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, 2002
Commission File No. 000-23016
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MEDIFAST, INC.
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(Exact name of small business issuer in its charter)
DELAWARE 13-3714405
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11445 CRONHILL DRIVE, OWINGS MILLS, MD 21117
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(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (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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(Title of Class)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months, and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements 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, 2002 were
$12,345,000.
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, 2002: $5.32.
Number of shares outstanding of registrant's Common Stock, as of December 31,
2002: 7,204,693 shares
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one)
Yes ___ No X
An amended 10-KSB is filed by registrant to include the CEO's Certification
Pursuant to Rule 13-A-14 and 15D-14 of the Securities and Exchange Act of 1934
that was not attached to the original filing. The original filing and content of
the 10-KSB remains unchanged except for the certification.
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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
two of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason") and
Take Shape for Life, Inc. ("TSFL"). 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.
During 2002, with an enthusiastic staff of Medifast(R) professionals, the
Management Team enhanced the value of the Company by generating significant
operating profits and cash flows.
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 a year U.S. Meal Replacement Market:
o The Company's increased advertising in national magazines and
newspapers e.g. Parade, Newsweek, US News & World Report, People,
Readers Digest; and
o The recent launch of the Take Shape for Life, Inc., health network
subsidiary, will provide supervised weight and disease management
and fitness programs to major clinics, corporations, and individuals
increasing the Company's market share.
o The Company's product development program has and will continue to
produce nutritional products positioned to significantly reduce the
incidences and cost of obesity, diabetes, arthritis, appetite
suppression, menopausal symptoms, and coronary disease; and
o Joint ventures, such as the one recently announced with Elken
International of Malaysia for the sales of the Company's Take
Shape(TM)/Dr. Diet weight management products for the Asian Market
will substantially increase revenues and expand the Medifast brand
worldwide.
Management's mission 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 2003:
o Enhancing and expanding its medical practitioner network through a
growing Clinical Affairs department;
o Continuing to develop the Lifestyles physician compliance program
that supports the practitioner's patient base by having his patients
order directly from the Company via the Internet or 800-telephone
number; and
o Expanding the Take Shape for Life Health Network to over twice its
current size through lead generation created by the Company's
marketing and recruiting efforts.
Management significantly improved the balance sheet and the Company's
profitability by retiring its short debt, its Series "A" Preferred stockholders,
purchasing its building and grounds and restructuring the long-term debt on more
favorable terms.
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o On July 26, 2002 Jason Pharmaceuticals purchased Seven Crondall
Associates, a Maryland Limited Liability Corporation, which owns the
assets of the building and grounds of 11445 Cronhill Drive, Owings
Mills, Maryland. The building is an FDA approved manufacturing
facility. Medifast purchased the LLC company for Three Million Four
Hundred Thousand Dollars ($3,400,000). The loan for $2,850,000 has a
15-year maturity and carries an interest rate of LIBOR plus 275
basis points.
o On July 26, 2002 Jason Pharmaceuticals opened a $550,000 revolving
line of credit at the prime rate, with Mercantile-Safe Deposit and
Trust Company.
The purchase of the manufacturing facility and the new revolving credit line
gives the Company the necessary financing to fund its growth and business plan
while securing its future in a state-of the-art food and pharmaceutical grade
manufacturing facility.
o On September 1, 2002 the Company announced the implementation of
Take Shape for Life, Inc., a Delaware Corporation, which is a wholly
owned subsidiary of Medifast, Inc. This is a dynamic health network
and marketing program that is dedicated to providing disease and
weight management solutions through qualified and trained health
advisors and professionals across the United States. Management
anticipates that this program should double in size over the next
twelve to eighteen months given that new physicians and health
advisors are enrolled from the Company's efforts and its database,
which already contains over 15,000 medical professionals. Based on
historical trends, management estimates that approximately 15% of
the physicians and health advisors will be converted into the health
network. This program currently has 40 physicians and 1000 certified
and trained health advisors.
o The Company has recently formed Jason Properties, LLC., a Delaware
Limited Liability Company, which is a wholly owned subsidiary of
Medifast, Inc. Jason Properties, LLC., introduced the implementation
of the MEDSLIM(R)Program, which allows licensing opportunities for
its medically prescribed weight control program. Since 1980, the
Company estimates that over 15,000 physicians nationwide have used
Medifast as a treatment for their overweight patients and that an
estimated 750,000 patients have used its products to lose and
maintain their weight. The new MEDSLIM(R)Program signed up two
functioning clinics during the fourth quarter of 2002. The Company
anticipates that over the next three years at least 100 clinics
across the country will be fully engaged. The program offers a
competitive marketing edge through a regional advertising program
providing exclusive territories, marketing support, and web-based
patient referrals.
o On July 26, 2002 Jason Properties, LLC., a wholly owned subsidiary,
purchased the intellectual property of MEDSLIM trademarks and
licenses, which consists of the licensed MEDSLIM clinics selling
Medifast products. The Company has nine MEDSLIM clinic licenses as
of March 1, 2003.
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o On September 23, 2002 the Company announced a joint venture with
Elegant World SDN BHD (Elken) of Malaysia. The venture calls for
Medifast, Inc., to manufacture its Take Shape(TM)/Dr. Diet weight
management products and programs for the Asian market. Medifast Take
Shape products were selected in a four-year U.S. government National
Institute of Health (Doctor Koop Study) weight management study at
the University of Vermont, and achieved significant weight loss
results. The Company has received significant business for the Take
Shape(TM)/Dr. Diet product and anticipates continuous orders in the
upcoming quarters, supporting their efforts to launch this clinical
weight management product in Asia.
The Company had stockholders equity of $5,578,000 on December 31, 2002 compared
with $2,538,000 at December 31, 2001. The $3,040,000 net increase reflects the
profits during the year from operations, execution of options and warrants, and
sales of additional shares. The Company has sufficient cash flow from operations
to fund its current business plan.
MARKETS
Obesity is a complex, multi-factorial chronic disease and is the second
leading cause of preventable death in the United States. According to the World
Health Organization's 2000 statistics, more than 1 billion individuals are
overweight. The International Obesity Task Force has estimated that 60% of the
U.S. population is overweight, and a 2001 survey by market researcher NPD
Foodworld reported that 63% of U.S. people responding to a survey wanted to lose
20 or more pounds. An estimated 10% of the people are clinically obese (defined
as having 25 to 40 pounds of excess weight), and an additional 15% are morbidly
obese (40 or more pounds of excess weight). Obesity appears to be a contributing
factor to susceptibility to diseases, including some forms of cancer, diabetes,
infertility, liver disease and heart disease.
According to the American Obesity Association, consumers spend about $30
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 U.S. market for meal replacement
products is approximately $26 billion annually, and sports nutrition represents
an additional $500 million or so. Furthermore, the U.S. weight loss and diet
control market increased 6.7% and 4.7% in 2000 and 2001, respectively.
Medifast's current business model incorporates three channels of
distribution, similar to a three-legged stool:
The Medifast Lifestyles Program- This program is a medical support network of
health care professionals that support patients on the Medifast program. Having
the support of a Medifast Lifestyles physician or qualified medical practitioner
increases Medifast success rates and ensures that each individual receives
personalized attention throughout their weight loss program. Since 1980,
management estimates that more than 15,000 physicians nationwide have used
Medifast as a treatment for their overweight patients and that an estimated
750,000 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 qualified medical practitioners
coordinate supervision of the Medifast program with the patient's primary care
physician. They also offer free Medifast program support. These practitioners
are available via telephone or e-mail when patients feel that they need some
extra encouragement or if they have questions or concerns relating to the
Medifast program.
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Take Shape for Life(TM) - On September 1, 2002 the Company announced the
implementation of Take Shape for Life, Inc., a Delaware Corporation and a wholly
owned subsidiary of Medifast, Inc. This program is a comprehensive, medically
supervised virtual clinic designed to assist in long-term weight loss and
disease and lifestyle management featuring Medifast weight and disease
management products.
Program entrants are encouraged to consult with their primary care
physician and Take Shape for Life health advisors for screening purposes. These
advisors are supported, educated and qualified by The Health Institute, a
dedicated training institute staffed by Medifast professionals. These
professionals obtain Medifast qualification based upon a testing of their
knowledge of Medifast and the Medifast product line. They recruit program
entrants and provide them with guidance and Medifast product samples. The number
of certified and trained health advisors presently exceeds 1,000 and management
plans for a very rapid expansion.
Traditional Physicians and Clinics - Many Medifast physicians chose to implement
and support the Medifast program completely within their practice. These
physicians carry an inventory of product and provide appropriate testing,
medical support and patient evaluations. In addition, the Company implemented
the MEDSLIM(R) Program, which allows licensing opportunities for its medically
prescribed weight management program. The program offers a competitive marketing
edge through a regional advertising program, on-site training, exclusive
MEDSLIM(R) territories, marketing support, and web-based patient referrals.
The Company's efforts are directed toward further penetration of the
growing $26 billion meal replacement market. According to a study conducted by
Marketdata Enterprises Inc., approximately 52 million people are on a diet in
the United States. Because obesity and overweight are associated with over 30
major medical conditions, Medifast(R) programs may be tax deductible when
recommended by a qualified medical practitioner for the treatment of an existing
disease. Obesity itself is recognized by the federal government as a treatable
disease.
THE MEDIFAST(R) BRAND
Traditionally, Medifast was a medically supervised weight loss program,
which specialized in multidisciplinary patient education programs using the
highest quality meal replacement supplements. Medifast's core programs and
products have recently expanded over a wellness spectrum to include disease
management and sports performance products. Medifast is particularly focused on
disease management with the launch of Medifast Plus for Diabetics, Medifast Plus
for Women's Health and Medifast Plus for Joint Health. Medifast is also focusing
on clinical sports nutrition with the launch of 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.
Many Medifast Plus for Diabetics patent pending 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 shakes, homestyle chili,
hearty apple cinnamon oatmeal, creamy chicken soup, creamy broccoli soup,
chicken noodle soup, ready-to drink, and two snack bars. Most Medifast products
are heart healthy as approved by the FDA contain at least 6.25 grams of soy
protein per serving.
The Johns Hopkins Bloomberg School of Public's Health Nutrition and Health
Research Clinic is conducting a two-year clinical study to evaluate the efficacy
of the dosage-controlled, engineered food, Medifast Plus for Diabetics compared
to a standard American Diabetes Association (ADA) weight loss treatment program
using whole foods, in terms of changes in weight loss in men and women who
suffer with overweight and type II diabetes. The results are to be presented
showing the cost savings of using the Medifast program.
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In addition, the Company is planning the launch of its cutting edge
adolescent weight management product, Fit!(TM) in 2003. Roughly 13% of children
ages 6 to 11 and 14% of adolescents aged 12-19 were overweight in 1999.
Medifast, Inc., recognizes the danger of this trend and is preparing to enter
the market of nutritional supplements for 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, which offers
gender specific formulas offering protein and 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 very 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 an over-the-counter weight loss product which
is currently being marketed through the internet and select independently owned
pharmacies across the country. In addition, the Company began manufacturing 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. The Company launched two sports nutrition products under
the Take Shape(TM) label in 2002 including 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 2000 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 $750+ million annual
rate. SlimFast(R) products generally have higher caloric and sugar content than
comparative Medifast(R) products.
Weight Watchers International and Jenny Craig, Inc. (privately held) sell
low-calorie, prepackaged meals and preach 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, and it generates significant fees
from those 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.)
The Company has a premier 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 thrives off its philosophy of eat a
nutritional meal or replace it with Medifast. In 2002, Medifast(R) developed
"Heart Healthy" Homestyle Chili, which contains 7.2 grams of soy protein per
serving, the most in its category. Medifast(R) also developed Medifast Plus for
Diabetics, Medifast Plus for Women's Health, Medifast Plus for Joint Health, and
Medifast Plus for Appetite Suppression. These products are formulated with
high-quality, low-calorie, low fat ingredients to provide alternatives to
traditional medicinal 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 Company
has launched Take Shape for Life, Inc., a health network of certified health
advisors and medical professionals who will distribute and medically monitor
Medifast(R) programs. In addition, the Company has formed a strategic joint
venture with Elken International of Maylasia, by which Medifast will manufacture
its Take Shape(TM)/Dr. Diet product for distribution in the Asian market.
The Medifast(R) line includes Medifast(R) 55, Medifast(R) 70, Medifast(R)
Plus for Appetite Suppression, Medifast(R) Take ShapeTM, Medifast(R) Supplement
Bars, Medifast(R) Creamy Soups, Medifast(R) Hot Cocoa, Medifast(R) Apple
Cinnamon Oatmeal, Medifast(R) Pro Tea, 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. Most provide high-quality soy protein and
essential 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.
Management has expanded its product development program across a wellness
spectrum to include specifically tailored disease management products with the
launch of Medifast Plus for Diabetics, Medifast Plus for Joint Health, and
Medifast Plus for Women's Health. The Company has also expanded into the sports
performance arena with two gender specific products, Take Shape(TM) Sports
Nutrition for men and women. It also has reformulated its ever-popular Medifast
Plus for Appetite Suppression to be more effective.
The Company plans to market a variety of non-nutritional, health related
items to supports its weight management business. These products include a blood
pressure monitor, thermometers, a body fat reader and a scale. Many of these
products will be sourced in the Far East. Management is evaluating other
products for possible marketing opportunities, with an eye toward offering
high-quality products at low prices.
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 currently and
subcontracts its production of its Ready-to-Drink products and Supplement Bars.
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NEW PRODUCTS!
Medifast Plus for Appetite Suppression- This is a low calorie, low fat drink mix
containing a variety of vitamins and minerals that is high in calcium and soy
protein. It also contains Super Citrimax(TM) and Medifiber(TM), which are
designed to curb appetite while maintaining consistent weight loss. Super
Citrimax(TM) is a natural product extracted from the dried pericarp rind of
Garcinia Cambogia, a South Asian fruit. It contains a hydroxycitric acid (HCA)
that studies indicate reduces appetite and provides the body with the
biochemical means to help control weight by balancing blood lipid levels and
energy metabolism. Medifiber(TM) is a natural ingredient derived from the skin
and pulp of selected fruit. It has been clinically shown to lower cholesterol
and suppress appetite.
Medifast Plus for Diabetics- This segment of the Medifast product line has been
specially formulated for diabetics. It is a low sugar, low calorie, low fat, low
cholesterol product line that is rich in calcium and iron and an excellent
source of fiber. The products are enriched with 24 essential vitamins and
minerals, are high in soy protein and have a low glycemic index. Many products
wear the Glycemic Research Institute's Seal of Approval and are classified as
diabetic friendly. The line includes chocolate, vanilla and strawberry shakes;
homestyle chili; oatmeal; chicken noodle, cream of broccoli and cream of chicken
soups; and chocolate and peanut butter nutritional bars. The Company has a
patent pending on its line of diabetic shakes.
With an estimated 17 million diabetics in the U.S., the market potential
for this product line appears to be substantial. Furthermore, the line is not
expected to exhibit a seasonal sales pattern, which would help offset the
seasonality of the Company's diet products.
Medifast Plus for Joint Health - This is a specially designed meal-replacement
supplement that is formulated to relieve the symptoms associated with arthritis
and poor joint health. The supplements are formulated with high quality
glucosamine and chondroitin. Glucosamine is a nutrient shown in studies to help
regenerate the cushioning components of joints and other tissues. Studies have
indicated that chondroitin helps draw more moisture into cartilage to provide
support and protection against further destruction of the joint. For optimal
joint health, Medifast Plus for Joint Health should be taken three times a day
as part of an overall Medifast program. It can also be used as a snack or
occasional meal replacement.
Medifast Plus for Women's Health - This is a specially designed meal-replacement
supplement, formulated to relieve and prevent the symptoms of menopause,
including hot flashes, mood swings, night sweats, fatigue, vaginal dryness, loss
of libido, headaches, anxiety and insomnia. This line of shakes is formulated
with the natural herbs black cohosh, chaste tree berry, and echinacea purpurea,
which studies have shown may reduce menopausal symptoms. Medifast Plus for
Women's Health can be taken up to three times per day as part of an overall
Medifast program. It can also be used as a snack or occasional meal replacement.
Clinical Sports Nutrition - The Company markets Take Shape(TM) Pro Drinks for
enhanced fitness and performance by particularly active individuals. The drinks
are formulated with high-quality protein, added BCAAs, antioxidants, chromium
glutamine, canitine and more. These drinks are recommended as meal replacements
or as snacks before, after or between workouts.
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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 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 has created a Clinical Affairs division led by a team of
seasoned sales professionals. The department is responsible for prospecting
larger accounts, clinics, hospitals, and HMOs and has been instrumental in the
development of the clinic-licensing program, MEDSLIM(R). In addition, the
department pursues new physicians and clinics and supports the existing
practitioner base.
The marketing department is staffed by a highly educated dynamic team of
professionals who work closely with medical and technical staff in the
development of cutting edge support materials, advertising and internet
marketing strategies and management of intellectual properties, patents, and
clinical distributors. In addition, the team works with medical and technical
staff in the development of product packaging, product labeling, creative
initiatives and website development. The marketing department develops
campaigns, materials and strategies for all subsidiaries of Medifast, Inc.
ADVERTISING AND PROMOTION
The Company launched an updated website in 2002 which provides consumers
with advanced information regarding the Medifast program and an online database
of participating Medifast practitioners. In addition, customers may receive
discounts using promotional codes from advertising. The website now offers an
extensive product FAQ, company history, information for investors, customer
order histories and overall ease of use for consumers. The Company will continue
to make improvements to its website and will specialize its site to offer more
specific information and easier ordering capabilities as it continues to develop
products in new categories.
The primary advertising medium used to attract customers to its teleweb
operation will continue to be print magazines e.g. Parade and Newsweek. The
Company will place increased emphasis in 2003 on integrated advertising, public
relations and investor relations strategies. The Company will continue to expand
its advertising efforts as sales and marketing spending will grow dramatically
in 2003. The Company also plans to move beyond print publications into radio and
local cable television. 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. The
Company is developing a comprehensive advertising and promotional campaign that
will feature Mr. Vitale, as the Medifast spokesperson to encourage American's to
lose weight and get in shape. The campaign's theme will be "You Lose and You Win
with Medifast."
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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 2002. The Company is
planning to increase its exposure in the clinical market by attending a broader
variety of 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.
MANUFACTURING
Jason Pharmaceuticals, Inc., the Company's wholly owned manufacturing
subsidiary, produces most 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 outsources its
bars and ready-to-drink products, but plans to add an internal production line
for bars and soups in 2003. The capital expenditure required for this addition
is estimated to be $400,000.
The plant has the capability for much higher production output without
substantial capital expenditure. It is presently operating on only a single
shift. Adding one additional shift would enable the Company to produce enough
product to generate over $50 million in sales if needed in 2003.
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
cGMP 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.
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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 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, 2002, the Company employed 55 people, of whom 20 were
engaged in manufacturing, and 35 in marketing, administrative and corporate
support functions. None of the employees are subject to a collective bargaining
agreement with the Company.
12
ITEM 2. DESCRIPTION OF PROPERTY
In 2002, the Company purchased a 49,000 square-foot facility in Owings
Mills, Maryland for its manufacturing, warehousing and distribution. The Company
leases a 3,600 square foot facility in Owings Mills, Maryland, through the year
2003 for additional storage and distribution purposes. The Company's outlet
retail store was moved to Owings Mills, Maryland in December 1998 with a
five-year lease that expires in March 2004. The leases require the Company to
bear, in addition to the basic rent, the costs of insurance, tax and certain
maintenance costs. The store is currently being subleased to a mortgage-banking
firm. The Company closed the store in 2001.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in a lawsuit with its competitor Robards, Inc.
/ Food Sciences Corporation, Inc. pertaining to what Robards, Inc. / Food
Sciences Corporation alleged were slanderous and untrue statements made to its
customers. The Company filed a Counterclaim and Third Party Claim, alleging
conspiracy to damage the Company's business and trademarks, trademark
infringement, violations of the Millennium Copyright Act, business defamation,
as well as other claims. Robards and Medifast both claim damages in excess of
$75,000. The Company also claims that selected third party defendants also
conspired to damage the reputation and quality of the Medifast brand. 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 June 6, 2002 at
Villanova University in Villanova, PA. The Shareholders (82% voted in favor)
elected the following slate of Directors: Mr. Bradley T. MacDonald, Rev. Donald
F. Reilly, O.S.A., Mr. Michael C. MacDonald, Mr. Scott Zion and Mr. David
Scheffler. The shareholders approved the reappointment of Wooden & Benson,
Chartered, as the Company's independent auditors for the fiscal year ending
December 31, 2002.
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
seven hundred thousand (700,000) to 1 million (1,000,000) 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.
The Directors authorized the Company to purchase the building at 11445
Cronhill Drive, Owings Mills, Maryland for 3.4 million dollars and directed the
CEO to arrange financing on favorable terms to close the transaction in 60 days.
13
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 2002 and 2001:
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
2001
-----------------
Low High
----- ------
Quarter ended March 31, 2001 ................. .16 .44
Quarter ended June 30, 2001 .................. .27 .45
Quarter ended September 30, 2001 ............. .17 .40
Quarter ended December 31, 2001 .............. .15 .33
(b) The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
(c) There were 1100 beneficial holders of the Company's Common Stock, as
of November 4, 2002.
(d) No dividends on common stock were declared by the Company during 2002
or 2001.
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.
14
2002 COMPARISON WITH 2001
OPERATING
Consolidated net sales for 2002 were $12,345,000 as compared to 2001 sales
of $5,022,000, an increase of $7,323,000, or 146%. 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 and (c.) the Take
Shape for Life health network sales.
Gross margins increased to 70% in 2002 from 56% in 2001, 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 $6,906,000 for 2002 were $4,840,000 more than the $2,066,000
in 2001, 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 costs.
In 2002, the Company realized a tax benefit of $925,000 as a result of
previous net loss carryforward.
Interest expense decreased by $139,000 due to the Company's decreased
borrowings.
A preferred stock dividend in the amount of $93,000 was accrued to
shareholders in 2002.
The Company experienced income from operations for the year 2002 of
$1,752,000. This compares with income from operations of $745,000 in 2001, an
increase of 135%. The profit from operations is attributed to the increased
sales to physicians and clinics, the successful launch of TSFL, increased
national advertising, 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.
The successful implementation of the Medifast(R) strategic plan to focus
only on the clinical weight management business while leveraging a new digital
network tied into the Internet propelled the Company into a new profitable
business model. The Medifast, Inc. name change two years ago was more substance
than formality since it signified the Company's focus on its branded clinical
weight management business. The new business model has brought back many medical
practitioners and patients and has the capability to build profitable revenues
with a stable customer base.
LIQUIDITY AND CAPITAL RESOURCES
On July 26, 2002 Jason Pharmaceuticals purchased Seven Crondall
Associates, a Maryland Limited Liability Company which owns the assets of the
building and grounds of 11445 Cronhill Drive, Owings Mills, Maryland. The
building is an FDA approved manufacturing facility. Medifast purchased the LLC
for Three Million Four Hundred Thousand Dollars ($3,400,000). The mortgage loan
for $2,850,000 has a 15-year maturity and carries an interest rate of LIBOR plus
275 basis points.
On July 26, 2002 Jason Pharmaceuticals opened a $550,000 revolving line of
credit at the Prime rate, with Mercantile-Safe Deposit and Trust Company.
15
The purchase of the manufacturing facility and the new revolving credit line
gives the Company the necessary financing to fund its growth and business plan
while securing its future in a state of the art food and pharmaceutical grade
manufacturing facility.
On September 1, 2002, the Company announced the implementation of Take
Shape for Life, Inc., a Delaware Corporation, which is a wholly owned subsidiary
of Medifast, Inc. This is a dynamic health network and marketing program that is
dedicated to providing disease and weight management solutions through qualified
and trained health advisors and professionals across the United States.
Management anticipates that this program should double in size over the next
twelve to eighteen months given that new physicians and health advisors are
enrolled from the Company's efforts and its database, which already contains
over 15,000 medical professionals. Based on historical trends, management
estimates that approximately 15% of the physicians and health advisors will be
converted into the health network. This program currently has 40 physicians and
1000 certified and trained health advisors. An Executive Team of experienced
professionals are tasked with leading this dynamic sales and marketing
organization.
The Company has recently formed Jason Properties, LLC, a Delaware Limited
Liability Company which is a wholly owned subsidiary of Medifast, Inc. Jason
Properties, LLC., introduced the implementation of the MEDSLIM(R) Program, which
allows licensing opportunities for its medically prescribed weight control
program. Since 1980, the Company estimates that over 15,000 physicians
nationwide have used Medifast as a treatment for their overweight patients and
that an estimated 750,000 patients have used its products to lose and maintain
their weight. The new MEDSLIM(R) Program has signed up two functioning clinics
during the fourth quarter of 2002. The Company anticipates that over the next
three years at least 100 clinics across the country will be fully engaged. The
program offers a competitive marketing edge through a regional advertising
program providing exclusive territories, marketing support, and web-based
patient referrals.
Founded in January 2003, Jason Enterprises, Inc., a Texas Corporation and
wholly owned subsidiary, owns the intellectual property of the Company, which
consists of the Medifast, Inc., Trademarks and Patents. This subsidiary will
also import health related items from the Far East to support its weight
management business and act as a domestic and international sales and marketing
agent for Medifast, Inc.
On September 23, 2002, the Company announced a joint venture with Elegant
World SDN BHD (Elken) of Malaysia. The venture calls for Medifast, Inc. to
manufacture its Take Shape(TM)/Dr. Diet weight management products and programs
for the Asian market. Medifast Take Shape products were selected in the
four-year U.S. government National Institute of Health (Doctor Koop Study)
weight management study at the University of Vermont, and achieved significant
weight loss results. The Company has received large orders for the Take Shape(R)
product and anticipates continuous orders in the upcoming quarters, supporting
their efforts to launch this clinical product in Asia. It is anticipated that
this business will exceed $2 million in 2003.
In the Fall of 2001, the Company was authorized to issue 1,000,000 shares
of Series "C" Preferred Convertible Stock par value ($.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. The
Company issued $93,000 in dividends for Series "C" in 2002.
16
In January 2000, The Company issued 552,757 shares of series "B"
convertible preferred stock at $1.00 per share convertible at 75% of the market
value of the stock or a maximum of $0.50 per share. This venture capital funding
by "D.S. Capital Investors" provided the "turn around" capital to keep the
Company from filing bankruptcy allowing it to pay its obligations after
divesting its losing subsidiaries. In March 2002, prior to his election to the
Board, the Company authorized the issuance of 44,000 shares of Series "C"
convertible preferred for investment advisory services related to the Series "B"
and Series "C" preferred to Mr. David Scheffler. In addition, the Company issued
100,000 options priced at $.50 to restructure the Company's balance sheet and
provide consulting services in changing the terms of Series "B" stock by
removing the "Spiral Preferred" provision and reducing the voting shares to 2
votes per share held, which was perceived to be a negative by new investors. The
Company issued 128,524 warrants at $0.35 to the Series "B" shareholders for the
agreement to change the terms and conditions of the offering that was more
favorable to the Company.
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 for diet control products and services. January and February
generally show increases in sales.
INFLATION
To date, inflation has not had a material effect on the Company's
business.
INFORMATION SYSTEMS INFRASTRUCTURE
The Company has installed major hardware and software data communications
equipment and services including new accounting and customer service interfaces
at a cost exceeding $300,000 in 2002 to support its new business model. The
Company has also enhanced its network capability and security systems. Computer
hardware and software and data communications hardware and software were
financed by an equipment lease. Xerox installed the latest digital printing
equipment allowing the Company to not only tailor and customize materials, but
also enhance its direct mail initiatives to its diverse medical practitioner
base and direct customers saving the Company over $300,000 in custom printing
costs.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-20.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
None
17
PART III
ITEM 9. 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 ....... 55 Chairman of the Board, 1996
Chief Executive Officer
and Director
Donald F. Reilly ........... 55 Director 1998
David Scheffler ............ 33 Director 2002
Michael C. MacDonald ....... 49 Director 1998
Scott Zion ................. 52 Director 1999
Michael J. McDevitt ........ 54 Director 2002
Mary T. Travis ............. 51 Director 2002
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 also
serves on the Board of Directors of the Wireless Accessories Group (OTCBB:
WIRX).
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 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
18
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.
DAVID SCHEFFLER, currently serves as a Principal and Registered
Representative of JPR Capital in New York. Mr. Scheffler has over ten years
experience in the financial service industry including over seven years in the
origination and distribution of private equity financing. Mr. Scheffler provides
technical, operational, and financial consultant services to high net worth
individuals and corporate clientele. A graduate of Temple University with a BA
in Finance, Mr. Scheffler has been working in the investment community since the
summer of 1991. He is Series 63 and 24 licensed. Mr. Scheffler has been involved
with the company since 1993 when it went public and was instrumental in
providing capital for the 1999 restructuring and liquidation of assets that led
to profitable operations.
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. He was also employed by Pilkington Barnes Hind, a
worldwide contact lens company, as Head of North American Sales and Marketing.
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, was named a director of Medifast in June 2002. Mr.
McDevitt 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, was named a director of Medifast in September 2002. She 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.
19
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information as to the compensation of the
Chief Executive Officer of the Company and each other executive officer who
received compensation in excess of $100,000 for 2002, 2001, and 2000.
Annual Compensation
-------------------
Value of Common/
Salary Bonus Preferred Stock Issued Option Other Annual
Name Year ($) ($) in Lieu of Cash Awards Compensation
---- ---- --- --- --------------- ------ ------------
Bradley T. MacDonald 2002 145,000 75,000 0 100,000(1) 0
Chairman of the Board 2001 135,371 (0) $20,000(2) 0 0
& CEO 2000 125,000 (0) $ 1,000(3) 100,000 0
----------
(1) The Board of Directors reinstated 100,000 options at $1.50 per share
granted in 1997 and not exercised. Mr. MacDonald exercised those options
in December 2002 per the Board's direction.
(2) Mr. MacDonald was issued 20,000 shares of restricted Series "C" Preferred
Convertible Stock as part of compensation related to restructuring and
raising new capital.
(3) The Board of Directors granted Mr. MacDonald and his family 1,000,000
shares of stock at par value ($.001) for providing a personal guarantee
for the financial package of almost $850,000, which was the capital
responsible for returning the Company to profitability. The stock issued
was part of the personal guarantee of the MacDonald family as collateral
for the Jason Pharmaceuticals Inc. loans. Mercantile Safe Deposit and
Trust held common stock as collateral in addition to other personal
assets.
STOCK OPTIONS
The Company's 1993 Employee Stock Option Plan (the "Plan"), as amended in
July 1995, December 1997 and again in June 2002, authorizes the issuance of
options for 1,000,000 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,
2002 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 2002, and a list of aggregated options and the value of these
options, is provided.
ALL
CURRENT
ALL CURRENT ALL CURRENT
EXECUTIVE INDEPENDENT
BRADLEY T. OFFICERS DIRECTORS
MACDONALD(1) AS A GROUP AS A GROUP
------------ ---------- ----------
Options granted ...................... 215,000 90,000 200,000
Average exercise price ............... $ 0.86 $ 0.56 $ 0.60
Options exercised .................... 120,000 * 10,000
Average exercise price .............. $ 1.29 * $ 0.25
Shares sold .......................... * * *
Options unexercised as of 12/31/02 ... 95,000 90,000 190,000
(1) 100,000 options issued at $1.50 per share in 1997 were reinstated after
shareholders increased authorized options to 1,000,000 shares provided they were
exercised by 12/31/02.
20
Approximate 5YR Value of
FY 02 Grants@ Potential Realizable Unexercised Unexercised
Price & Expiration Value at 10% Annual Options Options
Month/Year Stock Appreciation as of 12/31/02 as of 12/31/02
Bradley T. MacDonald, Chairman 95,000 474,150
Rev. Donald Reilly, Director 50,000 223,500
Scott Zion, Director 50,000 238,500
Michael C. MacDonald, Director 40,000 187,800
Kristina DeSantis, Director 20,000 101,400
Silver & Silver 35,000 177,450
Steve & Susan Rade 150,000 760,500
David Scheffler, Consultant 100,000 482,000
Sarah Clarke, Employee 3,333@$0.32 1/02 $0.52
Margaret MacDonald, Employee 20,000@$0.32 1/02 $0.52 20,000 100,000
Joseph DiBartolomeo, Employee 50,000@$0.65 7/02 $1.05 50,000 233,500
Kellie Hudson, Employee 25,000@$0.65 7/02 $1.05 25,000 116,750
Erin Erwood, Employee 5,000@$0.86 7/02 $1.39 5,000 22,300
Casey Seward, Employee 5,000@$0.86 7/02 $1.39 5,000 22,300
Michael McDevitt, Employee 20,000@$0.80 7/02 $1.29 20,000 90,400
Richard Law, Employee 20,000@$0.80 7/02 $1.29 40,000 190,400
Jaime Hershner, Employee 10,000@$0.80 7/02 $1.29 10,001 46,805
Shannon Wynne, Employee 5,000@$0.80 7/02 $1.29 6,668 31,740
Richard Logsdail, Employee 50,000@$1.26 9/02 $2.03 50,000 203,000
Dan Bell, Employee 25,000@$1.60 9/02 $2.58 25,000 93,000
Melissa Clark, Employee 10,000@$1.23 9/02 $1.98 10,000 40,900
Don Boysen, Employee 10,000@$1.23 9/02 $1.98 10,000 40,900
Dick Vitale, Consultant 75,000@$2.00 11/02 $3.22 75,000 249,000
------- ---------
891,669* 4,126,295
*Vested options granted are below. 1,000,000 authorized.
The following table provides information as to the value of the
unexercised options held by the persons named in the Summary Compensation Table
who are optionholders as of December 31, 2002 measured in terms of the closing
bid price of the Company's Common Stock on such date:
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
OPTIONS AS OF 12/31/02 OPTIONS ON 12/31/02
EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
-------------------------- --------------------------
Bradley T. MacDonald(1) 95,000/0 $474,150/0
----------
*On December 31, 2002 the closing price was $5.32 on the American Stock
Exchange.
(1) Mr. MacDonald exercised 100,000 options @1.50 on 12/27/02.
21
Nutraceutical Group Industry Comparison of Stock Prices
December 31, 2002 December 31, 2001 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED) ..................................................... $5.32 $ .22 5.10 2318.2%
Natural Alternatives International, Inc. (NAII) .................... 3.98 2.25 1.73 76.8%
Weider Nutrition (WNI) ............................................. 1.45 1.68 (.23) (13.7)%
Pure World, Inc (PURW) ............................................. .51 .85 (.34) (40.0)%
Twinlab Corporation (TWLB) ......................................... .10 1.35 (1.25) (92.6)%
Natures Sunshine Products, Inc. (NATR) ............................. 9.71 11.74 (2.03) (17.3)%
December 31, 2002 December 31, 1999 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED) ..................................................... $5.32 $ .22 5.10 2318.2%
Natural Alternatives International, Inc. (NAII) .................... 3.98 3.25 .73 22.5%
Weider Nutrition (WNI) ............................................. 1.45 3.69 (2.24) (60.7)%
Pure World, Inc (PURW) ............................................. .51 3.12 (2.61) (83.7)%
Twinlab Corporation (TWLB) ......................................... .10 7.94 (7.84) (98.7)%
Natures Sunshine Products, Inc. (NATR) ............................. 9.71 8.00 1.71 21.3%
Pharmaceutical Group Industry Comparison of Stock Prices
December 31, 2002 December 31, 2001 $ %
Company Stock Price Stock Price Change Change
------- ----------------- ----------------- ------ ------
Medifast (MED)...................................................... $ 5.32 $ .22 5.10 2318.2%
Abbott Labs (ABT)................................................... 40.00 55.75 (15.75) (28.3)%
Unilever (UL)....................................................... 38.25 33.27 4.98 15.0%
Novartis (NVS)...................................................... 36.73 36.50 .23 0.63%
Bristol Myers Squibb (BMY).......................................... 23.15 51.00 (27.85) (55.0)%
Index Comparison
$100 invested in 1999 would return:
1999 2002
---- ----
Nutraceutical Group Index............. $100 $ 80
Medifast.............................. $100 $ 2,431
S&P 500............................... $100 $ 71
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 $3,850 in Director's fees and/or expenses in 2002.
See "Executive Compensation - Stock Options" for stock options granted under the
1993 Plan to the Directors. The Company authorized a stock grant under rule 144
of 10,000 shares to Michael J. McDevitt, Director, Chairman of the Audit
Committee; 10,000 shares to David Scheffler, Director; and 5,000 shares to Mary
Travis, Director appointed prior to the AMEX listing in November 2002.
22
ITEM 11. 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,
2002 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, 2002 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 .................. 1,766,050(1) 25.00%
Donald F. Reilly ...................... 60,000(2) 0.80%
Michael C. MacDonald .................. 60,000(2) 0.80%
Scott Zion ............................ 260,000(2) 3.60%
David Scheffler ....................... 164,000(2)(3) 2.25%
Mary Travis ........................... 5,000(2) 0.06%
Michael J. McDevitt ................... 11,400(2) 0.16%
Executive Officers and
Directors as a group (8 persons) .... 2,111,000 39.92%
* The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills,
Maryland 21117
(1) Mr. MacDonald beneficially owns 1,676,050 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 1,208,402 shares of stock.
(2) Independent directors were issued 25,000 shares of common stock as
compensation for their participation as Board Members in 2002.
(3) David Scheffler was an investment banker for three high net worth
individuals who wish to remain anonymous and but called themselves D.S.
Capital Investors prior to his election to the Board. He received 44,000
shares of Series "C" stock and 100,000 options at $0.50 a share for
investment advisory services to the Company while redeeming 36,000 shares
of Series "B" preferred stock previously earned.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2002, the Company leased the latest digital printing equipment from
Xerox, Inc. Michael MacDonald, a Director of Medifast, Inc., is currently the
President of the North American Solutions Group of Xerox however, the division
that sells and services their Xerox equipment does not report to M. MacDonald.
The Xerox equipment, leased on favorable terms, has saved the Company an excess
of $300,000 on printing expense based on Jason Pharmaceuticals historical
printing costs since 1990.
Kristina DeSantis, was elected to the Board in 2001 by proxy. After her
election and prior to the June 2002 election, David Scheffler married Ms.
DeSantis and accordingly during the 2002 stockholders meeting, Mr. Scheffler was
nominated, elected and replaced Ms. DeSantis.
Margaret E. MacDonald, the daughter of the CEO, is the Vice President of
Administration for Jason Pharmaceuticals, Inc., and is not an executive officer
of the parent, Medifast, Inc.
23
RECENT DEVELOPMENTS
On September 1, 2002, the Company announced the implementation of Take
Shape for Life, Inc., a Delaware Corporation and a wholly owned subsidiary of
Medifast, Inc. This program is a comprehensive, medically supervised program
(www.takeshapeforlife.com) designed to assist in long-term weight loss and
disease and lifestyle management featuring Medifast weight-loss and disease
management products. Program entrants are encouraged to consult with Take Shape
for Life health advisors who are key to the program. These advisors are
supported, educated and qualifies by The Health Institute, a dedicated training
institute staffed by Medifast professionals. These professionals obtain Medifast
qualification and certification based upon a testing of their knowledge of
Medifast and the Medifast product line. Further certification and training is
also offered through the Health Institute on areas such as nutrition, fitness
and behavior modification. Health advisors recruit program entrants and provide
them with guidance and samples of Medifast products. The number of certified and
trained health advisors presently exceeds 1000, and management plans for a very
rapid expansion.
On November 1, 2002, management announced that coach and celebrity
sportscaster Dick Vitale joined the Company to assist in promoting a healthy
lifestyle using Medifast weight and disease management and clinical sports
nutrition products. Mr. Vitale will participate in a comprehensive, three-year
advertising and promotional campaign, in which he will encourage Americans to
lose weight and get in shape using Medifast medical meal replacement products.
Management plans to use national print, radio and television advertising. During
the first quarter of 2003, Medifast will deliver over 820 million consumer
impressions through a national print and network radio advertising campaign
featuring Coach Dick Vitale. Look for Medifast ads in a variety of national
publications including Parade Magazine, Today's Health and Wellness, Modern
Maturity, and over the airwaves of CBS radio during the NCAA's March Madness.
The ads are offering $25.00 coupons as incentives to join the Medifast program.
On January 2, 2003 Jason Enterprises, Inc., a wholly owned subsidiary of
Medifast, Inc., and Health Care Products, a division of Hi Tech Pharmacal,
signed a joint venture and distribution agreement to develop and produce retail
diabetic meal replacement products for their extensive quality line of Diabetic
products under the DiabetiTrim(TM) brand. Health Care Products is a leading
manufacturer and marketer of OTC, HBA, and nutritional products for people with
diabetes.
24
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
The Company filed two (2) reports on Form 8-K during 2002 as follows:
June 7, 2002, to report shareholder meeting on June 6, 2002.
July 26, 2002, to report the purchase of Seven Crondall Associates.
25
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)
/s/ BRADLEY T. MACDONALD
------------------------
Bradley T. MacDonald
Chairman & CEO
Dated: March 8, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ BRADLEY T. MACDONALD Chairman of the Board, March 8, 2002
------------------------------ Director, Chief Executive
Bradley T. MacDonald Officer and Chief Financial
Officer
/s/ DAVID SCHEFFLER Director March 8, 2002
------------------------------
David Scheffler
/s/ MICHAEL C. MACDONALD Director March 8, 2002
------------------------------
Michael C. MacDonald
/s/ SCOTT ZION Director March 8, 2002
------------------------------
Scott Zion
/s/ REV. DONALD F. REILLY, OSA Director March 8, 2002
------------------------------
Rev. Donald F. Reilly, OSA
/s/ MICHAEL J. MCDEVITT Director March 8, 2002
------------------------------
Michael McDevitt
/s/ MARY TRAVIS Director March 8, 2002
------------------------------
Mary Travis
26
CERTIFICATION PURSUANT TO RULE 13-A-14 AND 15D-14 OF
THE SECURITIES AND ECHANGE 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
27
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: March 7, 2003
/s/ BRADLEY T. MACDONALD
------------------------------------
Bradley T. MacDonald
Chairman and Chief Executive Officer
28
MEDIFAST, INC. AND ITS SUBSIDIARIES
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent auditors' report ............................................. F-2
Balance sheet as of December 31, 2002 .................................... F-3
Statements of operations for the years ended
December 31, 2002 and 2001 ............................................. F-4
Statements of changes in stockholders' equity for the years
ended December 31, 2002 and 2001 ....................................... F-5
Statements of cash flows for the years ended
December 31, 2002 and 2001 ............................................. F-6
Notes to financial statements ............................................ F-8
F-1
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, 2002, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 2002 and 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medifast, Inc. and subsidiaries as of December 31, 2002, and the consolidated
results of their operations and their consolidated cash flows for the years
ended December 31, 2002 and 2001 in conformity with accounting principles
generally accepted in the United States of America.
Wooden & Benson
Baltimore, Maryland
March 4, 2003
F-2
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets:
Cash $ 837,000
Certificates of deposit 418,000
Accounts receivable - net of allowance for doubtful accounts of $55,000 284,000
Inventory 1,259,000
Prepaid expenses and other current assets 249,000
Deferred tax asset 1,079,000
-----------
Total current assets 4,126,000
Property, plant and equipment - net 4,498,000
Trademarks and intangibles 608,000
Other assets 1,000
Deferred tax asset 655,000
-----------
Total assets $ 9,888,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 1,189,000
Dividends payable 25,000
Line of credit 91,000
Current maturities of long term debt 304,000
-----------
Total current liabilities 1,609,000
Long term debt less short-term position 2,701,000
-----------
Total liabilities 4,310,000
Stockholder's Equity:
Series B convertible preferred stock; stated value $1.00;
600,000 shares authorized; 521,290 shares issued and outstanding 521,000
Series C convertible preferred stock; stated value $1.00; 1,015,000 shares
authorized; 985,000 shares issued and outstanding 985,000
Common stock; par value $.001 per share; 15,000,000 shares authorized;
7,204,693 shares issued and outstanding 7,000
Additional paid-in capital 9,613,000
Accumulated deficit (5,381,000)
-----------
5,745,000
Less: Cost of 30,178 shares of common stock in treasury (167,000)
-----------
5,578,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,888,000
===========
See notes to financial statements
F-3
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
---- ----
Net sales $12,345,000 $5,022,000
Cost of sales 3,687,000 2,211,000
----------- ----------
Gross profit 8,658,000 2,811,000
Selling, general and administrative expenses 6,906,000 2,066,000
----------- ----------
Income from continuing operations before other income (expenses) 1,752,000 745,000
----------- ----------
Other income (expenses):
Interest and other financing expense, net (101,000) (240,000)
Other income 47,000 61,000
----------- ----------
(54,000) (179,000)
Net income before provision for income taxes 1,698,000 566,000
Provision for income tax benefit 925,000 22,000
----------- ----------
Net income/comprehensive income 2,623,000 588,000
----------- ----------
Less:
Preferred Stock dividend requirement 218,000 52,000
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock 0 10,000
----------- ----------
218,000 62,000
----------- ----------
Net income attributable to common stockholders $ 2,405,000 $ 526,000
=========== ==========
Basic earnings per share $0.36 $0.08
Diluted earnings per share $0.30 $0.07
Weighted average shares outstanding - basic 6,722,505 6,524,969
=========== ==========
- diluted 8,737,292 8,069,646
=========== ==========
See notes to financial statements
F-4
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series B
-------- Series C
Preferred Stock Preferred Stock Common Stock
Par
Number Stated Number Stated Value Additional
of Value of Value Number $.001 Paid-In Accumulated
Shares Amount Shares Amount of Shares Amount Capital Deficit
------ ------ ------ ------ --------- ------ ------- -------
Balance, December 31, 2000 552,757 $553,000 0 $0 6,524,531 $7,000 $8,972,000 ($8,322,000)
Common Stock issued to
employees and directors 40,000 9,000
Issuance of Series C
Convertible Preferred
Stock 849,000 849,000 (56,000)
Dividend on Preferred
Stock (52,000)
Accretion of
difference
between
carrying amount and
redemption
amount of redeemable
preferred
stock (10,000)
Net income 588,000
------- -------- ------- ------- --------- ------- ---------- -----------
Balance, December 31, 2002 552,757 553,000 849,000 849,000 6,564,531 7,000 8,915,000 (7,786,000)
Common Stock issued to
Employees, directors,
consultants and
contractors 170,000 218,000
Options exercised to
Common Stock 222,664 189,000
Warrants Converted to
Common Stock 106,060 35,000
Preferred Converted to
Common Stock (31,467) (32,000) (30,000) (30,000) 141,438 62,000
Dividends on Preferred
Stock (93,000)
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 69,000
Purchase of Treasury
Shares
Dividend resulting from
beneficial conversion
feature 125,000 (125,000)
Net Income 2,623,000
------- -------- ------- ------- --------- ------- ---------- -----------
Balance, December 31, 2002 521,290 $521,000 985,000 $985,000 7,204,693 $7,000 $9,613,000 ($5,381,000)
======= ======== ======= ======== ========= ====== ========== ===========
Treasury
Total Stock
----- -----
Balance, December 31, 2000 $1,210,000 $0
Common Stock issued to
employees and directors 9,000
Issuance of Series C
Convertible Preferred
Stock 793,000
Dividend on Preferred
Stock (52,000)
Accretion of
difference
between
carrying amount and
redemption
amount of redeemable
preferred
stock (10,000)
Net income 588,000
---------- -------
Balance, December 31, 2002 2,538,000 0
Common Stock issued to
Employees, directors,
consultants and
contractors 218,000
Options exercised to
Common Stock 189,000 (165,000)
Warrants Converted to
Common Stock 35,000
Preferred Converted to
Common Stock
Dividends on Preferred
Stock (93,000)
Preferred Stock issued
for cash 102,000
Preferred Stock issued
to employees
and consultants 64,000
Options granted to
non-employees 69,000
Purchase of Treasury
Shares (2,000)
Dividend resulting from
beneficial conversion
feature
Net Income 2,623,000
---------- ---------
Balance, December 31, 2002 $5,745,000 ($167,000)
========== =========
See notes to financial statements
F-5
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income ........................................................... $2,623,000 $588,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities from
continuing operations:
Depreciation and amortization ................................... 321,000 211,000
Non-cash directors compensation ................................. 54,000 0
Common stock issued for services ................................ 41,000 9,000
Series "C" Preferred issued for services ........................ 24,000 0
Deferred income tax benefit ..................................... (925,000) (22,000)
Changes in:
Accounts receivable .......................................... (1,000) (31,000)
Inventory .................................................... (619,000) (29,000)
Prepaid expenses and other current assets .................... (173,000) (73,000)
Other assets ................................................. 199,000 26,000
Accounts payable and accrued expenses ........................ 912,000 (28,000)
----------- ---------
Net cash provided by operating activities ................. 2,456,000 651,000
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of certificates of deposit ................................ 319,000 100,000
Investment in certificates of deposit ................................ (409,000) (200,000)
Proceeds from sale of property and equipment ......................... 4,000 0
Purchase of building ................................................. (3,451,000) 0
Purchase of intangible assets ........................................ (505,000) 0
Purchase of property and equipment ................................... (526,000) (46,000)
----------- ---------
Net cash (used in) investing activities ................... (4,568,000) (146,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series A preferred stock ............................... (150,000) (170,000)
Issuance of Common stock ............................................. 59,000 0
Issuance of Series C convertible preferred stock ..................... 102,000 250,000
Repayment of capital lease obligations ............................... (23,000) (27,000)
Increase (decrease) in credit line (net) ............................. 91,000 (269,000)
Principal repayments of long-term debt ............................... (374,000) (85,000)
Proceeds from long-term debt ......................................... 3,070,000 16,000
Dividends paid on preferred stock .................................... (94,000) (52,000)
Purchase of treasury shares .......................................... (2,000) 0
----------- ---------
Net cash provided by (used in) financing activities ....... 2,679,000 (337,000)
----------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS .................................................... 567,000 168,000
Cash and cash equivalents - beginning of the year ....................... 270,000 102,000
----------- ---------
CASH AND CASH EQUIVALENTS -
END OF THE YEAR ..................................................... $837,000 $270,000
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ........................................................ 90,000 $227,000
Taxes paid ........................................................... $0 $0
F-6
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
----- ----
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of Series A preferred stock
to Series C ......................................... $0 $315,000
Common stock issued for services ...................... 41,000 0
Common stock issued to directors ...................... 54,000 9,000
Conversion of subordinated notes payable
to Series C convertible preferred stock ............. 0 256,000
Conversion of accrued expenses to
Series C convertible preferred stock ................ 0 8,000
Series C convertible preferred stock
issued to officer ................................... 20,000 20,000
Options issued to non-employees ....................... 69,000 0
Warrants issued to preferred stockholders ............. 71,000 0
See notes to financial statements
F-7
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE A - BUSINESS
Medifast, Inc.'s (the "Company") operations are primarily conducted
through two of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc.,
("Jason") and Take Shape for Life ("TSFL"). The Company is engaged in the
manufacturing and distribution of Medifast(R) branded and private label weight
management products. These products are sold through physicians, supported by
the Internet, diet centers and other 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.
The Company has dramatically improved its profitability and financial
prospects by focusing on international joint ventures, product development, the
launch of Take Shape for Life, Inc., and increasing its advertising expense. The
following financial transactions have provided the liquidity and stability for
the Company to successfully execute its business plan:
On July 26, 2002 Jason Pharmaceuticals opened a $550,000 revolving line of
credit at the Prime rate, with Mercantile-Safe Deposit and Trust Company.
On September 1, 2002 the Company announced the implementation of Take
Shape for Life, Inc., a Delaware Corporation, which is a wholly owned subsidiary
of Medifast, Inc. This is a dynamic health network and marketing program that is
dedicated to providing disease and weight management solutions through qualified
and trained health advisors and professionals across the United States.
Management anticipates that this program should double in size over the next
twelve to eighteen months given that new physicians and health advisors are
enrolled from the Company's efforts and its database, which already contains
over 15,000 medical professionals. Based on historical trends, management
estimates that approximately 15% of the physicians and health advisors will be
converted into the health network.
On September 23, 2002 the Company announced a joint venture with Elegant
World SDN BHD (Elken) of Malaysia. The venture calls for Medifast, Inc. to
manufacture its Take Shape(TM)/Dr. Diet weight management products and programs
for the Asian market. Medifast Take Shape(TM) products were selected in a
four-year U.S. government National Institute of Health (Dr. Koop Study) weight
management study at the University of Vermont, and achieved significant weight
loss results. The Company has received large orders for the Take Shape(TM)
product and anticipates continuous orders in the upcoming quarters, supporting
their efforts to launch this clinical product in Asia.
F-8
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 a maturity of three months or less
to be cash equivalents. At December 31, 2002, the Company had invested in four
$100,000 certificates of deposit, which are not considered cash equivalents due
to the terms to 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 first shown except for the
costs of executory contracts, which are amortized as performance under the
contract is received. Advertising costs so deferred were $238,000 at December
31, 2002. Advertising expense for the years ended December 31, 2002 and 2001
amounted to $1,214,000 and $262,000, 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 3 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-9
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 domestic sales is recognized when the product is shipped to
customers or purchased by wholesale customers. Revenue from foreign sales is
recognized at the time the goods are received by the customer.
[9] ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 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, and trade receivables. Cash and
certificates of deposit at December 31, 2002 include amounts deposited with one
financial institution that exceed the federal insurance coverage by $1,556,000.
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-10
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 and in June 2002, 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 and 300,000 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,
-----------------------
2002 2001
---- ----
Net income:
As reported $2,623,000 $588,000
Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (95,000) (3,000)
---------- --------
Pro forma $2,528,000 $585,000
Net income per share:
As reported:
Basic $0.36 $0.08
Diluted $0.30 $0.07
Pro forma:
Basic $0.34 $0.08
Diluted $0.29 $0.07
F-11
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
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:
2002 2001
---- ----
Dividend yield ................... 0.0% 0.0%
Expected volatility .............. 0.40 0.40
Risk-free interest rate .......... 3.00%-5.00% 4.25%-4.75%
Expected life in years ........... 5 1-5
The weighted average fair value at date of grant for options granted
during the years 2002 and 2001 were $0.36 and $0.08, respectively, using the
above assumptions.
The following summarizes the stock option activity for the years ended
December 31:
2002 2001
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 706,000 $0.36 651,000 $0.55
Options granted 340,000 1.14 155,000 0.44
Options reinstated 100,000 1.50 -- --
Options exercised (222,664) 0.85 -- --
Options forfeited or expired (31,667) 0.26 (100,000) 1.50
-------- --------
Outstanding at end of year 891,669 0.69 706,000 0.39
======= ========
Options exercisable at year end 714,994 0.64 637,667 0.36
======= ========
Options available for grant at end of year 108,331 0
======= ========
F-12
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2002:
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
------ ----------- ---------- ----- ----------- -----
$0.25 335,000 2.3 $0.25 335,000 $0.25
$0.32 46,668 4.4 $0.32 26,666 $0.32
$0.50 100,000 3.0 $0.50 100,000 $0.50
$0.65 75,000 4.5 $0.65 24,999 $0.65
$0.75 85,000 2.0 $0.75 85,000 $0.75
$0.80 50,001 4.5 $0.80 13,332 $0.80
$0.86 10,000 4.5 $0.86 3,332 $0.86
$1.23 20,000 4.7 $1.23 6,666 $1.23
$1.26 50,000 4.7 $1.26 16,666 $1.26
$1.50 20,000 0.3 $1.50 20,000 $1.50
$1.60 25,000 4.7 $1.60 8,333 $1.60
$2.00 75,000 3 $2.00 75,000 $2.00
------- -------
891,669 3.1 $0.69 714,994 $0.64
======= =======
[13] SEGMENT INFORMATION
Prior to 2002, the Company was considered to have only one operating
segment. In late 2002, the Company made its first shipment of goods under an
arrangement with Elken International of Malaysia for distribution of those goods
in the Asian market. Revenues recognized under this arrangement in 2002 amounted
to $233,000.
NOTE C - INVENTORY
Inventory consists of the following at December 31, 2002:
Raw materials ...................... $722,000
Work-in-process .................... 5,000
Finished goods ..................... 532,000
----------
$1,259,000
==========
F-13
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 consist of the
following:
Land $ 345,000
Building and building improvements 3,874,000
Equipment and fixtures 1,761,000
Vehicle 25,000
----------
6,005,000
Less accumulated depreciation and amortization 1,507,000
----------
Property, plant and equipment - net $4,498,000
==========
Substantially all of the Company's property, plant and equipment is
pledged as collateral for various loans (see Note H).
NOTE E - TRADEMARKS AND INTANGINLES
During 2002, the Company began developing a patent for a new product. As
of December 31, 2002, the patent has been given patent pending status from the
United States Patent and Trademark Office. Costs, which consist of raw
materials, salaries, and consulting fees, amounted to $152,000. Amortization of
the development costs will begin once the patent has been approved and the
product has been fully developed.
As part of the implementation of Take Shape for Life, Inc., the Company
purchased a database of qualified health professionals responsible for providing
disease and weight management solutions through the use of Company products. The
$474,000 cost of the database is being amortized over a period of seven years.
Amortization expense relative to the database amounted to $23,000, for the year
ended December 31,2002.
A summary of Trademarks and Intangibles as of December 31,2002 is as
follows:
Patent development costs $157,000
Professional network database 474,000
--------
631,000
Less accumulated amortization 23,000
--------
Trademarks and intangibles $608,000
========
F-14
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at December
31, 2002:
Trade payables $ 348,000
Accrued expenses 325,000
Accrued payroll and related taxes 218,000
Sales commissions payable 168,000
Deferred revenue 130,000
----------
Total $1,189,000
==========
NOTE G - INCOME TAXES
At December 31, 2002, the principal components of the net deferred tax
assets are as follows:
Net operating loss carryforwards $1,709,000
Accounts receivable 21,000
Inventory overhead and writedowns 4,000
----------
Total deferred tax assets 1,734,000
Current benefit 1,079,000
----------
$ 655,000
==========
Prior to 2002, the company had provided a valuation allowance against the
portion of its net operating loss carryforwards and other temporary differences,
for which the likelihood of realization could not be determined. 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,
------------
2002 2001
---- ----
Income tax (benefit) based on federal statutory rate $577,000 $192,000
State and local tax (benefit), net of federal benefit 111,000 27,000
Decrease in valuation allowance (1,613,000) (241,000)
---------- --------
Income tax benefit $(925,000) $(22,000)
========== ========
The Company has net operating loss carryforwards of approximately
$4,500,000 which are available to offset future taxable income. These
carryforwards expire from 2009 to 2019. The Tax Reform Act of 1986 contains
provisions which limit the net operating loss carryforwards available for use
should significant changes in ownership interests occur. The Company has had an
ownership change which may require the applications of these limitations.
F-15
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE H - LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt as of December 31, 2002 consists of the following:
$2,850,000 fifteen year term loan secured by the building and land at a
variable rate which was 4.19% at December 31,2002 $2,771,000
$220,000 two year term loan secured by equipment at a floating rate
which was 6.25% at December 31, 2002 161,000
$100,000 unsecured note payable at a fixed rate of 3%, discounted to an
incremental borrowing rate of 12% 64,000
Note payable over 3 years secured by vehicle at a fixed rate of 12.25% 9,000
---------
3,005,000
Less current portion 304,000
----------
$2,701,000
==========
Future principal payments on long-term debt for the next 5 years are as
follows:
2003 ............................ 304,000
2004 ............................ 276,000
2005 ............................ 200,000
2006 ............................ 200,000
2007 ............................ 200,000
The Company has established a $550,000 revolving line of credit at the
prime interest rate with Mercantile Safe Deposit and Trust Company. The
outstanding balance on this line was $91,000 at December 31, 2002.
F-16
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE I - LEASES
[1] OPERATING LEASES:
The Company has an operating lease for a retail outlet store, which
expires in December 2003. The Company also leases 3,600 square feet of warehouse
and storage space on a 3-year lease until 2003.
In addition, the Company leases certain office equipment under operating
leases expiring in 2005 and 2006.
Future minimum lease payments as of December 31, 2002 are as follows:
Sublease
Total Agreement Net
----- --------- ---
2003 191,000 16,000 175,000
2004 128,000 -- 128,000
2005 128,000 -- 128,000
2006 11,000 -- 11,000
2007 11,000 -- 11,000
Rent expense totaled approximately $157,000 and $342,000 for the years
ended December 31, 2002 and 2001, respectively. Rent expense for 2002 and 2001
has been reduced by $16,000 and $4,000, respectively, representing amounts
received under a sublease agreement.
NOTE J - EMPLOYMENT AGREEMENTS
The CEO of Medifast, Inc., Bradley T. MacDonald, has a two-year employment
agreement for an aggregate annual base salary of $190,000 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, 2004. The
agreement also provides certain incentives plus discretionary bonuses in 2002
and 2003. The Board of Directors reinstated 100,000 options at $1.50 which
MacDonald exercised in December 2002. Mr. MacDonald also exercised 20,000 of
options at $.25 in July 2002 and 80,000 of options at $.25 in January 2003. He
has 15,000 options at $.75 remaining available to exercise.
NOTE K - REDEEMABLE PREFERRED STOCK
In August 1996, the Company sold 432,500 shares of Series "A" nonvoting
preferred stock that generated gross proceeds of $865,000, or $2.00 per share.
Each share was entitled to a dividend of 8% ($.16) per share. The shares were
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-17
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE L - SERIES "B" CONVERTIBLE PREFERRED STOCK
In January 2000, the Company was authorized to issue 600,000 Series "B"
Convertible Preferred Stock ("Preferred Stock B") par value $1.00 per share.
Each share is entitled 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. The Company also agreed to (1) give
Series "B" shareholders an additional 128,524 warrants at $0.35 per share, (2)
issue Mr. David Scheffler, consultant, 100,000 options at $0.50 per share, and
(3) redeem his 36,050 shares of Series "B". 44,000 shares of Series "C"
preferred stock were also issued to Mr. Scheffler for investment advisory
services. Subsequent to these transactions Mr. Scheffler was elected to the
Board of Directors of Medifast, Inc., in June 2002.
NOTE M - SERIES "C" PREFERRED CONVERTIBLE STOCK
In the Fall of 2001, the Company was authorized to issue 1,000,000 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.
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-18
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE N - WARRANTS
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.
During 2001, the Company issued 47,600 warrants to the stockholders of
Series "C" Preferred Convertible Stock and 137,000 warrants to Series "B"
Preferred Stock. These are 3 year warrants to purchase common shares at exercise
prices of $.35 per share. These warrants were valued at $0.
The fair value of these warrants was estimated using the Black-Scholes
pricing model with the following assumptions: interest rate 3% - 5%, dividend
yield 0%, volatility 0.40 and expected life of three years.
The Company has the following warrants outstanding for the purchase of its
common stock as follows:
Year Ended
December 31,
Exercise ------------
Price Expiration Date 2002 2001
----- --------------- ---- ----
$0.35 August, 2004 80,100 89,900
$0.35 March, 2005 102,724 0
0.45 September, 2003 30,000 30,000
0.25 January, 2003 56,000 105,530
0.625 September, 2004 27,500 37,500
2.00 June, 2002 0 24,000
1.50 August, 2003 60,000 60,000
1.50 April, 2003 60,000 60,000
1.75 August, 2001 0 51,375
1.75 February, 2003 0 25,000
--------- -------
416,324 483,305
========= =======
Weighted average exercise price $0.73 $1.06
========= =======
As of December 31, 2002, the warrants were all exercisable.
F-19
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE O - 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.
[2] MIE Properties recently made a claim through counsel of over $100,000 from a
guarantee provided to Dr. Vitale (Jason Pharmaceuticals) in 1993. The Company
and its counsel are investigating the validity of the claim.
[3] The Company is a defendant in a lawsuit brought by Food Sciences
Corporation, a competitor, alleging that slanderous and untrue statements were
made to its customers by the Company. The Company has counterclaimed against
Food Sciences Corporation and third parties alleging a conspiracy to damage the
company's business and trademarks as well as business defamation and other
claims. It is management's opinion that the probability of an unfavorable
outcome from this litigation is unlikely.
F-20