sales for the Company's new
CCS division. The Clinical Affairs and business development team were
instrumental in the development of the clinic-licensing program, MEDSLIM(R) and
the integration of Hi-Energy Weight Control(TM). The sales team is responsible
for prospecting larger medical accounts, clinics, hospitals, and HMOs as well as
prospecting business opportunities for the Medifast(R), Womans Wellbeing(R) and
UTI(R) brands.
The marketing department is staffed by a team of dynamic and technology
proficient professionals who work closely with medical and technical staff in
the development of cutting edge websites, customer support material, advertising
and marketing strategies as well as management of intellectual properties,
patents and clinical distributors. The marketing team has been instrumental in
the integration of the acquisitions of Consumers Choice Systems and Hi-Energy
Weight Loss clinics. In addition, the staff works closely with product
development to develop product packaging, labeling, promotional material and
advertising. The marketing department develops marketing and advertising
strategies for all subsidiaries and divisions of Medifast, Inc.
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ADVERTISING AND PROMOTION
The primary advertising medium used to attract customers to its teleweb
operation in 2003 was print magazines e.g. Parade, USA Weekend, AARP Magazine
and Newsweek. The Company placed increased emphasis in 2003 on integrated
advertising, public relations and investor relations' strategies. The Company
tested a 60-second direct response television commercial in the fall of 2003,
which produced a dramatic response. The Company will continue to expand its
advertising efforts in 2004 with an integrated strategy to include television,
print and radio campaigns.
In addition, the Company plans to develop a 30-minute infomercial,
which will compare Medifast to the competition and highlight the Company's
Diabetic product line. Emphasis will be placed on public relations in 2004 as
the Company expands its disease management strategies with the results of the
study on Medifast Plus for Diabetics. The Company plans to expand its direct
response television campaign throughout the year across cable and satellite
stations as well as major networks. These sales and marketing initiatives tie in
with current market trends, seasonal diet trends, and Internet and product
development strategies.
"Medifast is Awesome Baby!" In November 2002, the Company announced
that Dick Vitale, a former basketball coach and celebrity sportscaster joined
the Medifast team in order to assist in promoting a healthy lifestyle using the
Company's weight and disease management and sports nutrition products. Mr.
Vitale is a spokesperson for the Company's Take Shape for Life business and was
the keynote speaker at its 2003 conference in Orlando, Florida. The Company also
uses Mr. Vitale as a coach and motivator in marketing and advertising for its
Fit! Adolescent and Take Shape Sports Nutrition lines. In 2003, the Company
conducted a successful radio campaign promoting the Medifast brand during the
NCAA basketball tournament, featuring Mr. Vitale as the spokesperson.
The three-year agreement between Mr. Vitale and the Company is to
augment the Company's already established sales and marketing efforts, which
included more than doubling advertising and coupon support.
The Company's Clinical Affairs and Marketing departments planned and
attended several medical professional trade shows in 2003. The Company continues
to advertise to its physician and qualified medical practitioner network in
trade publications. This industry specific advertising, which consists of direct
mail and targeted ads that include a tear off business reply card, has assisted
in the creation of the Medifast database of medical practitioners, which allows
the Company to market its products and programs to an interested audience and as
a result is leading to the expansion of the medical practitioner network.
Medifast launched a For Physicians section on its website where qualified
medical practitioners can learn about the Medifast program, register as a
Medifast physician or place orders online and receive a 2% discount.
MANUFACTURING
Jason Pharmaceuticals, Inc., the Company's wholly owned manufacturing
subsidiary, produces over 95% of the Medifast products in a state-of-the-art
food and pharmaceutical-grade facility in Owings Mills, Maryland. Management
purchased the plant in July 2002 for $3.4 million. The Company purchased
additional lines for the internal production of its growing nutritional meal
replacement bar product line in 2003.
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The manufacturing facility has the capability for massive increases to
its production output with minimal capital expenditures. It is presently
operating on only a single shift. Adding an additional shift, along with
diminutive machinery expenses would enable the Company to produce enough
products to generate over $200 million in sales if needed in 2004.
Product labeling, quality control, manufacturing processes and
equipment are subject to regulations and inspections mandated by the Food & Drug
Administration (FDA), the Maryland State Department of Health and Hygiene, and
the Baltimore County Department of Health. The plant strictly adheres to all GMP
practices and has maintained its status as an "OU" (Orthodox Union)
Kosher-approved facility since 1982.
FINANCING AND STRATEGIC ALTERNATIVES
Management desires to develop strategic marketing relationships with
other third parties having existing relationships with the medical professional
community, specifically to reach the diabetic population in the United States
and to secure international distribution in Europe and Asia.
GOVERNMENTAL REGULATION HISTORY
The formulation, processing, packaging, labeling and advertising of the
Company's products are subject to regulation by several federal agencies, but
principally by the Food and Drug Administration (the "FDA"). The Company must
comply with the standards, labeling and packaging requirements imposed by the
FDA for the marketing and sale of medical foods, vitamins, and nutritional
products. Applicable regulations prevent the Company from representing in its
literature and labeling that its products produce or create medicinal effects or
possess drug-related characteristics. The FDA could, in certain circumstances,
require the reformulation of certain products to meet new standards, require the
recall or discontinuation of certain products not capable of reformulation, or
require additional record keeping, expanded documentation of the properties of
certain products, expanded or different labeling, and scientific substantiation.
If the FDA believes the products are unapproved drugs or food additives, the FDA
may initiate similar enforcement proceedings. Any or all such requirements could
adversely affect the Company's operations and its financial condition.
The FDA also requires "medical food" labeling to list the name and
quantity of each ingredient and identify the product as a "weight
management/modified fasting or fasting supplement" in the labeling.
To the extent that sales of vitamins, diet, or nutritional supplements
may constitute improper trade practices or endanger the safety of consumers, the
operations of the Company may also be subject to the regulations and enforcement
powers of the Federal Trade Commission ("FTC"), and the Consumer Product Safety
Commission. The Company's activities are also regulated by various agencies of
the states and localities in which the Company's products are sold. The
Company's products are manufactured and packaged in accordance with customers'
specifications and sold under their private labels both domestically and in
foreign countries through their own distribution channels.
PRODUCT LIABILITY AND INSURANCE
The Company, like other producers and distributors of products that are
ingested, faces an inherent risk of exposure to product liability claims in the
event that, among other things, the use of its
12
products results in injury. The Company maintains insurance against product
liability claims with respect to the products it manufactures. With respect to
the retail and direct marketing distribution of products produced by others, the
Company's principal form of insurance consists of arrangements with each of its
suppliers of those products to name the Company as beneficiary on each of such
vendor's product liability insurance policies. The Company does not buy products
from suppliers who do not maintain such coverage.
Additionally, the Company maintains directors and officers liability
insurance in order to attract "high quality and experienced" directors.
EMPLOYEES
At December 31, 2003, the Company employed 110 people, of whom 35 were
engaged in manufacturing, and 75 in marketing, administrative and corporate
support functions. None of the employees are subject to a collective bargaining
agreement with the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns a 49,000 square-foot facility in Owings Mills,
Maryland for its Corporate Headquarters and manufacturing plant. In 2003, the
Company purchased a state of the art distribution facility in Ridgely, Maryland.
The facility gives the Company the ability to distribute over $200 million of
Medifast product sales per year.
ITEM 3. LEGAL PROCEEDINGS.
On June 10, 2003, Medifast, Inc. and Jason Pharmaceuticals, Inc. filed a
Complaint for Damages, Injunctive Relief and Determination of Discharge ability
against John A. Sankey in the U.S. Bankruptcy Court for the District of Alaska.
The Defendant, who also trades under the name, "Diet -Fast," and who also owns
Wellness Institute of Alaska, Inc., was at one time a distributor of Medifast
products, but the Company terminated the distributorship contract. Nevertheless,
the Defendant continued to utilize Medifast trademarks and service marks in
violation of said contract. On December 3, 2003, the parties entered into an
Agreement for Settlement whereby the Defendant would cease using all trademarks
and service marks of the Company. The court approved the Settlement on February
2, 2004.
On August 21, 2002 Food Sciences Corporation, Inc. trading as Robard
Corporation, a competitor of the Company, filed a lawsuit in the U.S. District
Court for the District of New Jersey Camden Vicinage, alleging, among other
things, slanderous and libelous statements made to Plaintiff's customers. The
Company filed a Counterclaim and Third Party Claims against other competitors,
alleging, among other things, business defamation, trademark infringement and
conspiracy. Plaintiff and Defendant both claim damages in excess of $75,000. The
Company intends to vigorously defend its reputation of ethical integrity
(integrity of its products and formulas) and its trademarks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Medifast Annual Shareholder Meeting was held on July 25, 2003 at
the American Stock Exchange in New York, NY. The shareholders voted in favor of
the classification of the Board of
13
Directors into three classes consisting of Class I, Class II and Class III based
on seniority and to amend the Company bylaws accordingly. The shareholders voted
Bradley T. MacDonald (91%) and Rev. Donald F. Reilly, O.S.A. (96%) into Class I,
Michael C. MacDonald (91%) and Scott Zion (96%) into Class II, and Mary Travis
(96%) and Michael J. McDevitt (96%) into Class III. Additionally, the
shareholders approved the appointment of Wooden & Benson, Chartered, as the
Company's independent auditors for the fiscal year ending December 31, 2003.
Upon the resignation of Wooden & Benson, Chartered, the Company engaged the
services of Bagell, Josephs & Company, LLC as the independent auditors for the
fiscal year ending December 31, 2003.
The Directors elected Mr. Bradley T. MacDonald as Chairman of the
Board, CEO, Treasurer and Secretary, and Mr. Scott Zion as Assistant Secretary
of the Corporation.
The stockholders approved and the Directors amended the Company's 1993
stock option plan and increased the number of authorized stock options from one
million (1,000,000) to one million two hundred and fifty thousand (1,250,000) in
order to provide incentives for employees, directors, and consultants
performance.
The stockholders approved and the Directors consented to increase the
number of authorized shares of common stock by five million (5,000,000) shares
to fifteen million (15,000,000) shares.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock has been quoted under the symbol MED
since December 20, 2002. The old symbol, MDFT, had been traded since February 5,
2001. The common stock is traded on the American Stock Exchange. The following
is a list of the low and high bid quotations by fiscal quarters for 2003 and
2002:
2003
------------------
Low High
----- ------
Quarter ended March 31, 2003 ....................... 3.79 6.10
Quarter ended June 30, 2003 ........................ 4.80 14.95
Quarter ended September 30, 2003 ................... 11.15 17.21
Quarter ended December 31, 2003 .................... 11.60 18.49
2002
------------------
Low High
----- ------
Quarter ended March 31, 2002 ....................... .23 1.00
Quarter ended June 30, 2002 ........................ .68 .90
Quarter ended September 30, 2002 ................... .65 1.92
Quarter ended December 31, 2002 .................... 1.77 6.04
(b) The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions and may not represent actual transactions.
(c) There were 7,315 beneficial holders of the Company's Common Stock,
as of November 5, 2003.
(d) No dividends on common stock were declared by the Company during
2003 or 2002.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements which may involve
known and unknown risks, uncertainties and other factors that may cause
Medifast, Inc. actual results and performance in future periods to be materially
different from any future results or performance suggested by these statements.
Medifast, Inc. cautions investors not to place undue reliance on forward-looking
statements, which speak only to management's expectations on this date.
15
2003 COMPARISON WITH 2002
OPERATING
Consolidated net sales for 2003 were $25,379,000 as compared to 2002
sales of $12,345,000, an increase of $13,034,000, or 106%. The revenue increase
for the Company is attributed to the following: (a) increased Direct Patient
Sales via the Internet's Physicians Lifestyles Program; (b) increased
advertising support via national print and radio that stimulated increased
sales; (c) increased International sales and (d) the Take Shape for Life health
network sales.
Gross margins increased to 73% in 2003 from 70% in 2002, due to the
higher margins of the Medifast(R) products. The increase is attributed to the
increased margin of Medifast(R) direct and Internet sales directly to patients
via the Lifestyles and Take Shape for Life programs. Selling, general and
administrative (SG&A) expenses of $14,956,000 for 2003 were $8,050,000 more than
the $6,906,000 in 2002, due to increased advertising expenses to increase new
sales, employee costs, upgrading the educational level and training of middle
management and the addition of the Take Shape for Life health network sales and
marketing infrastructure and commission costs.
In 2003, the Company realized a tax expense of $1,148,000, as compared
to a tax benefit of $925,000 in 2002 as a result of previous net loss carry
forward.
Interest expense increased by $49,000 due to the Company's increased
borrowings for infrastructure growth.
A preferred stock dividend in the amount of $58,000 was accrued to
shareholders in 2003.
The Company experienced income from operations for the year 2003 of
$3,598,000. This compares with income from operations of $1,752,000 in 2002, an
increase of 105%. The profit from operations is attributed to the success of
national print and radio advertising, the dynamic growth in the Take Shape for
Life Health Advisor Network, international distribution to Asia, increased sales
to physicians and clinics, improved gross margins and more direct patient sales
via the Internet and the 800-telephone number supporting the Medifast(R)
physician network and their patients directly.
LIQUIDITY AND CAPITAL RESOURCES
On June 11, 2003 Jason Enterprises, Inc. acquired the assets of
Consumers Choice Systems, Inc., a Delaware Corporation. The Company obtained all
the assets of the business that support their retail and international business
including the distribution rights in 18,000 retail food and drug stores. Jason
Enterprises, Inc. acquired the assets for 76,120 shares of Medifast, Inc.
restricted common stock and 50,000 five-year warrants at a purchase price of
$10.00 per share. The transaction will be accounted for as an asset purchase
transaction. The Company is expecting to record limited and selected liabilities
that amount to approximately $1.35 million.
On July 24, 2003 the Company announced an agreement with Amazon.com.
Through the agreement the Consumer Choice Systems, Women's Wellbeing branded
products will be offered on Amazon.com's website in the women's health section.
16
On July 25, 2003, the Company announced that it had sold an aggregate
of 550,000 shares of common stock and warrants to purchase 82,500 shares of
common stock (the "PIPE Shares") to Mainfield Enterprises, Inc. and Portside
Growth & Opportunity Fund. The shares of common stock were sold for a cash
consideration of $12.40 per share, or a total of $6,820,000, and the warrants,
exercisable for a period of five years from the date of issuance, at an exercise
price equal to one hundred fifteen percent (115%) of the five-day volume
weighted average price (the "PIPE Transaction"), all pursuant to the terms of
that certain Securities Purchase Agreement by and between the Company and
Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund dated as of
July 24, 2003 (the "Securities Purchase Agreement").
On September 12, 2003 Medifast, Inc.'s wholly owned subsidiary Seven
Crondall, LLC purchased a 119,825 sq. foot distribution facility located at 601
Sunrise Ave., Ridgely, Maryland 21660 from NewRoads, Inc. for $2,200,000. The
Company financed $1,760,000 through Merrill Lynch Capital at the 30 day LIBOR
interest rate plus 220 basis points over seven years.
On November 7, 2003 Medifast, Inc.'s wholly owned subsidiary Jason
Properties, LLC purchased the assets of Hi-Energy Weight Control Centers,
located in Gulf Breeze, Florida. The acquisition includes equipment, inventory,
trademarks, and licenses for fifty Hi-Energy clinics. The clinics are located
primarily in the southeastern region of the United States. The assets were
purchased for $1,500,000 in cash, which included selected liabilities, capital
expenditures, costs of assets and miscellaneous fees.
On November 7, 2003 Medifast, Inc.'s wholly owned subsidiary Jason
Pharmaceuticals, Inc. increased its Secured Line of Credit from $1,000,000 to
$5,000,000 from Mercantile Safe-Deposit and Trust of Baltimore, Maryland. The
line of credit is at the LIBOR plus two percent. The increased line may be used
to finance equipment, inventory, and receivables of Medifast, Inc.
On March 5, 2004 the Company entered into a joint venture agreement
with XL Health, Inc., one of the leading diabetic management companies in the
United States. Medifast, Inc.'s Medifast Plus for Diabetics line will be the
exclusive nutritional product for XL Health's CMS Medicare Demonstration
Project. The pilot project will use Medifast Plus for Diabetics as the exclusive
nutritional intervention program to prove the cost effectiveness of disease
management programs for Medicare beneficiaries. Take Shape For Life, Inc,
through its' parent Medifast, Inc, provided a one million dollar corporate
guarantee of XL's revolving credit line secured by the assets of the Company
through Mercantile Safe-Deposit and Trust company, the Company's lender.
SEASONALITY
The Company's weight management/diet control is subject to seasonality.
Traditionally the holiday season in November/December of each year are
considered poor sales for diet control products and services. January and
February generally show increases in sales.
INFLATION
To date, inflation has not had a material effect on the Company's
business.
17
INFORMATION SYSTEMS INFRASTRUCTURE
Throughout 2003 the Company significantly enhanced the capacity and the
functionality of its IT infrastructure. These enhancement methods included an
overall upgrade to the Company's web site. The upgrade used the latest
technology and added user-friendly features to enhance the overall website. This
upgrade enhanced the Company's web presence, and provided a much simpler
interface for its web customers. There were major enhancements to the Company's
call center and order taking capabilities to include an upgrade to the latest
release of software to allow the Company to use the latest phone technology,
improving the employee to customer relationship. The Company continued its
upgrades to its Navision ERP system to more effectively and efficiently manage
the increasing inventories and order shipments.
ITEM 7. CONTROLS AND PROCEDURES
INTERNAL CONTROL POLICY
In April 2003, the Company implemented an Internal Control Policy
allowing for the confidential receipt and treatment of complaints in regards to
the Company's internal accounting controls and auditing matters. A director,
officer or employee may file a confidential and anonymous concern regarding
questionable accounting or auditing maters to an independent representative of
the Medifast Audit Committee. As of December 31, 2003, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2003. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to December 31, 2003.
CODE OF ETHICS
In September 2002, the Company implemented a Code of Ethics by which
directors, officers and employees commit and undertake to personal and corporate
growth, dedicate themselves to excellence, integrity and responsiveness to the
marketplace, and work together to enhance the value of the Company for the
shareholders, vendors, and customers.
TRADING POLICY
In March 2003, the Company implemented a Trading Policy whereby if a
director, officer or employee has material non-public information relating to
the 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 days after an earnings
or special announcement to include the 10-KSB, 10-QSB and 8-K in order to insure
that investors have available the same information necessary to make investment
decisions as insiders.
18
ITEM 8. FINANCIAL STATEMENTS.
See pages F-1 through F-20.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
On December 10, 2003 Wooden & Benson, Chartered resigned as the
Company's auditor. Wooden & Benson, Chartered was acquired by Clifton Gunderson,
LLP and will no longer audit public companies. The Company's new auditor is
Bagell, Josephs & Company, LLC, also a member of the BDO Seidman Alliance.
There were no disagreements with the Company's independent auditors,
regarding accounting and financial disclosures for the fiscal year ending
December 31, 2002.
19
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) The following are the Board of Directors:
Date First
Name Age Position Became Director
---- --- -------- ---------------
Bradley T. MacDonald .................... 56 Chairman of the Board, 1996
Chief Executive Officer
and Director
Donald F. Reilly ........................ 56 Directors 1998
Mary T. Travis .......................... 53 Director 2002
Michael C. MacDonald .................... 50 Director 1998
Scott Zion .............................. 53 Director 1999
Michael J. McDevitt ..................... 55 Director 2002
Joseph D. Calderone ..................... 55 Director 2003
Under the by-laws, the directors are to serve for a period of one year and until
the due election and qualification of their respective successors.
BRADLEY T. MACDONALD became Chairman of the Board and Chief Executive
Officer of Medifast, Inc. on January 28, 1998. Prior to joining the Company, he
was appointed as Program Director of the U.S. Olympic Coin Program of the
Atlanta Centennial Olympic Games. Mr. MacDonald was previously employed by the
Company as its Chief Executive Officer from September 1996 to August 1997. From
1991 through 1994, Colonel MacDonald returned to active duty to be Deputy
Director and Chief Financial Officer of the Retail, Food, Hospitality and
Recreation Businesses for the United States Marine Corps. Prior thereto, Mr.
MacDonald served as Chief Operating Officer of the Bonneau Sunglass Company,
President of Pennsylvania Optical Co., Chairman and CEO of MacDonald and
Associates, which had major financial interests in a retail drug, consumer
candy, and pilot sunglass companies. Mr. MacDonald was national president of the
Marine Corps Reserve Officers Association and retired from the United States
Marine Corps Reserve as a Colonel in 1997, after 27 years of service. He has
been appointed to the Defense Advisory Board for Employer Support of the Guard
and Reserve (ESGR). Mr. MacDonald serves on the Board of Directors of the
Wireless Accessories Group (OTCBB: WIRX). He is also on the Board of Directors
of the Marine Corps Reserve Toys for Tots Foundation and is a Foundation Trustee
of the Marine Reserve Association.
REVEREND DONALD FRANCIS REILLY, O.S.A., a Director, holds a Doctorate
in Ministry (Counseling) from New York Theological and an M.A. from Washington
Theological Union as well as a B.A. from Villanova University. Reverend Don
Reilly was ordained a priest in 1974. His assignments included Associate Pastor,
pastor at St. Denis, Havertown, Pennsylvania, Professor at Villanova University,
Personnel Director of the Augustinian Province of St. Thomas of Villanova,
Provincial Counselor, Founder of SILOAM Ministries where he ministers and
counsels HIV/AIDS patients and
20
caregivers. He is currently on the Board of Directors of Villanova University,
is President of the board of "Bird Nest" in Philadelphia, Pennsylvania and is
Board Member of Prayer Power. Fr. Reilly was recently elected Provincial of the
Augustinian Order at Villanova, PA. He will oversee more than 300 Augustinian
Friars and their service to the Church, teaching at universities and high
schools, ministering to parishes, serving as chaplains in the Armed Forces and
hospitals, ministering to AIDS victims, and serving missions in Japan and South
America.
MICHAEL C. MACDONALD, a Director, is a corporate officer, the
President, North American Solutions Group for the Xerox Corporation. Mr.
MacDonald's former positions at Xerox Corporation include executive positions in
the sales and marketing areas. He is currently on the Board of Trustees of
Rutgers University and a Director of the Jimmy V Foundation. Mr. MacDonald is
the brother of Bradley T. MacDonald, the CEO of the Company.
SCOTT ZION is a Director and also Corporate Secretary for Medifast,
Inc. He received a Bachelor of Arts Degree from Denison University, Granville,
Ohio. Mr. Zion is currently a principal in Resources Development, Inc. a health
care consulting company in Napa, California. Prior to forming Resources
Development, he was Senior Vice President of Sales and Marketing for Santen,
Inc. an ophthalmic pharmaceutical company. Before Santen, he was Senior Vice
President and General Manager for Akorn, Inc., an ophthalmic manufacturing and
distribution company. Pilkington Barnes Hind, a worldwide contact lens company,
as Head of North American Sales and Marketing, also employed him. Prior to that,
he spent 20 years with the Mead Johnson Nutritional Division of Bristol Myers
Squibb in various positions of increasing responsibility in sales management. He
has extensive experience in nutritional products particularly in the areas of
sales and marketing.
MICHAEL J. MCDEVITT, a Director, is a retired Senior Executive and
Senior Security Manager with the Federal Bureau of Investigation (FBI). He is
recognized nationally as a leading authority in the U.S. Government (USG) on
physical security and technical countermeasures. Mr. McDevitt developed and
managed highly successful technical security programs through a succession of
leadership posts, culminating in a Senior Executive Services (SES) position in
the Investigative Technology Branch, FBI Laboratory Division. He managed nearly
two hundred Special Agent's and engineering support staff spanning a broad
spectrum of technical security programs, as well as an annual budget exceeding
$200 million. Senior government personnel regard him as a leading expert on
technology applied to physical security and has played a leading role in
developing critical partnerships with industry as well as coupling technical
capabilities with operational requirements.
MARY T. TRAVIS, a Director, is currently employed with Sunset Mortgage
Company, L.P. in Pennsylvania as the Senior Vice President of wholesale
operations and was formerly the Vice President of operations for the Financial
Mortgage Corporation. Mrs. Travis is an expert in mortgage banking with over 31
years of diversified experience. She is an approved instructor of the Mortgage
Bankers Association Accredited School of Mortgage Banking and is a Delegate and
2nd Vice president of the Mortgage Bankers Association of Greater Philadelphia.
She is the key financial executive on the Company's Audit Committee providing
oversight of the Company's external auditors.
REVEREND JOSEPH D. CALDERONE, O.S.A., was named a director of Medifast
in November 2003. Rev. Calderone is the Associate Director of Campus Ministry at
Villanova University. He formerly spent over eight years with the Loyola
University Medical Center as the hospital Chaplain and taught multiple courses
including Introduction to the Practice of Medicine and Business Ethics. Rev.
Calderone is currently a Captain in the US Navy Reserves and serves as the Wing
Chaplain for the 4th Marine Aircraft Wing. He has spent over 25 years in the
medical related field and plans to assist the Company with future growth plans
involving development of clinical affairs and diabetic nutrition initiatives.
21
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information as to the compensation of
the Chief Executive Officer of the Company and each other executive officer that
received compensation in excess of $100,000 for 2003, 2002, and 2001.
Annual Compensation
-------------------
Value of Common/
Salary Bonus Preferred Stock Issued Option Other Annual
Name Year ($) ($) in Lieu of Cash Awards Compensation
---- ---- --- --- --------------- ------ ------------
Bradley T. MacDonald 2003 225,000 112,000 0 0 0
Chairman of the Board 2002 145,000 75,000 0 100,000(1) 0
& CEO 2001 135,371 (0) $20,000 (2) 0 0
-------------
(1) The Board of Directors reinstated 100,000 options at $1.50 per share
granted in 1997 and not exercised. Mr. MacDonald exercised those options in
December 2002 per the Board's direction.
(2) Mr. MacDonald was issued 20,000 shares of restricted Series "C" Preferred
Convertible Stock as part of compensation related to restructuring and
raising new capital.
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, 2003 with respect to options granted under the Plan since the inception of
the Plan to the persons set forth under the Summary Compensation Table, all
current executive officers as a group and all current Directors who are not
executive officers as a group of the Company. In addition, a chart listing
option holders, grants made in FY 2003, and a list of aggregated options and the
value of these options, is provided.
ALL CURRENT ALL CURRENT
EXECUTIVE INDEPENDENT
BRADLEY T. OFFICERS DIRECTORS
MACDONALD (1) AS A GROUP AS A GROUP
------------- ---------------- --------------
Options granted .................. 215,000 92,500 110,000
Average exercise price $ 0.86 $ 0.67 $ 1.07
Options exercised ................ 215,000 76,665 100,000
Average exercise price .......... $ 0.86 $ 0.53 $ 0.70
Shares sold ...................... * * *
Options unexercised as of 12/31/03 0 15,835 10,000
22
Approximate 5 YR Value of
FY 03 Grants @ Potential Realizable Unexercised Unexercised
Price & Expiration Value at 10% Annual Options Options
Month/Year Stock Appreciation as of 12/31/03 as of 12/31/03
Current Executive Officers and Directors 12,500@$4.80 2008 12,500 $116,250
Employees 69,333@$8.71 2008 46,669 258,260
Consultants 81,667@$2.23 2008 4,445 41,339
------ ------
63,614* $415,849
*Vested options granted are below. 1,250,000 authorized.
23
NUTRACEUTICAL GROUP INDUSTRY COMPARISON OF STOCK PRICES
December 31, 2003 December 31, 2002 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED) ................................ $ 14.10 $ 5.32 8.78 165.0%
Natural Alternatives International, Inc. (NAII) 6.40 3.98 2.42 60.8%
Weider Nutrition (WNI) ........................ 4.45 1.45 3.00 206.9%
Pure World, Inc (PURW) ........................ 2.51 .51 2.00 (392.1)%
Twinlab Corporation (TWLB) .................... 0.02 .10 (0.08) (80.0)%
Natures Sunshine Products, Inc. (NATR) ........ 8.42 9.71 (1.29) (13.3)%
December 31, 2003 December 31, 2002 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED) ................................ $ 14.10 $ .22 13.88 6309.1%
Natural Alternatives International, Inc. (NAII) 6.40 3.25 3.15 96.9%
Weider Nutrition (WNI) ........................ 4.45 3.69 .76 20.6%
Pure World, Inc (PURW) ........................ 2.51 3.12 (0.61) (19.6)%
Twinlab Corporation (TWLB) .................... 0.02 7.94 (7.92) (99.7)%
Natures Sunshine Products, Inc. (NATR) ........ 8.42 8.00 0.42 5.3%
PHARMACEUTICAL GROUP INDUSTRY COMPARISON OF STOCK PRICES
December 31, 2003 December 31, 2002 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED) ................................ $ 14.10 $ 5.32 8.78 165.0%
Abbott Labs (ABT) ............................. 46.34 40.00 6.34 15.9%
Unilever (UL) ................................. 37.60 38.25 (0.65) (1.7)%
Novartis (NVS) ................................ 45.89 36.73 9.16 24.9%
Bristol Myers Squibb (BMY) .................... 28.60 23.15 5.45 23.5%
INDEX COMPARISON
$100 invested in 1999 would return:
1999 2003
---- -------
Nutraceutical Group Index ..................................... $100 $ 1052
Medifast ...................................................... $100 $ 6,309
S&P 500 ....................................................... $100 $ 90
Factual material is obtained from sources believed to be reliable, but
the publisher is not responsible for any errors or omissions contained herein.
COMPENSATION OF DIRECTORS
The Company is authorized to pay a fee of $300 for each meeting
attended by its Directors who are not executive officers. It reimburses those
who are not employees of the Company for their expenses incurred in attending
meetings. Independent Directors claimed $2,459 in Director's fees and/or
expenses in 2003. See "Executive Compensation - Stock Options" for stock options
granted under the 1993 Plan to the Directors. The Company authorized stock
options under rule 144 of 2,500 shares at $4.80 to all non-executive members of
the board of directors, which includes Michael J. McDevitt, Michael C.
MacDonald, Scott Zion, Mary Travis and Rev. Donald Reilly.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to the
beneficial ownership of shares of Common Stock or voting Preferred Stock as of
December 31, 2003 of the Chief Executive Officer, each Director, each nominee
for Director, each current executive officer named in the Summary Compensation
Table under "Executive Compensation" and all executive officers and Directors as
a group. The number of shares beneficially owned is determined under the rules
of the Securities and Exchange Commission and the information is not necessarily
indicative of beneficial ownership for any other person. Under such rules,
"beneficial ownership" includes shares as to which the undersigned has sole or
shared voting power or investment power and shares, which the undersigned has
the right to acquire within 60 days of March 15, 2003 through the exercise of
any stock option or other right. Unless otherwise indicated, the named person
has sole investment and voting power with respect to the shares set forth in the
table.
NUMBER % OF
NAME AND ADDRESS* OF SHARES OUTSTANDING
----------------- ------------- -----------
Bradley T. MacDonald ...................... 1,309,873 (1) 12.5%
Donald F. Reilly .......................... 65,452 (2) 0.62%
Michael C. MacDonald ...................... 38,354 (2) 0.37%
Scott Zion ................................ 182,500 (2) 1.74%
Mary Travis ............................... 5,340 (2) 0.05%
Michael J. McDevitt ....................... 13,900 (2) 0.13
Executive Officers and Directors as a group
(8 persons) ........................... 1,615,419 15.41%
*The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills,
Maryland 21117
(1) Mr. MacDonald beneficially owns 1,129,873 shares of common stock and 90,000
shares of voting Series "C" Preferred Convertible Stock. Mrs. Shirley D.
MacDonald and Ms. Margaret E. MacDonald, wife and daughter of Mr.
MacDonald, individually or jointly own 492,625 shares of stock.
(2) Certain Independent directors were issued a total of 3,500 shares of common
stock and 12,500 options to buy common stock at $4.80, as compensation for
their participation as Board Members in 2003.
RECENT DEVELOPMENTS
On March 5, 2004 the Company entered into a joint venture agreement
with XL Health, Inc., one of the leading diabetic management companies in the
United States. Medifast, Inc.'s Medifast Plus for Diabetics line will be the
exclusive nutritional product for XL Health's CMS Medicare Demonstration
Project. The pilot project will use Medifast Plus for Diabetics as the exclusive
nutritional intervention program to prove the cost effectiveness of disease
management programs for Medicare beneficiaries. As part of the joint venture
Mercantile Safe Deposit and Trust Company became the Lender to XL Health for a
revolving loan with a maximum principal amount of $1 Million. Medifast, Inc.
guaranteed the payment on behalf of XL Health, and therefore has become the
Guarantor of the Loan to Mercantile Safe Deposit and Trust.
Medifast, Inc. intends to increase the number of licensed and
corporately owned clinics to over 125 nationwide by year-end in 2004. The
Company has acquired over 30 additional Hi-Energy licensed Weight Control
Centers since December 31, 2003. With of over 100 Weight and Disease Control
clinics to date, Medifast, Inc. has become one of the six largest Weight Control
Clinic licensors and operators in the United States.
25
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company and amendments
thereto*
3.2 By-Laws of the Company*
10.1 1993 Stock Option Plan of the Company as amended*
10.3 Lease relating to the Company's Owings Mills, Maryland
facility**
10.4 Employment agreement with Bradley T. MacDonald***
--------
* Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form SB-2 of the Company, File No. 33-71284-NY.
** Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form S-4 of the Company, File No. 33-81524.
*** Filed as an exhibit to 10KSB, dated April 15, 1999 of the Company,
file No. 000-23016.
(b) Reports on Form 8-K
June 11, 2003, to report acquisition of Consumer Choice Systems, Inc.
July 25, 2003, to report the selling of 550,000 shares of common stock and
warrants to purchase 82,500 shares of common stock in a "PIPE Transaction."
July 31, 2003 to report shareholder meeting on July 25, 2003.
September 15, 2003 to report the purchase of the Ridgely, MD distribution
facility.
November 7, 2003 to report the asset purchases of Hi-Energy Weight Control
Centers.
November 21, 2003 to report the election of Joseph D. Calderone to the Board of
Directors.
December 10, 2003 to report that Wooden & Benson, Chartered would no longer
serve as auditor to the Company and that Bagell, Josephs & Company would become
the Company's new auditor.
December 12, 2003 to report the Company had increased 2004 guidance.
26
MEDIFAST, INC. AND ITS SUBSIDIARIES
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent auditors' report for the year ended
December 31, 2003................................................... F-2
Independent auditors' report for the year ended
December 31, 2002................................................... F-3
Balance sheet as of December 31, 2003 ................................ F-4
Statements of income for the years ended
December 31, 2003 and 2002 ......................................... F-5
Statements of changes in stockholders' equity and
Comprehensive loss for the years ended
December 31, 2003 and 2002 ......................................... F-6
Statements of cash flows for the years ended
December 31, 2003 and 2002 ......................................... F-7
Notes to financial statements ........................................ F-9
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Medifast, Inc.
Owings Mills, Maryland
We have audited the consolidated balance sheet of Medifast, Inc. and its
subsidiaries as of December 31, 2003, and the related consolidated statements of
income, changes in stockholders' equity and comprehensive loss and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medifast, Inc. and subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
Bagell, Josephs & Company, LLC
Gibbsboro, New Jersey
March 10, 2004
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Medifast, Inc.
Owings Mills, Maryland
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of Medifast, Inc. and subsidiaries for the
year ended December 31, 2002. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Medifast, Inc. and
subsidiaries for the year ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
Wooden & Benson
Baltimore, Maryland
March 4, 2003
F-3
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets:
Cash $ 2,524,000
Accounts receivable - net of allowance for doubtful accounts of $55,000 641,000
Inventory 2,988,000
Investment securities 3,983,000
Deferred compensation 321,000
Prepaid expenses and other current assets 936,000
Deferred tax asset 596,000
------------
Total current assets 11,989,000
Property, plant and equipment - net 7,449,000
Trademarks and intangibles 4,419,000
Other assets 375,000
------------
Total assets
$ 24,232,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses 1,714,000
Dividends payable 58,000
Line of credit 55,000
Current maturities of long term debt 764,000
------------
Total current liabilities 2,591,000
Long term debt, net of current portion 4,564,000
------------
Total liabilities 7,155,000
Stockholders' Equity:
Series B convertible preferred stock; par value $1.00;
600,000 shares authorized; 403,734 shares issued and outstanding 404,000
Series C convertible preferred stock; par value $0.001
market value $1.00; 1,015,000 shares authorized;
267,000 shares issued and outstanding 267,000
Common stock; par value $.001 per share; 15,000,000 shares authorized;
10,482,609 shares issued and outstanding 10,000
Additional paid-in capital 20,120,000
Accumulated comprehensive loss (25,000)
Accumulated deficit (3,016,000)
------------
17,760,000
Less: cost of 83,863 shares of common stock in treasury (683,000)
------------
17,077,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,232,000
============
See notes to consolidated financial statements
F-4
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------
2003 2002
------------ ------------
Net sales $ 25,379,000 $ 12,345,000
Cost of sales 6,825,000 3,687,000
------------ ------------
Gross profit 18,554,000 8,658,000
Selling, general and administrative expenses 14,956,000 6,906,000
------------ ------------
Income from continuing operations before other income (expenses) 3,598,000 1,752,000
------------ ------------
Other income (expenses):
Interest and other financing expense, net (150,000) (101,000)
Other income 110,000 47,000
------------ ------------
(40,000) (54,000)
------------ ------------
Net income before (provision) benefit for income taxes 3,558,000 1,698,000
Provision for income tax benefit (expense) (1,148,000) 925,000
------------ ------------
Net income 2,410,000 2,623,000
------------ ------------
Less:
Preferred stock dividend requirement 58,000 218,000
------------ ------------
Net income attributable to common stockholders $ 2,352,000 $ 2,405,000
============ ============
Basic earnings per share $ 0.25 $ 0.36
Diluted earnings per share $ 0.22 $ 0.30
Weighted average shares outstanding - basic 9,305,731 6,722,505
============ ============
- diluted 10,952,367 8,737,292
============ ============
See notes to consolidated financial statements
F-5
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
SERIES B SERIES C
-------- --------
PREFERRED STOCK PREFERRED STOCK
--------------- ---------------
STATED STATED
NUMBER VALUE NUMBER VALUE
OF SHARES AMOUNT OF SHARES AMOUNT
--------- ------ --------- ------
Balance, December 31, 2001 552,757 $553,000 849,000 $849,000
Common Stock Issued
to Employees, directors
consultants & contractors
Options exercised to
Common Stock
Warrants Converted to
Common Stock
Preferred Converted to
Common Stock -31,467 -32,000 -30,000 -30,000
Dividends on Preferred Stock
Preferred Stock issued for cash 102,000 102,000
Preferred Stock issued to employees and consultants 64,000 64,000
Options granted to non-employees
Purchase of Treasury Shares
Dividend resulting from beneficial conversion feature
Net Income
-------- -------- -------- --------
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
======== ======== ======== ========
COMMON STOCK
-----------------------------------------------------------------
PAR VALUE ADDITIONAL ACCUMULATED
NUMBER $0.001 PAID-IN COMPREHENSIVE
OF SHARES AMOUNT CAPITAL LOSS
--------- --------- ---------- -------------
Balance, December 31, 2001
Common Stock Issued 6,564,531 $ 7,000 $ 8,915,000
to Employees, directors
consultants & contractors
Options exercised to 170,000 218,000
Common Stock
Warrants Converted to 222,664 189,000
Common Stock
Preferred Converted to 106,060 35,000
Common Stock
Dividends on Preferred Stock 141,438 62,000
Preferred Stock issued for cash
Preferred Stock issued to employees and consultants
Options granted to non-employees
Purchase of Treasury Shares 69,000
Dividend resulting from beneficial conversion feature
Net Income 125,000
---------- ------- ---------- ----------
Balance, December 31, 2002
Preferred converted to Common Stock 7,204,693 7,000 9,613,000 0
Options exercised to Common Stock 1,671,108 2,000 833,000
Warrants converted to Common Stock 615,714 590,000
Common Stock issued to Directors, Consultants and 288,724 350,000
acquisitions
Common Stock issued for Series "C" Dividend 665,970 1,000 8,717,000
Dividend paid in stock 36,400 18,000
Net Income
---------- ------------ ------------ ----------
Balance, December 31, 2003 -25,000
10,482,609 $ 10,000 $ 20,120,000 ($25,000)
========== ============ ============ ==========
COMMON STOCK
--------------------------------------------------
ACCUMULATED TREASURY
DEFICIT TOTAL STOCK
Balance, December 31, 2001 ----------- ------- ---------
Common Stock Issued
to Employees, directors
consultants & contractors ($ 7,786,000) $ 2,538,000 $ 0
Options exercised to
Common Stock 218,000
Warrants Converted to
Common Stock 189,000 -165,000
Preferred Converted to
Common Stock 35,000
Dividends on Preferred Stock
Preferred Stock issued for cash
Preferred Stock issued to employees and consultants -93,000 -93,000
Options granted to non-employees 102,000
Purchase of Treasury Shares 64,000
Dividend resulting from beneficial conversion feature 69,000
Net Income -2,000
----------- ------------ ----------
Balance, December 31, 2002 -125,000
Preferred converted to Common Stock 2,623,000 2,623,000
Options exercised to Common Stock -5,381,000 5,745,000 -167,000
Warrants converted to Common Stock
Common Stock issued to Directors, Consultants and 590,000 -516,000
acquisitions
Common Stock issued for Series "C" Dividend 350,000
Dividend paid in stock 8,717,000
Net Income 18,000
Balance, December 31, 2003 -45,000 -45,000
2,410,000 2,385,000
----------- ------------ ----------
($ 3,016,000) $ 17,760,000 ($ 683,000)
=========== ============ ==========
See notes to consolidated financial statements
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income .................................................................... $ 2,410,000 $ 2,623,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities from
continuing operations:
Depreciation and amortization ............................................ 677,000 321,000
Realized gain on investment securities ................................... (1,000) --
Common stock issued for services ......................................... 207,000 95,000
Series "C" Preferred issued for services ................................. -- 24,000
Deferred income tax expense (benefit) .................................... 1,138,000
(925,000) Changes in:
Accounts receivable ................................................... (357,000) (1,000)
Inventory ............................................................. (1,729,000) (619,000)
Prepaid expenses and other current assets ............................. (735,000) (173,000)
Deferred compensation ..................................................... (350,000) --
Other assets .......................................................... -- 199,000
Accounts payable and accrued expenses ................................. 488,000 912,000
----------- -----------
Net cash provided by operating activities .......................... 1,748,000 2,456,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of certificates of deposit ......................................... 418,000 319,000
Investment in certificates of deposit ......................................... -- (409,000)
Purchase of investment securities ............................................. (3,982,000) --
Proceeds from sale of property and equipment .................................. -- 4,000
Purchase of building .......................................................... (1,980,000) (3,451,000)
Purchase of intangible assets ................................................. (2,128,000) (505,000)
Purchase of property and equipment ............................................ (1,353,000) (526,000)
----------- -----------
Net cash (used in) investing activities ............................ (9,025,000) (4,568,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series A preferred stock ........................................ (150,000)
Issuance of Common stock ...................................................... 6,722,000 59,000
Issuance of Series C convertible preferred stock .............................. -- 102,000
Repayment of capital lease obligations ........................................ -- (23,000)
Increase (decrease) in credit line (net) ...................................... (36,000) 91,000
Principal repayments of long-term debt ........................................ (346,000) (374,000)
Proceeds from long-term debt .................................................. 2,669,000 3,070,000
Dividends paid on preferred stock ............................................. (45,000) (94,000)
Purchase of treasury shares ................................................... -- (2,000)
----------- -----------
Net cash provided by financing activities .......................... 8,964,000 2,679,000
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS ............................................................. 1,687,000 567,000
Cash and cash equivalents - beginning of the year ................................ 837,000 270,000
----------- -----------
CASH AND CASH EQUIVALENTS -
END OF THE YEAR .............................................................. $ 2,524,000 $ 837,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ................................................................. $ 154,000 $ 90,000
Taxes paid .................................................................... $- $-
See notes to consolidated financial statements
F-7
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------
2003 2002
---- ----
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for services ............................................. $ 207,000 $ 95,000
Conversion of preferred stock B and C to common stock......................... 835,000 20,000
Common stock for intangibles and fixed assets ................................ 1,949,000 --
Preferred stock dividends .................................................... 18,000 --
Options issued to non-employees .............................................. -- 69,000
Warrants issued to preferred stockholders .................................... -- 71,000
See notes to consolidated financial statements
F-8
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE A - BUSINESS
The year of 2003 was one of phenomenal growth for Medifast, Inc. (the
"Company"). The growth accomplished by the Company throughout 2003 is
particularly apparent in the categories such as revenue and pre-tax profit, both
of which were up over 100% from the year-end December 31, 2002. However it is
also necessary to place an emphasis on the growth of particular infrastructure
components, such as the production, order taking and shipping capabilities, that
are the operating platforms which will allow the continuance of these growth
rates in the coming years. The major operations responsible for this growth are
conducted throughout the five wholly owned subsidiaries, Jason Pharmaceuticals,
Inc., Take Shape for Life, Inc., ("TSFL") Jason Enterprises, Inc., Jason
Properties, LLC, and Seven Crondall, LLC.
The Company is engaged in the manufacturing and distribution of
Medifast(R) and Hi-Energy(R) branded and private label weight and disease
management products. These products are sold through various channels of
distribution, to include medical professionals, weight loss clinics, direct
consumer marketing supported via the phone and the web, supported by licensed,
qualified medical practitioners including qualified health advisors. The
processing, formulation, packaging, labeling and advertising of the Company's
products are subject to regulation by one or more federal agencies, including
the Food and Drug Administration, the Federal Trade Commission, the consumer
Product Safety Commission, the United States Department of Agriculture, and the
United States Environmental Protection Agency.
During the year of 2003 the Company significantly improved its
financial outlook. The major factors for this improvement were related to the
the increased revenues and profits generated throughout the year, the
acquisition of assets, and theraising of more than $6.8 million dollars through
a Private Placement initiated through the Company's financial advisor and
placement agent, Merrill Lynch & Company, Inc. The raising of capital provided
the necessary funds to allow the Company to move forward with multiple
strategies that will be the main drivers for the future revenue growth. These
strategies include, but are not limited to the Company's advertising
initiatives, featuring television, print and radio, expansion of their Corporate
Weight and Disease Management Clinics and the dynamic growth of the Take Shape
For Life health network. The capital also allowed the Company to move forward in
building an internal infrastructure that will parallel the substantial growth in
revenues that are expected to occur during the next five years. The following
financial transactions, which occurred throughout 2003, assisted in providing
the financial platform as well as the necessary infrastructure to allow the
Company to execute its plan for exponential and profitable growth in 2004 and
beyond.
On June 11, 2003 Medifast, Inc.'s wholly owned subsidiary Jason
Enterprises, Inc. completed the acquisition of the assets of Consumer Choice
Systems, Inc. ("CCS"). CCS is a retail distribution company focusing on high
quality, innovative products for women, marketed under the Woman's Wellbeing
brand. CCS products are currently distributed in over 18,000 retail outlets
nationwide. The CCS business is supported by a website and toll-free customer
service line where customers can inquire about product information and retail
availability.
F-9
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE A - BUSINESS (CONTINUED)
On July 25, 2003, the Company announced it had sold an aggregate of
550,000 shares of common stock and warrants to purchase 82,500 shares of common
stock (the "PIPE Shares") to Mainfield Enterprises, Inc. and Portside Growth &
Opportunity Fund. The shares of common stock were sold for a cash consideration
of $12.40 per share, or a total of $6,820,000, and the warrants, exercisable for
a period of five years from the date of issuance, at an exercise price of
$16.78, that being equal to one hundred fifteen percent (115%) of the five-day
volume weighted average price (the "PIPE Transaction"), all pursuant to the
terms of that certain Securities Purchase Agreement by and between the Company
and Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund dated as
of July 24, 2003 (the "Securities Purchase Agreement").
On August 4, 2003 Medifast, Inc.'s wholly owned subsidiary Jason
Enterprises, Inc established a Revolving Line of Credit with Wachovia Bank,
National Association of $1 million. The Line of Credit is at Libor plus 2.5%.
The Line of Credit will be used to finance foreign exchange needs related to the
Company's overseas requirements.
On September 12, 2003 Medifast, Inc.'s wholly-owned subsidiary Seven
Crondall Associates, LLC purchased a 119,825 sq. foot distribution facility from
New Roads, Inc. for $2.6 million. The "state of the art" distribution facility,
located on the Maryland eastern shore, has given the Company the capability to
distribute over $200 million of Medifast product sales per year. The Company
financed $1.76 million through Merrill Lynch Capital at the 30 day LIBOR
interest rate plus 220 basis points over seven years.
On November 7, 2003 Medifast, Inc.'s wholly-owned subsidiary Jason
Properties, LLC purchased the assets of Hi-Energy Weight Control Centers, a
national company specializing in weight management programs, with weight loss
centers in over 50 locations. Hi-Energy centers offer a competitive marketing
edge through a regional advertising program, exclusive territories and marketing
support.
On November 7, 2003 Medifast, Inc.'s wholly owned subsidiary Jason
Pharmaceuticals, Inc. increased its Secured Line of Credit with Mercantile Safe
Deposit and Trust of Baltimore, Maryland from $1 million to $5 million. The Line
of Credit is at Libor plus two percent. The increased Line of Credit will be
used to finance capital requirements incurred while building equipment,
inventory and receivables as its business is expected to expand and grow in
2004.
F-10
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the financial
statements are as follows:
[1] PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., Take
Shape For Life, Inc., Seven Crondall Associates, LLC, Jason Properties, LLC and
Jason Enterprises, Inc. All inter-company accounts have been eliminated.
[2] CASH AND CASH EQUIVALENTS:
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with maturity of three months or
less to be cash equivalents. At December 31, 2003, the Company had invested in
four $100,000 certificates of deposit, which are considered cash equivalents.
The Company also invested $465,000 in miscellaneous investments through Merrill
Lynch. These investments are considered cash equivalents due to terms of
maturity.
[3] INVENTORY:
Inventory is stated at the lower of cost or market, utilizing the
first-in, first-out method. The cost of finished goods includes the cost of raw
materials, packaging supplies, direct and indirect labor and other indirect
manufacturing costs.
[4] ADVERTISING:
Advertising costs such as preparation, layout, design and production of
advertising are deferred. They are expensed when the advertisement is first
used, except for the costs of executory contracts, which are amortized as
performance under the contract is received. Advertising costs so deferred were
$295,000 at December 31, 2003. Advertising expense for the years ended December
31, 2003 and 2002 amounted to $2,233,000 and $1,214,000, respectively.
[5] PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. The Company computes depreciation and
amortization using the straight-line method over the estimated useful lives of
the assets acquired as follows:
Building and building improvements 39 years
Equipment and fixtures 3 - 15 years
Vehicles 5 years
The carrying amount of all long-lived assets is evaluated periodically to
determine whether adjustment to the useful life or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long-lived assets and the projected undiscounted cash flows of the
operations in which the long-lived assets are used.
F-11
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] INCOME TAXES:
The Company accounts for income taxes in accordance with the liability
method. Deferred taxes are recognized for temporary differences in the
recognition of income and expenses for financial reporting and income tax
purposes, principally due to net operating loss carryforwards and allowances.
[7] EARNINGS PER COMMON SHARE:
Basic earnings per share is calculated by dividing net profit
attributable to common stockholders by the weighted average number of
outstanding common shares during the year. Basic earnings per share exclude any
dilutive effects of options, warrants and other stock-based compensation, which
are included in diluted earnings per share.
[8] REVENUE:
Revenue from sales is recognized when the product is shipped to
customers or purchased by wholesale customers.
[9] ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
[10] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the consolidated balance sheet for
cash, certificates of deposit, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of the financial instruments.
The Company believes that its indebtedness approximates fair value
based on current yields for debt instruments with similar terms.
[11] CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to credit
risk consist of cash, certificates of deposit, investment securities and trade
receivables. Cash, certificates of deposit and investment securities at December
31, 2003 include amounts deposited with multiple financial institutions that
exceed the federal insurance coverage by $3,862,000. The Company markets its
products primarily to medical professionals, clinics, and Internet medical sales
and has no substantial concentrations of credit risk in its trade receivables.
F-12
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[12] STOCK-BASED COMPENSATION:
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The provisions of
SFAS 123 allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in
Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. The Company has elected to
continue to apply APB 25 in accounting for its employee stock option incentive
plans.
STOCK OPTION PLAN
On October 9, 1993 and as amended in May 1995, the Company adopted a
stock option plan ("Plan") authorizing the grant of incentive and nonincentive
options for an aggregate of 500,000 shares of the Company's common stock to
officers, employees, directors and consultants. Incentive options are to be
granted at fair market value. Options are to be exercisable as determined by the
stock option committee.
In November 1997, June 2002 and July 2003, the Company amended the Plan
by increasing the number of shares of the Company's common stock subject to the
Plan by an aggregate of 200,000 shares, 300,000 shares and 250,000 shares
respectively.
The Company has elected to continue to account for stock option grants
in accordance with APB 25 and related interpretations. Under APB 25, where the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation is recognized.
If compensation expense for the Company's stock-based compensation
plans had been determined consistent with SFAS 123, the Company's net income and
net income per share including pro forma results would have been the amounts
indicated below:
Year Ended December 31,
-----------------------
2003 2002
---- ----
Net income:
As reported $ 2,410,000 $ 2,623,000
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax (403,000) (95,000)
------------- -------------
effects $ 2,007,000 $ 2,528,000
Pro forma Net income per share:
As reported:
Basic $ 0.25 $ 0.36
Diluted $ 0.22 $ 0.30
Pro forma:
Basic $ 0.21 $ 0.34
Diluted $ 0.18 $ 0.29
F-13
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[12] STOCK-BASED COMPENSATION: (CONTINUED)
The pro forma effect on net income may not be representative of the pro
forma effect on net income of future years due to, among other things: (i) the
vesting period of the stock options and the (ii) fair value of additional stock
options in future years.
For the purpose of the above table, the fair value of each option grant
is estimated as of the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
2003 2002
---- ----
Dividend yield ...................... 0.0% 0.0%
Expected volatility ................. 0.40 0.40
Risk-free interest rate ............. 3.00%-3.50 3.00%-5.00%
Expected life in years .............. 1-5 1-5
The weighted average fair value at date of grant for options granted
during the years 2003 and 2002 were $5.32 and $0.36, respectively, using the
above assumptions.
The following summarizes the stock option activity for the years ended
December 31:
2003 2002
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
Outstanding at beginning of year 891,669 $0.69 706,000 $0.36
Options granted 163,500 5.32 340,000 1.14
Options reinstated - 0.00 100,000 1.50
Options exercised (615,714) 1.16 (222,664) 0.85
Options forfeited or expired - 0.00 (31,667) 0.26
------------ -------
Outstanding at end of year 439,455 1.76 891,669 0.69
======= =======
Options exercisable at year end 302,668 0.76 714,994 0.64
======= =======
Options available for grant at end of year 810,545 108,331
======= =======
F-14
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[12] STOCK-BASED COMPENSATION: (CONTINUED)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2003:
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
------ ----------- ---------- ----- ----------- -----
$ 0.25 165,000 1.3 $ 0.25 165,000 $ 0.25
$ 0.32 16,670 2.7 $ 0.32 10,000 $ 0.32
$ 0.50 100,000 1.9 $ 0.50 100,000 $ 0.50
$ 0.65 25,001 3.6 $ 0.65 - $ 0.65
$ 0.80 20,001 3.5 $ 0.80 1,667 $ 0.80
$ 0.86 6,667 3.5 $ 0.86 3,333 $ 0.86
$ 1.23 6,668 3.7 $ 1.23 - $ 1.23
$ 1.26 16,667 3.7 $ 1.26 - $ 1.26
$ 1.60 8,334 3.8 $ 1.60 - $ 1.60
$ 4.80 35,779 4.3 $ 4.80 19,332 $ 4.80
$ 8.26 2,000 4.4 $ 8.26 - $ 8.26
$11.12 16,668 4.4 $11.12 - $11.12
$11.15 20,000 4.5 $11.15 3,333 $11.15
------------------ ---------------
439,455 2.5 $1.71 302,665 $0.76
======= =======
[13] SEGMENT INFORMATION
In 2003 and 2002, the Company's international joint venture
arrangements for distribution of goods in the Asian market were responsible for
the revenue recognition of approximately $2,000,000 and $233,000, respectively.
In 2003, the Company's retail distribution through the division of
Consumer Choice Systems recognized revenue of $730,000.
MEDIFAST, INC. AND SUBSIDIARIES
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
consolidated financial statements. This statement has been considered in the
preparation of the consolidated financial statements.
On July 20, 2000, the Emerging Issues Task Force issued EITF 00-14
"Accounting For Certain Sales Incentives" which establishes accounting and
reporting requirements for sales incentives such as discounts, coupons, rebates
and free products or services. Generally, reductions in or refunds of a selling
price should be classified as a reduction in revenue. For SEC registrants, the
implementation date is the beginning of the fourth quarter after the
registrant's fiscal year end December 15, 1999. EITF 00-14 has been considered
in the preparation of the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances, and is effective during the first quarter of fiscal year 2001.
SAB 101 has been considered in the preparation of the consolidated financial
statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", an amendment of FASB
Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial
Reporting", to require disclosure about those effects in interim financial
information. SFAS 148 is effective for financial statements for fiscal years
ending after December 15, 2002. The Company will continue to account for
stock-based employee compensation using the intrinsic value method of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", but has adopted the
enhanced disclosure requirements of SFAS 148.
F-16
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
[15] INVESTMENTS
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", securities are classified into three categories:
held-to-maturity, available-for-sale and trading. The Company's investments
consist of debt and equity securities classified as available-for-sale
securities. Accordingly, they are carried at fair value in accordance with SFAS
No. 115. Further, SFAS No. 115 the unrealized holding gains and losses for
available-for-sales securities are excluded from earnings and reported, net of
deferred income taxes, as a separate component of stockholders' equity, unless
the loss is classified as other than a temporary decline in market value.
[16] RECLASSIFICATIONS
Certain amounts for the year ended December 31, 2002 have been
reclassified to conform with the presentation of the December 31, 2003 amounts.
The reclassifications have no effect on net income for the year ended December
31, 2002.
NOTE C - INVENTORY
Inventory consists of the following at December 31, 2003:
Raw materials ......................... $ 813,000
Packaging.............................. 694,000
Finished goods ........................ 1,481,000
---------------
$2,988,000
F-17
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2003 consist of the
following:
Land $565,000
Building and building improvements 5,937,000
Equipment and fixtures 2,855,000
Vehicle 20,000
--------------
9,377,000
Less accumulated depreciation and amortization 1,928,000
--------------
Property, plant and equipment - net $ 7,449,000
==============
Substantially all of the Company's property, plant and equipment is
pledged as collateral for various loans (see Note H).
Depreciation expense for the years ended December 31, 2003 and 2002
were $421,000 and $246,000, respectively.
NOTE E - TRADEMARKS
On March 16, 2004, the Company anticipates approval will be issued from
the U.S. Patent and Trademark Office for the patent of the Medifast Diabetic
Nutrition and Weight Loss Drink Composition. The patent number is 6,706,697.
Costs associated with the issuance, which consist of raw materials, salaries,
and consulting fees, amounted to $331,000.
As part of the asset purchase agreement with Consumer Choice Systems,
Inc. the Company purchased intangible assets totaling $500,000. These assets
consisted of the Consumer Choice Systems Customer List, and the Trademarks and
Property Rights to several Consumer Choice Systems products.
As part of the asset purchase agreement with Hi-Energy Weight Control
Centers, the Company purchased intangible assets valued at $1,000,000. These
assets consisted of the Hi Energy Customer List, and the Hi Energy Trademarks.
A summary of Trademarks and Intangibles as of December 31,
2003 is as follows:
Trademarks $ 660,000
Customer Lists 1,100,000
Other Intangibles 2,909,000
-------------
4,669,000
Less accumulated amortization 250,000
-------------
Trademarks and intangibles $ 4,419,000
=============
Amortization expense for the years ended December 31, 2003 and 2002
were $227,000 and $23,000, respectively.
F-18
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at December
31, 2003:
Trade payables $ 969,000
Accrued expenses and other 121,000
Accrued payroll and related taxes 96,000
Sales commissions payable 360,000
Deferred revenue 168,000
------------
Total $ 1,714,000
============
NOTE G - INCOME TAXES
At December 31, 2003, the principal components of the net deferred tax
assets are as follows:
Net operating loss carryforwards $ 290,000
Accounts receivable 32,000
Inventory overhead and write downs 274,000
------------
Total deferred tax assets 596,000
Current benefit 596,000
------------
$ -
============
In 2002, it was determined that the entire net operating loss was
realizable by 2004 and the valuation allowance was eliminated.
A reconciliation of the federal statutory rate to the income tax
expense is as follows:
Year Ended
December 31,
2003 2002
---- ----
Income tax (benefit) based on federal statutory rate $ 973,000 $ 577,000
State and local tax (benefit), net of federal benefit 175,000 111,000
Decrease in valuation allowance -- (1,613,000)
---------- -----------
Income tax benefit (expense) $1,148,000 $ (925,000)
========== ===========
The Company has net operating loss carryforwards of approximately
$750,000 that are available to offset future taxable income. These carryforwards
expire from 2009 to 2019. The Tax Reform Act of 1986 contains provisions that
limit the net operating loss carryforwards available for use should significant
changes in ownership interests occur. The Company may be subject to rules
related to an ownership change which may require the applications of these
limitations.
F-19
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE H - LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt as of December 31, 2003 consists of the following:
$2,850,000 fifteen year term loan secured by the building and land at a
variable rate which was 3.87% at December 31, 2003 $2,581,000
$1,760,000 ten-year reducing revolver line of credit
rate at LIBOR plus 220 bps , which was 3.32% on December 31, 2003 1,740,000
$186,976 three-year term loan secured by 20,000 restricted common shares
variable rate which was 7% at December 31, 2003 151,000
$220,000 two-year term loan secured by equipment at a floating rate
which was 6% at December 31, 2003 73,000
$200,000 five-year term loan secured by equipment
fixed rate was 3% at December 31, 2003 172,000
$100,000 unsecured note payable at a fixed rate of 3%, discounted to an
incremental borrowing rate of 12% 59,000
Note payable over 3 years secured by vehicle at a fixed rate of 12.25% 2,000
$550,000 agreement three years secured by certain assets of the Company 550,000
----------
5,328,000
Less current portion 764,000
----------
$4,564,000
==========
Future principal payments on long-term debt for the next 5 years are as
follows:
2004 ............................... $ 764,000
2005 ............................... 585,000
2006 ............................... 624,000
2007 ............................... 477,000
2008 ............................... 465,000
Thereafter ......................... 2,413,000
----------
$5,328,000
The Company has established a $5 Million revolving line of credit at
the LIBOR rate plus 2% with Mercantile Safe Deposit and Trust Company secured by
substantially all of the assets of Jason Pharmaceuticals, Inc. The outstanding
balance on this line was $55,000 at December 31, 2003.
F-20
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE I - EMPLOYMENT AGREEMENTS
The CEO of Medifast, Inc., Bradley T. MacDonald, has a two-year
employment agreement for an aggregate annual base salary of $225,000 with a
bonus potential of 50% of base salary provided the Company makes its profit plan
per the Board approved forecast. This contract has been extended to December 31,
2005. Due to the inequities of funding a retirement plan in the 401K, and in
recognition of the performance responsible for the turnaround of the Company,
the Board of Directors approved a Selective Executive Retirement Compensation
Plan funded by the form of deferred compensation. The Deferred Compensation Plan
will be funded up to $350,000 by a dollar for dollar match program, having Mr.
MacDonald defer $175,000, followed by a Company match of $175,000. Mr. MacDonald
exercised 100,000 options at $.25 in January 2003 and 15,000 options at $.75 in
March 2003. He has no options remaining available to exercise.
NOTE J - REDEEMABLE PREFERRED STOCK
In August 1996, the Company sold 432,500 shares of Series "A" nonvoting
preferred stock that generated gross proceeds of $865,000, or $2.00 per share.
Each share was entitled to a dividend of 8% ($.16) per share. The shares were
convertible into the Company's common stock on the basis of one share of common
stock for each share of convertible preferred stock. In 2001, 157,000 shares
opted to convert to Series "C" Preferred Convertible Stock and 85,000 shares
were redeemed under the partial settlement and conversion to Series "C"
preferred convertible stock offered to Series "A" preferred stockholders as
approved by the Board of Directors. In 2002 the remaining 75,000 shares were
redeemed.
F-21
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE K - SERIES "B" CONVERTIBLE PREFERRED STOCK
In January 2000, the Company was authorized to issue 600,000 Series "B"
Convertible Preferred Stock ("Preferred Stock B") par value $1.00 per share.
Each share is entitled to a dividend of 10% of liquidation value $1.00 ($.10)
per share and is to be converted on January 15, 2005 unless converted prior
thereto. Each holder of Preferred Series "B" stock is entitled to four votes per
share in all matters in which holders of the Company's common stock are entitled
to vote.
Each share of Preferred Series "B" stock is convertible, at the option
of the holder after one year from the issuance date into common stock of the
Company. The initial conversion price will be 75% of the market value of the
Company's common stock on the day prior to conversion with a maximum conversion
price of $.50 per share subject to adjustment as defined. In March 2002, the
Board amended the Series "B" convertible preferred stock terms and conditions as
follows (1) a dividend of 10% paid in preferred stock, or (2) cash at the option
of the holder. The Board also fixed the conversions of Series "B" preferred at
$0.50 per share in common stock and eliminated the spiral conversion provision
and reduced voting to 2 votes per share.
Throughout the year of 2003, 117,556 shares of Series "B" Convertible
Preferred Stock were converted into 235,112 shares of Common Stock. As of
December 31, 2003 there were 403,734 shares of Series "B" Convertible Preferred
Stock remaining.
NOTE L - SERIES "C" PREFERRED CONVERTIBLE STOCK
In the Fall of 2001, the Company was authorized to issue 1,015,000
shares of Series "C" Preferred Convertible Stock par value (.001), market value
$1.00 per share. Each share is entitled to a dividend of 10% of liquidation
value $1.00 ($.10) per share and is to be converted on December 31, 2006 unless
converted prior thereto. Each Holder of Preferred Series "C" Stock is entitled
to one (1) vote per share in all matters in which holders of the Company's
Common Stock are entitled to vote. Each share of Preferred Series "C" Stock is
convertible, at the option of the holder, after one year from the issuance date
into Common Stock of the Company. The conversion price will be $.50 a share. In
2002, 11,500 warrants issued at $0.35 per share were distributed proportionately
to Series "C' preferred holders.
Throughout the year of 2003, 718,000 shares of Series "C" Preferred
Convertible Stock were converted into 1,436,000 shares of Common Stock. As of
December 31, 2003 there were 267,000 shares of Series "C" Preferred Convertible
Stock remaining.
The beneficial conversion feature for the 166,000 shares of Series "C"
Preferred Convertible Stock issued in 2002, representing the difference between
the conversion price and fair value of the common stock at the date of issuance,
was $125,000. Such amount was treated as a preferred stock dividend for
accounting purposes and reflected in the calculation of the per share results
attributed to common stockholders.
F-22
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE M - WARRANTS
During 2003, the Company issued 200,000 warrants to James Paradis and
Anthony Burrascono, both affiliated with Villanova University and 200,000
warrants to Mr. David Scheffler, an investment banker, for advisory and
consulting services provided to the Company. The warrants vest in five equal
installments of 40,000 warrants per year over a five-year period. These are
five-year warrants to purchase common shares at an exercise price of $4.80 per
share. These warrants may be cancelled, with a 90 day notice, if the consultants
fail to perform to the satisfaction of the company.
During 2003, the Company issued 50,000 warrants to Consumer Choices
Systems, Inc. ("CCS") as part of the payment for the purchase of the assets of
CCS. These warrants are three-year warrants to purchase common shares at an
exercise price of $10.00 per share. Of this amount, 25,000 warrants were
exercised in 2003.
During the year the company issued 63,750 warrants and 18,750 warrants
to Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund. These
warrants are five-year warrants to purchase common shares at exercise prices of
$16.78 per share, which was equal to one hundred fifteen percent (115%) of the
five-day volume weighted average price, all pursuant to the terms of that
certain Securities Purchase Agreement by and between the Company and Mainfield
Enterprises, Inc. and Portside Growth & Opportunity Fund dated as of July 24,
2003.
During 2002, the Company issued 128,524 warrants to holders of Series
"B" Preferred Stock and 11,200 warrants to holders of Series "C" Preferred
stock. These are three year warrants to purchase common shares at exercise
prices of $0.35 per share. These warrants were valued at $71,000.
The fair value of these warrants was estimated using the Black-Scholes
pricing model with the following assumptions: interest rate 3% - 3.5%, dividend
yield 0%, volatility 0.40 and expected life of five years.
The Company has the following warrants outstanding for the purchase of
its common stock:
Year Ended
December 31,
Exercise ------------
Price Expiration Date 2003 2002
----- --------------- ---- ----
$ 0.25 January , 2003 ................ -- 56,000
$ 0.35 August, 2004 .................. 40,100 80,100
$ 0.35 March, 2005 ................... -- 102,724
$ 0.45 September, 2003 ............... -- 30,000
$0.625 September, 2004 ............... 2,500 27,500
$ 1.50 August, 2003 .................. -- 60,000
$ 1.50 April, 2003 ................... -- 60,000
$ 4.80 April, 2008 ................... 400,000 --
$10.00 June, 2006 .................... 25,000 --
$16.78 July, 2008 .................... 82,500 --
------- -------
550,100 416,324
Weighted average exercise price $ 6.49 $ 0.73
======= =======
As of December 31, 2003, 230,100 of the warrants were exercisable.
Additionally, during 2003 there were 263,724 warrants exercised at various
exercise prices.
F-23
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE N - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] The Company, like other manufacturers and distributors of products that are
ingested, faces an inherent risk of exposure to product liability claims in the
event that, among other things, the use of its products results in injury.
NOTE O - LITIGATION
On June 10, 2003, Medifast, Inc. and Jason Pharmaceuticals, Inc. filed
a Complaint for Damages, Injunctive Relief and Determination of Discharge
ability against John A. Sankey in the U.S. Bankruptcy Court for the District of
Alaska. Defendant, who also trades under the name, "Diet -Fast," and who also
owns Wellness Institute of Alaska, Inc., was at one time a distributor of
Medifast products, but the Company terminated the distributorship contract.
Nevertheless, Defendant continued to utilize Medifast trademarks and service
marks in violation of said contract. On December 3, 2003, the parties entered
into an Agreement for Settlement whereby Defendant would cease using all
trademarks and service marks of the Company. The court approved the Settlement
on February 2, 2004.
On August 21, 2002 Food Sciences Corporation, Inc. trading as Robard
Corporation, a competitor of the Company, filed a lawsuit in the U.S. District
Court for the District of New Jersey Camden Vicinage, alleging, among other
things, slanderous and libelous statements made to Plaintiff's customers. The
Company filed a Counterclaim and Third Party Claims against other competitors,
alleging, among other things, business defamation, trademark infringement and
conspiracy. Plaintiff and Defendant both claim damages in excess of $75,000. The
company intends to vigorously defend its reputation of ethical integrity
(integrity of its products and formulas) and its trademarks.
NOTE P - SUBSEQUENT EVENTS
On March 5, 2004 the Company entered into a joint venture agreement
with XL Health, Inc., one of the leading diabetic management companies in the
United States. Medifast, Inc.'s Medifast Plus for Diabetics product line will be
the exclusive nutritional product for XL Health's CMS Medicare Demonstration
Project. The pilot project will use Medifast Plus for Diabetics as the exclusive
nutritional intervention program to prove the cost effectiveness of disease
management programs for Medicare beneficiaries. As part of the joint venture
Mercantile Safe Deposit and Trust Company became the Lender to XL Health for a
one-year Series "A" revolving loan with a maximum principal amount of $1
Million. Medifast, Inc. guaranteed the payment on behalf of XL Health, and
therefore has become the Guarantor of the Loan to Mercantile Safe Deposit and
Trust.
Medifast, Inc. intends to increase the number of licensed and
corporately owned clinics to over 125 nationwide by year-end in 2004. The
Company has acquired over 30 additional Hi-Energy licensed Weight Control
Centers since December 31, 2003. With of over 100 Weight and Disease Control
clinics to date, Medifast, Inc. has become one of the six largest Weight Control
Clinic licensors and operators in the United States.
F-24
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, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this Report below.
Name Title Date
BRADLEY T. MACDONALD Chairman of the Board, March 15, 2004
------------------------------------------- Director, Chief Executive
Bradley T. MacDonald Officer and Chief Financial Officer
SCOTT ZION Director March 15, 2004
------------------------------------------
Scott Zion
/s/ MICHAEL C. MACDONALD Director March 15, 2004
------------------------------------------
Michael C. MacDonald
/s/ MARY T. TRAVIS Director March 15, 2004
------------------------------------------
Mary T. Travis
/s/ REV. DONALD F. REILLY, OSA Director March 15, 2004
------------------------------------------
Rev. Donald F. Reilly, OSA
/s/ MICHAEL J. MCDEVITT Director March 15, 2004
------------------------------------------
Michael J. McDevitt
/s/ JOSEPH D. CALDERONE Director March 15, 2004
------------------------------------------
Joseph D. Calderone
27
CERTIFICATION PURSUANT TO RULE 13-A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Bradley T, MacDonald, certify that:
1. I have reviewed this annual report on Form 10-KSB of Medifast, Inc.
2. Based in my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by the annual report.
3. Based on my knowledge, the financial statements and other financial
information included in the annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report:
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such discloser controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared.
b. Evaluated the effectiveness the registrant's discloser controls
and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
this annual report whether there were significant changes in internal
controls or in other factors that could significantly
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affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 15, 2004
/s/ BRADLEY T. MACDONALD
-------------------------
Bradley T. MacDonald
Chairman and Chief Executive Officer
29
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Medifast, Inc. (the "Company") on Form
10-KSB for the year ended December 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I Bradley T. MacDonald,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of the
operations of the Company.
By: /s/ Bradley T. MacDonald
---------------------------
Bradley T. MacDonald
Chief Financial Officer
March 15, 2004
30