PART
I
ITEM
1. BUSINESS.
SUMMARY
Medifast,
Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
1993. The Company’s operations are primarily conducted through five of its
wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape for
Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven
Crondall, LLC. The Company is engaged in the production,
distribution, and sale of weight management and disease management products and
other consumable health and diet products. Medifast, Inc.’s product
lines include weight and disease management, meal replacement, and vitamins
primarily manufactured in its modern, FDA approved facility in Owings Mills,
Maryland.
MARKETS
Throughout
the past 30 years, obesity in the United States has dramatically increased. The
obesity epidemic shows no signs of slowing down and recently, the condition has
worsened among Americans rather than improved. Approximately 1.7 billion people
worldwide are overweight; however the percentage of overweight adults is the
highest in the United States, with two-thirds of all Americans being overweight
or obese.
According
to a recent study, “Prevalence of Obesity and Overweight in the United States”,
published in April 2006 in the Journal of American Medical Association, almost 7
out of 10 adults in the U.S. are overweight or obese, with 60 million (or about
thirty percent) American adults suffering from obesity. The obesity
epidemic raises concern among Americans because of the implications associated
with their health. The most common health conditions associated with obesity are
type II diabetes, coronary heart disease, hypertension and stroke, sleep apnea
and respiratory problems, gallbladder disease, depression and certain forms of
cancer.
The
Centers for Disease Control and Prevention show that obesity is not only affects
adults, but children and adolescents as well. According to the CDC, the obesity
prevalence in children and adolescents has tripled since
1976. Overweight and obesity in children and adolescents increases
the risk of health problems such as high blood pressure, high cholesterol and
Type 2 Diabetes.
Type 2
Diabetes is expected to increase by 165% between 2000 and 2050 according to a
study “Projection of diabetes burden through 2050: impact of change demography
and disease prevalence in the U.S.”, published 2001 in Diabetes
Care. In addition, a study published by the CDC in October 2007 shows
how children are now being affected by Type 2 diabetes. Obese children suffering
from Type 2 diabetes are at increased risk of suffering significant morbidities
in the form of amputations, kidney problems, and blindness.
Obesity
is defined as a Body Mass Index (BMI) of 30 kg/m2 or
greater, whereas overweight is defined as a BMI ranging between 25 and 30
kg/m2.
According to a recent study conducted by the Centers for Disease Control and
Prevention in 2006, only four (4) states in the U.S.A. had a prevalence of
obesity less than twenty percent (20%). Twenty–two states showed a prevalence
equal to or greater than twenty-five percent (25%), and two of those states had
a prevalence of obesity equal to or greater than thirty percent
(30%).
The
primary obesity causing factors are preventable and well known in the United
States. These factors are unhealthy diet and physical inactivity. It’s estimated
that poor nutrition and physical inactivity account for more than 300,000
premature deaths per year in the U.S. According to the United States
Department of Health and Human Services, only 25% of adults and less than 25% of
teenagers include the suggested 5 or more servings of vegetables and fruits in
their daily meal. More than half of American adults fail to engage in the
suggested amount of physical activity, and more than 1/3 of young Americans do
not engage in regular vigorous physical activity at all.
The
United States Department of Human and Health Services states that Americans
spend $117 billion in costs associated with overweight and obesity. Direct
medical and healthcare costs total $93 billion. The U.S. weight loss
market is estimated to be a $55 billion/ year industry. This includes consumer
spending on diet foods, health clubs, commercial weight loss centers,
low-calorie prepared foods, medically supervised and commercial weight loss
programs, diet books, appetite suppressants, artificial sweeteners, diet sodas,
videos and cassettes, children’s weight loss camps and more.
Distribution
Channels
Medifast Direct – In the
direct to consumer channel, customers order Medifast product directly through
the Company’s website, www.choosemedifast.com, or our in-house call
center. The product is shipped directly to the customer’s house.
Customers have access to support from qualified nutritional practitioners and
customer care representatives via telephone, e-mail and online
chats. Medifast Direct offers a robust online web community and
library for support, information and meal planning for weight loss and weight
maintenance. This business is driven by an aggressive multi-media customer
acquisition strategy that includes print, television, radio, direct mail and web
advertising as well as public relations initiatives. The Medifast
Direct division focuses on targeted marketing initiatives and providing customer
support through its in-house call center and nutrition support teams to better
serve its clients. In addition, Medifast also continued to promote
its use of leading web technology featuring customized meal planning and
community components.
Take Shape for Life™ - Take
Shape for Life is a physician led network of independent health coaches who are
trained to provide coaching and support to clients on Medifast
programs. Health coaches are conduits to give clients the strategies
and skills to successfully reach a healthy weight and then provide a road map to
empower the individual to take control of their health. Take Shape
for Life offers the exclusive BeSlimTM
philosophy, which encourages long-term weight maintenance. Take Shape
for Life also moves beyond the scope of weight loss to show customers how to
achieve optimal health through the balance of body, mind, and finances. Take
Shape for Life uses the high quality, medically validated products of Medifast
as the platform to launch integrity based lifelong health optimization
program.
Program
entrants are encouraged to consult with their primary care physician and a Take
Shape for Life Health Coach to determine the Medifast program that is right for
them. Health Coaches are supported, educated and qualified by The
Health Institute, a training group staffed by Medifast professionals. Health
Advisors obtain Medifast qualification based upon testing of their knowledge on
Medifast products and programs.
Take
Shape for Life is a member of the Direct Selling Association (DSA), a national
trade association representing over 200 direct selling companies doing business
in the United States. To become a member of the DSA Take Shape
for Life,
like other active DSA member companies, underwent a comprehensive and rigorous
one-year company review by DSA legal staff that included a detailed analysis of
its company business plan materials. This review is designed to ensure
that a company’s business practices do not contravene DSA’s Code of
Ethics. Compliance with the requirements of the Code of Ethics is
paramount to become and remain a member in good standing of DSA.
Accordingly, Membership in DSA by Take Shape for Life demonstrates its
commitment to the highest standards of ethics and a pledge not to engage in any
deceptive, unlawful, or unethical business practices. Among those
Code of Ethics proscriptions are pyramid schemes or endless chain schemes as
defined by federal, state, or local laws. Moreover, Take Shape for Life,
like other DSA member companies in good standing, has pledged to provide
consumers with accurate and truthful information regarding the price, grade,
quality, and performance of the products Take Shape for Life markets.
Medifast Weight Control Centers
– The Medifast Weight Control Center is the brick and mortar
clinic channel of Medifast located in Texas and Florida. In
2008, the Company opened ten new Medifast Weight Control Centers and had a total
of twenty locations in operation at year-end. The centers offer a supervised
model and a nationally advertised brand which encourages walk-ins and referrals
from other Medifast business channels. In addition to offering a
comprehensive Medifast program, the clinics offer customized patient counseling
programs, and the Inbody TM
composition analysis.
In 2008,
the Company began offering the clinic model as a franchise
opportunity. On February 18, 2008, the Company announced that it has
sold its first franchise of Medifast Weight Control Centers. The
Company sold the rights to open four clinics in the Greater Baltimore
Metropolitan Area. The franchisee also has the rights to open four
additional Medifast Weight Control Centers in the Baltimore area over the next
two years, bringing the total to eight locations. On June 3,
2008 the Company announced that it sold the rights to open four Medifast Weight
Control Centers in Southern California and three Medifast Weight Control Centers
in Central California to two different local business operators. On
October 8, 2008, the Company announced the opening of its first franchise clinic
in the Baltimore, MD area. In December 2008, three Medifast Weight Control
Center franchise locations opened in Southern California and one location opened
in Central California. At December 31, 2008, five franchise locations
were operating.
The
Company continues to support its controlled label licensee model, Hi-Energy, by
providing marketing materials, ads, on-site trainings, fitness programs,
nutritional programs and clinical operation materials and forms.
Medifast Physicians –Medifast
physicians have implemented the Medifast program within their
practice. These physicians carry an inventory of Medifast products
and resell them to patients. They also provide appropriate medical
monitoring, testing, and support for patients on the
program. Management estimates that more than 15,000 physicians
nationwide have recommended Medifast as a treatment for their overweight
patients since 1980, and over an estimated 1 million patients have used its’
products to lose and maintain their weight.
The
Company offers an additional in-house support program to assist customers that
are consulting their primary care physician. Customers have access to
registered dieticians that provide program support and advice via a toll free
telephone help line, by e-mail and online chats.
THE
MEDIFAST® BRAND
Medifast
enriches lives by providing innovative choices for lasting health through
products and programs. Medifast is physician recommended and
clinically proven offering programs for weight management, weight maintenance
and long term health through multiple channels of
distribution. Medifast products are high quality, portion controlled
meal replacement foods. In recent years, Medifast’s core products and
programs have continued to expand over a wellness spectrum to include health
management products such as those specially formulated for people with diabetes
as well as products for women’s health, joint health and coronary
health.
While all
Medifast products are suitable for individuals with type 2 diabetes, Medifast
also has a line of products specially designed to meet the needs of people with
diabetes – Medifast Plus for Diabetics. Medifast Plus for Diabetics products
consist of three delicious, patented shakes that have been certified ‘low
glycemic’ by the Glycemic Research Institute.
Over 40
Medifast products qualify for 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, sodium, and cholesterol. Unlike popular fad diets and
herbal supplements, Medifast products are a safe, nutritionally balanced choice,
offering gender specific formulas containing high protein and low carbohydrates,
a soy protein source rather than animal protein source, and vitamin and mineral
fortification. It is very difficult to meet the minimum recommended
nutritional requirements on a low-calorie diet, but a dieter can easily meet
these requirements using the nutrient dense Medifast brand of meal replacement
food supplements.
Portion
controlled, meal replacement weight management programs are continuing to gain
popularity, as consumers search for a safe and effective solution that provides
balanced nutrition, quick weight loss and valuable behavior modification
education. In addition, consumers are becoming more aware of chronic
diseases such as diabetes and coronary health.
Clinical
Research Overview
Medifast
uses both clinical research studies and retrospective analysis data from its
Medifast clinics as the basis of its claim, “clinically proven.” The following
abstracts include both peer-reviewed research (consisting of prospective
controlled clinical trials and retrospective studies) and in-house clinical data
(studies 7 & 8).
Study 1
Reference
Haddock
CK, Poston WSC, Foreyt JP, DiBartolomeo JJ. “Effectiveness of Medifast
supplements combined with obesity pharmacotheraphy: A clinical program
evaluation.” Eating and Weight
Disorders. 13:95-101; 2008.
Purpose
To
evaluate the long-term impact of Medifast meal-replacement supplements (MMRS)
combined with appetite-suppressant medication (ASM) among participants who
received 52 weeks of treatment as part of a medically supervised weight-control
program.
Results
Participants
who completed 52 weeks of treatment experienced substantial weight losses at 12
(-9.4 + 5.7kg), 24 (-12.0 + 8.1kg), and 52 weeks (12.4 + 9.2kg), and all
measures were significantly different from baseline weight (p<0.001 for all
contrasts) for both true completers (n=324) and for ITT analysis (n=1,351).
Fifty percent of patients remained in the program at 24 weeks and nearly 25%
were still participating at one year. Results were better than those typically
reported for obesity pharmacotherapy in both short- and long-term studies, and
also better than those reported for partial meal-replacement
programs.
This study was published in the June
2008 issue of Eating and Weight Disorders. Results of this study were
presented at the American Society of Bariatric Physicians’ annual meeting in May
2007.
Study 2
Reference
Davis LM,
Coleman CD, Andersen WS, Cheskin LJ. “The effect of metabolism-boosting
beverages on 24-hr energy expenditure.” The Open Nutrition Journal.
2:37-41; 2008.
Purpose
To test
the effect of thermogenic meal-replacement beverages (TMRB) containing 90 mg of
EGCG and 100 mg of caffeine on resting energy expenditure (REE). Thirty adults
(19 women, 11 men) were stratified into 3 groups: lean (n=10, BMI 21.5 + 2.1);
overweight/obese (OW) (n=10, BMI 29.8 + 2.7); or weight maintainers (WM) (n=10,
BMI 28.8 + 4.0). Following an overnight fast, baseline measurements, including
REE via indirect calorimetry, were performed. REE was repeated at 30, 60, 90,
and 120 minutes after consuming a TMRB. Appetite was assessed via visual
analogue scale at baseline, 30 minutes, and 120 minutes after consuming the
TMRB.
Results
Mean
24-hour REE was increased 5.9 + 2.5% overall (p=0.000), 5.7 + 3.1% among lean
subjects (p=0.0002), 5.3 + 1.4% among OW subjects (p=0.000), and 6.8 + 2.7%
among WM subjects (p=0.0007). Appetite was significantly reduced 30 minutes
after consuming the TMRB (p=0.0002). TMRBs appear to be a promising
weight-control tool.
This
study was presented as a poster session at Experimental Biology,
2008.
Study 3
Reference
Cheskin
LJ, et al. “Efficacy of
meal replacements versus a standard food-based diet for weight loss in type 2
diabetes.” The Diabetes
Educator. 34(1):118-127; Jan/Feb 2008.
Purpose
To
compare the efficacy of a portion-controlled meal-replacement diet (PCD) to a
standard diet (SD) (based on recommendations by the American Diabetes
Association) in achieving and maintaining weight loss among 119 obese men and
women with type 2 diabetes mellitus.
Results
Using
intention-to-treat analyses, weight loss at 34 weeks and weight maintenance at
86 weeks was significantly better on PCD versus SD. Approximately 40% of the PCD
participants lost >5% of their initial weight compared with 12% of those on
the SD. Significant improvements in biochemical and metabolic measures were
observed at 34 weeks in both groups. The retention rate and self-reported ease
of adherence in the PCD group were significantly higher throughout the
study.
This study was published in the
January/February 2008 issue of The Diabetes Educator. The peer-reviewed journal is the
official journal of the American Association of Diabetes Educators. The study
was also presented at the American Diabetes Association’s 65th Annual Scientific Session,
2005.
Study 4
Reference
Cheskin
LJ, et al. “A RCT
comparing balanced energy deficit diets with or without meal replacements
for weight loss and maintenance among children dieting alone or with a parent.”
Johns Hopkins Bloomberg School of Public Health, Center for Human Nutrition,
Department of International Health.
Purpose
To
compare the safety and efficacy of supplemental Medifast portion-controlled meal
replacements (MRs) to a USDA Food Guide Pyramid-based diet. Both weight-loss
diets were 20% energy-restricted (~500 kcal deficit). Eighty children (8-15
y.o.), BMI>95th%ile, were screened and randomized to either a MR diet (3
MRs/d during active weight loss and 2 MRs/d during maintenance) or to the
food-based diet. Subjects were further randomized to dieting alone or with a
parent.
Results
By ITT
analysis, dieting alone vs. with a parent or food vs. MR made no difference in
weight outcome. However, following initial weight loss (6 mos) and 1 yr
maintenance (18 mos), significant benefits were seen in the MR group in BMI%ile
(0 mos=98.8 + 1.0, 6 mos=96.6 + 3.2, 18 mos=96.4 + 3.4); body fat ( 5.9% @ 6
mos, 5.3% @ 18 mos); total cholesterol ( 6.7% @ 6 mos, 5.6% @ 18 mos); LDL (
19.8% @ 6 mos, 7.9% @ 18 mos); and triglycerides ( 23.6% @ 6 mos, 22.3% @ 18
mos). No significant betweengroup differences, differences in growth rates, or
adverse events were observed. Conclusions: Among overweight 8-15 y.o. children,
dieting with or without a parent, meal replacements were as safe and effective
as a food-based diet for weight loss and maintenance.
This
study was presented as a poster session at Experimental Biology,
2007.
Study 5
Reference
Matalon
V. “Impaired capacity to lose visceral adipose tissue during weight reduction in
obese postmenopausal women with the Trp64Arg B3-adrenoceptor gene variant.”
Diabetes. 49:1709-1713;
2000.
Purpose
To
examine the effect of the Trp64Arg gene variant on total and visceral adipose
tissue loss, and cardiovascular risk factors in response to weight reduction
among 24 obese women (age 57 + 4 yrs) in a 13 + 3 mos weight reduction program
of 1,200 kcal with or without the inclusion of Medifast.
Results
Whether
women were carriers or noncarriers of the Trp64Arg allele, significant weight
loss (-16.4 + 5.0kg vs. -14.1 + 6.2kg, NS) and reductions in body fat (-10.0 +
5.2 vs. -11.5 + 3.9kg, NS) were observed in response to a calorie-restricted
program with or without Medifast. Loss of visceral adipose tissue was 43% lower
in carriers of the Trp64Arg allele compared with noncarriers (-46 + 27 vs. -81 +
51cm2, p=0.05). The study concluded that older women carrying the Trp64Arg
B3-adrenoceptor gene variant have an impaired capacity to lose visceral adipose
tissue in response to a calorie-restricted diet.
Study 6
Reference
Matalon
V. “An evaluation of weight loss following a carbohydrate and fat restricted
diet with appetite suppressant and dietary supplementation.” The Bariatrician. 10-13;
2000.
Purpose
To assess
the safety and effectiveness of a weight-loss regimen consisting of a
carbohydrate- and fat restricted diet supplemented with an appetite suppressant,
a dietary supplement, and a liquid protein drink (Medifast) in an open label
trial. Baseline and 6-mos evaluations of body weight (lbs), body fat (%), BMI
(kg/m2), lean body mass, water weight, and blood pressure were performed. At 6
mos, statistically significant differences were found for body weight
(p<0.001), percent body fat (p<0.001), BMI (p<0.001), lean body mass
(p<0.001), water weight (p=0.01), and body systolic (p=0.003) and diastolic
(p<0.001) blood pressure.
Results
Of 47
patients enrolled, 24 (51%) completed six months using the dietary regimen
prescribed. Data was analyzed for all patients who were treated with the diet,
as well as for the subset of patients who completed the entire study period. The
dietary regimen showed that a carbohydrate- and fat restricted program
supplemented by a natural appetite suppressant can lead to progressive weight
loss of comparable value to prescribed pharmacologic agents at the time of
study. Patients in the study experienced statistically significant decreases in
overall body weight, percent body fat, BMI, lean body mass, total body water,
and both systolic and diastolic blood pressure.
Study 7
Reference
Crowell
MD, Cheskin LJ. “Multicenter evaluation of health benefits and weight loss on
the Medifast weight management program.” The Johns Hopkins University School of
Medicine.
Purpose
To
retrospectively evaluate the efficacy of a medically supervised,
protein-supplemented modified program (Medifast) for weight reduction and to
evaluate the impact of weight reduction on coexisting health
problems.
Results
The
results of the study concluded that medically supervised, protein-sparing
meal-replacement programs offer a safe and effective means of weight reduction
and are accompanied by significant improvements in coexisting health problems.
Of samples taken, males lost an average of 67 lbs and females lost an average of
47 lbs during fasting. The study found significant reductions in total
cholesterol and triglycerides, systolic and diastolic blood pressure, and
normalized blood pressure in hypertensive patients.
Study 8
Reference
Davis LM,
Cheskin LJ. “Dietary intervention using Medifast meal replacements in
pre-bariatric surgery patients.” Johns Hopkins Weight Management Center;
2006.
Purpose
N=14
severely obese patients—13 females (11 African Americans, 2 Caucasians) and 1
male (Caucasian)—with a mean BMI of 64.14 kg/m2 (range 40.2kg/m2 to 91.7kg/m2)
entered a 6-month weight-control program at the Johns Hopkins Weight Management
Center. All patients were Medicaid (Priority Partners) recipients. The program
provided a comprehensive approach to weight control focused on diet, behavior,
and physical activity. Portion-controlled meal replacements (MRs) supplied by
Medifast were utilized as part of the dietary-behavior intervention. All
subjects met with a licensed dietitian and were prescribed a 1,000-1,200
kcal/day diet plan incorporating up to 6 MRs/day. Only 1 subject chose not to
incorporate meal replacements as part of a low-calorie diet plan. The average
intake of meal replacements was 2.5-3 per day through the duration of the
study.
Results
After 6
months on the program, patients lost an average of 26.73 lbs (-2.86kg/m2) and
6.96% body weight, and reported a high level of satisfaction with their diet
plan. Program completers at 1 month were N=13, at 3 months N=12, and 6 months
N=10.
A
statistical review of patient charts, unpublished data on file.
2006.
Scientific
Advisory Board
In
September 2008, Medifast announced the formation of its Scientific Advisory
Board.
The role
of the Board is to continually review the effectiveness, safety, and nutritional
benefits of Medifast’s products and programs. The team of specialists will also
assist in the development of new Meals and supplements, as well as weight-loss
approaches for specific medical needs (i.e., patients with heart disease) or
lifestyles (vegetarians, etc.).
The work
of this cross-disciplinary group builds on Medifast’s heritage of medically
sound approaches to weight loss, and the incorporation of leading-edge clinical
research into the company’s products and programs.
Lawrence
Cheskin, M.D.
Director
of the Johns Hopkins Weight Management Center in Baltimore, MD
Miriam
Cohen, M.D., F.A.C.C.
Cardiologist
and Assistant Professor at the University of Maryland Medical
School
Scott
Kahan, M.D., M.P.H.
Instructor
at the Johns Hopkins Bloomberg School of Public Health
Varsha
Vaidya, M.D.
Assistant
Professor of Psychiatry and General Internal Medicine at Johns Hopkins
University School of Medicine, Director of the Obesity Psychiatry program at
Johns Hopkins Bayview Medical Center
Alison
Duncan, Ph.D., RD
Associate
Professor, Department of Human Health and Natural Sciences at University of
Guelph, Functional Foods Expert
Debra L.
Miller, Ph.D.
Director
of Nutrtion at the Hershey Company
COMPETITION
There are
many different kinds of diet products and programs within the weight loss
industry. These include a wide variety of commercial weight loss
programs, pharmaceutical products, weight loss books, self-help diets, dietary
supplements, appetite suppressants and meal replacement shakes and
bars. Some of Medifast’s top competitors are Jenny Craig,
Nutrisystems, EDiets, Herbalife, and Weight Watchers.
The
Company has proven it can compete in this competitive market because its
products have been clinically tested and proven in clinical studies conducted by
researchers from Johns Hopkins University and other major institutions, the
Medifast products have been safely and effectively used by customers
and recommended by physicians for over 28 years. Medifast has been on
the cutting edge of product development with soy based nutritional and weight
management products since 1980. These products are formulated with
high-quality, low-calorie, low-fat ingredients that provide alternatives to fad
diets or medicinal weight loss remedies.
The
Company’s diverse multi-channel distribution strategy makes the Medifast brand
available through multiple support channels, which target different customer
needs. Medifast practitioners offer Medifast to patients through
wholesale or an innovative home delivery model and some practitioners choose to
prescribe appetite suppression diet drugs to patients in conjunction with a
Medifast based diet. Medifast Direct via the website and call center
serves customers with free online support and community tools and access to
nutritionists and customer service representatives. The Take Shape
for Life division offers the personal support of a health coach that is often a
person who has achieved success on the Medifast program and has turned their
success into a business opportunity generating incremental revenue for the
company through relationship marketing. Medifast Weight Control
Centers offer a medically supervised and structured model for customers who
prefer more accountability and personalized counseling on the
program. The Medifast program alone is a mild ketogenic diet that
naturally suppresses appetite and eliminates hunger without other therapies for
most people.
PRODUCTS
The
Company offers a variety of weight and disease management products under the
Medifast® brand and for select private label customers. The Medifast line
includes Medifast® 55 Shakes, Medifast® 70 Shakes, Medifast® Plus for Appetite
Suppression Shakes, Medifast® Plus for Women’s Health Shakes, Medifast® Plus for
Diabetics Shakes, Medifast® Plus for Joint Health Shakes, Medifast® Plus for
Coronary Health Shakes, New! Medifast Momentum Drinks, New! Momentum Flavor
Infusers, New! Antioxidant Shakes, New! Antioxidant Flavor Infusers, New! Super
Omega 3, Medifast® Bars, New! Medifast Crispy Bars, Medifast® Creamy Soups,
Medifast® Chicken Noodle Soup, Medifast® Chicken & Wild Rice Soup, Medifast®
Beef Vegetable Stew, Medifast® Home-style Chili, Medifast® Oatmeal, Medifast®
Pudding, Medifast® Scrambled Eggs, Medifast® Hot Cocoa, Medifast® Cappuccino,
Medifast® Chai Latte, Medifast® Iced Teas, Medifast® Fruit Drinks, Medifast® Soy
Crisps, and Medifast® Crackers.
Medifast
nutritional products are formulated with high-quality, low-calorie, and low-fat
ingredients. Many Medifast products are soy based and contain 24 vitamins and
minerals, as well as other nutrients essential for good health. The Company uses
Solae® brand soy protein, which is a high-quality complete protein derived from
soybeans.
Medifast
brand awareness continues to expand through the Company’s marketing campaigns,
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 products have been proven to be effective
for weight and disease management in clinical studies conducted by researchers
from 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 all powders and subcontracts the production of its
Ready-To-Drink products, meal replacement bars, crackers, soy crisps and omega 3
capsules.
NEW
PRODUCTS
In 2008,
the Company expanded the Medifast product line in 2008 by introducing a new line
of metabolic boosters. This product line includes shakes and flavor
infusers (to flavor water) that includes a specific blend of caffeine and
epigallocatechin gallate (EGCG), designed to help burn calories and
fat. Consuming three of these products a day can help burn an extra
100 calories per day.
The
Company also added new products aimed at optimizing health. The first of these
products was a new supplement line- Super Omega 3. This
product boasts one of the highest concentrations of docosahexanoic acid (DHA)
and eicosapentanoic acid (EPA) on the market as well as organic Flax Seed for
healthy hair, skin, and nails. This product services a variety of
needs from decreasing body fat to improving satiety, to providing
cardioprotection to prevention of cognitive decline. The Company also
designed a special line of antioxidant infusers and shakes. Each
Shake and Infuser gives you the antioxidant power of two full servings of fruits
and vegetables.
Medifast
also began its plan to expand the Medifast bar line to include Crispy bars that
are fully interchangeable with all the other meals in the program. In
the past, bars could only be enjoyed once a day because of the higher calorie
and carbohydrate level. The new bars contain only 110 calories, 11g
of protein, less than 13g of carbohydrates and are fully fortified with 20% of
the RDI for 24 Essential Vitamins and Minerals. These new bars are available in
Chocolate, Chocolate Mint, Peanut Butter, Oatmeal Raisin, Cinnamon Roll,
Strawberry Crunch, Caramel, Lemon, Fruit & Nut, and Smores
flavors.
MARKETING
In 2008,
the Company continued to build and leverage its core Medifast brand through
multiple marketing strategies to its target audiences. Customer
acquisition strategies include national advertising in print magazines,
television commercials, web advertising, direct mailings, radio commercials, and
DJ testimonials. In addition, the Company executed strategic public
relations efforts to secure local and national editorial placements to raise
brand awareness. These mediums were used to target new
customers by stressing Medifast's quick, easy and safe approach to weight
management. The Company invested in two celebrity contracts with
preliminary marketing and media campaigns launching in late 2007 and extending
into 2009. Direct mail campaigns, e-mail newsletters and outbound calling
programs were utilized to reactivate, encourage and support existing
customers. Medifast continued to enhance the Medifast website
including adding features in the “My Medifast” community which
offers meal planning, community message boards, blogs and a robust library of
information. The Company also continued to feature customer blogs on
the website for potential customers to interact with loyal Medifast
customers. Late in 2007, the Company launched an auto ship loyalty
program where customers receive discounts and rewards with automatic shipments
of Medifast Meals on a monthly basis. Both the MyMedifast community
enhancements and Auto-ship programs contribute to the retention of Medifast
customer through improved compliance with the program.
SALES
The
Company’s Sales division handles three primary areas:
Physician
Sales - The sales team is responsible for prospecting medical accounts, clinics,
hospitals, and HMOs. During 2008, the sales team attended a number of
medical professional trade shows, which expanded Medifast's penetration of the
medical weight loss business segment.
Medifast
Weight Control Center Franchises - The brick and mortar clinics have Counselors
that sell Medifast products and full service programs which include weekly
one-on-one counseling sessions, medical monitoring and physician
oversight. Franchise sales seek qualified partners to develop defined
market territories.
International
- Sales manages our bulk export business and has responsibility to qualify and
develop new international business partners.
MANUFACTURING
Jason
Pharmaceuticals, Inc., the Company’s wholly owned manufacturing subsidiary,
produces over 80% 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 has also
invested in increasing production capacity with the purchase of two additional
manufacturing lines and a larger capacity blender. The lines have
significantly improved the Company's production capability, while also improving
its overall efficiencies.
The
manufacturing facility has the capacity for significant increases to its
production output with minimal capital expenditures. Adding
additional shifts will enable the Company to produce enough products to generate
over $250 million in sales.
Manufacturing
processes, product labeling, quality control and equipment are subject to
regulations and inspections mandated by the Food & Drug Administration
(FDA), the Maryland State Department of Health and Hygiene, and the Baltimore
County Department of Health. The plant strictly adheres to all GMP practices and
has maintained its status as an "OU" (Orthodox Union) kosher-approved facility
since 1982.
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 foods and nutritional supplements. 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.
To the
extent that sales of foods and 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 independent distribution
channels.
PRODUCT
LIABILITY AND INSURANCE
The
Company, like other producers and distributors of ingested products, faces an
inherent risk of exposure to product liability claims in the event that, among
other things, the use of its products results in injury. The Company
maintains insurance against product liability claims with respect to the
products it manufactures. With respect to the retail and direct
marketing distribution of products produced by others, the Company's principal
form of insurance consists of arrangements with each of its suppliers of those
products to name the Company as beneficiary on each of such vendor's product
liability insurance policies. The Company does not buy products from
suppliers who do not maintain such coverage.
EMPLOYEES
As of
December 31, 2008, the Company employed 290 full-time employees, of whom 156
were engaged in manufacturing, warehouse management, and shipping, and 134 in
marketing, administrative, call center and corporate support
functions. None of the employees are subject to a collective
bargaining agreement with the Company.
INFORMATION
SYSTEMS INFRASTRUCTURE
Our
website, which is based on internally developed software and other third party
software, is hosted in San Francisco, California at a ServePath co-location
facility. This facility provides redundant network connections, an
uninterruptible power supply, physical and fire security and diesel generated
power back up for the equipment on which our website relies upon. Our servers
and our network are monitored 24 hours a day, seven days a week.
We use a
variety of security techniques to protect our confidential customer data. When
our customers place an order or access their account information, we use a
secure server (SSL) to transfer information. Our secure server software encrypts
all information entered before it is sent to our server. All customer data is
protected against unauthorized access. We use PayPal, VeriSign and HackerSafe
software to secure our credit card transactions.
OTHER
MATTERS
An
Independent Committee of the Board of Directors of Medifast was constituted to
review the public allegations of a third party "Convicted Felon" on his website
pertaining to alleged illegal activities of Take Shape for Life, a
Direct Selling Subsidiary of Medifast Inc. Other public Direct Selling
Companies have been attacked by this individual and his network of associates
using the same blueprint of allegations. These public allegations were made in
mid- February and were immediately followed by significant short selling and
short selling option puts that shaved over $30 million from the Market
Capitalization of Medifast. The company has demanded that this third
party take down its website information containing false information or be
subject to appropriate legal action.
Medifast,
in a press release on February 17th, 2009,
responded to the False Claims in SEC File # 001-31573; Film #09617581. The
Independent Committee appointed Chairman is Mr. Barry B. Bondroff, CPA, an
officer and director with Gorfine, Schiller & Gardyn, PA. Members
are: Mr. George J. Lavin Esq, founding Partner of the law firm, Lavin, O’Neil,
Ricci, Ceprone & Dispicio, who is an expert in Product Liability Law, Lt.
Gen. Dennis M. McCarthy USMC (Ret.), Executive Director of the Reserve Officers
Association of the United States and a licensed attorney, Capt. Joseph D.
Calderone USNR (Ret.), chaplain and counselor of the Villanova University Law
School, and Mr. Charles P. Connolly, former President and CEO of First Union
Corp.
After an
investigation of the facts and information developed to date the committee
unanimously agreed that the allegations were false, misleading and or without
merit.
AVAILABLE
INFORMATION
All
periodic and current reports, registration statements, code of conduct, code of
ethics and other material that the Company is required to file with the
Securities and Exchange Commission (“SEC”), including the Company’s annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act
Reports”). These materials are available free of charge through the
Company’s investor relations page at www.ChooseMedifast.com. Such
documents are available as soon as reasonably practicable after electronic
filing of the material with the SEC. The Company’s Internet web site and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K. The Company will
furnish without charge a copy of the Company’s Annual Report on Form 10-K,
including the financial statements and schedules thereto, to any person
requesting in writing and stating that he or she is the beneficial owner of
Common Shares of the Company.
Requests
and inquiries should be addressed to:
Investor
Relations
Medifast,
Inc.
11445
Cronhill Dr.
Owings
Mills, MD 21117
CERTIFICATIONS
The
Company’s Chief Executive Officer and Chief Financial Officer have filed their
certifications as required by the Securities and Exchange Commission (the “SEC”)
regarding the quality of the Company’s public disclosure for each of the periods
ended during the Company’s fiscal year ended December 31, 2008 and the
effectiveness of internal control over financial reporting as of December 31,
2008 and 2007. Further the Company’s Chief Executive Officer has
certified to the New York Stock Exchange (“NYSE”) that he is not aware of any
violation by the Company of the NYSE corporate governance listing standards, as
required by Section 303A.12(a) of the NYSE listing standards.
EXECUTIVE
OFFICERS OF THE COMPANY
|
Name
|
Age
|
|
Position
|
|
Bradley
T. MacDonald
|
61
|
|
Chairman
of the Board of Directors
|
|
Michael
S. McDevitt
|
30
|
|
Chief
Executive Officer and Chief Financial Officer
|
|
Leo
V. Williams
|
61
|
|
Executive
Vice President
|
|
Margaret
MacDonald- Sheetz
|
31
|
|
Chief
Operating Officer and President
|
|
Brendan
N. Connors
|
31
|
|
Vice
President of
Finance
|
Bradley
T. MacDonald
Mr.
MacDonald became Chairman of the Board of Medifast, Inc. on January 28, 1998.
Mr. MacDonald was previously employed by the Company as its Chief Executive
Officer from September 1996 to March 2007. In 2006, Mr. MacDonald was
named “Entrepreneur of the Year” in consumer products for the State of Maryland.
Prior to joining the Company, he was appointed as Program Director of the U.S.
Olympic Coin Program of the Atlanta Centennial Olympic Games. 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 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 was appointed and served on the
Defense Advisory Board for Employer Support of the Guard and Reserve
(ESGR.) Mr. MacDonald serves on the Board of Directors of
Stevenson University in Maryland, and the Institute of Notre Dame High School,
Baltimore, Maryland. He is also the Vice-Chairman on the Board of Directors of
the Marine Corps Reserve Toys for Tots Foundation.
Michael
S. McDevitt
Mr. McDevitt joined Medifast in 2002 as
the Controller and was promoted to Vice President of Finance in January 2004. In
March 2005, he was promoted to President and in January of 2006 was also named
Chief Financial Officer. In March of 2007, Mr. McDevitt was promoted to CEO of
the Company. Prior to joining Medifast, Mr. McDevitt worked as a Financial
Analyst for the Blackstone Group, an investment advisory firm based in New York,
NY.
Leo
V. Williams
Mr. Williams became Executive Vice
President of Medifast, Inc. in January of 2004. Prior to joining
Medifast, he was a Future Vehicles Marketing Plans Director for Ford Division
sport utility vehicles and pickup trucks. A retired Marine Corps
Reserve major general, he was ordered to active duty from October 2002 to
September 2003 to serve as Deputy Director of the Marine Corps Combat
Development Command. Mr. Williams served as the Vice-Chairman of the
Board, Marine Corps Toys for Tots Foundation. Currently, he serves on
the Board of Directors of the Direct Selling Association, U.S. Naval Academy
Foundation, Maryland Chapter of the American Diabetes Association, Naval Academy
Alumni Association Board of Trustees, Board of Trustees for the University of
the District of Columbia, and on the Navy Mutual Aid Association
Board.
Margaret
MacDonald - Sheetz, MBA
Ms. Sheetz joined Medifast in 2000 as
the Director of Sales and Administration. In 2002 she was promoted to VP of
Operations and in 2004 promoted to Senior VP of Operations. In May of 2006, Ms.
Sheetz received an Executive MBA from Loyola University. In March 2007, she was
promoted to President and Chief Operating Officer of Medifast Inc.
Brendan
N. Connors, CPA
Mr. Connors joined Medifast as the Vice
President of Finance in April of 2005. Prior to joining Medifast, Mr.
Connors worked as a Senior Accountant at Wolf & Company P.C., a certified
public accounting and consulting firm in Boston, MA.
ITEM
1A. RISK FACTORS
The
following risk factors should be considered when reading this Annual Report on
Form 10-K. If any of the events described below occurs, the Company’s
financial condition and operating results could be adversely
affected.
Much
of our growth and future profitability depends on the effectiveness of our
advertising spent in the Direct to consumer channel.
Our
marketing expenditures may not result in increased revenue or generate
sufficient awareness of the program or the brand to the consumer. We
may not be able to manage our advertising spend in a cost effective manner
thereby increasing the cost to acquire a new customer to an elevated level that
will decrease profits.
We
may be subject to health related claims from our customers
A
customer that suffers health problems may allege that the Medifast program
contributed to the ailment. The Company is not currently the subject
of any such claims; however, we would defend ourselves vigorously against such accusations. Regardless of the
ultimate outcome, defending against such claims would be costly and could
adversely affect our results of operations.
A
competitor or new entrant into the market may develop a product and program
similar to ours
Many of
our competitors are significantly larger than us and have more financial
resources to develop new products and programs. Our business could be
affected if one of our competitors or a new entrant to the market develops
similar products and programs through similar marketing
channels. This could result in lower sales as well as pricing
competition which could adversely affect the Company’s results from
operations.
New
fad diets or pharmaceutical solutions could put us at a competitive
disadvantage
The
weight loss industry is subject to fad diets. The Atkins craze hit
the U.S. several years ago and had an impact on many weight loss
companies. Another fad diet could sweep the nation or consumer
preferences could change. Our failure to adapt or respond quickly enough to
these changes could have an adverse affect on our results of
operations. In addition, pharmaceutical companies are constantly
trying to develop safe, effective, drugs that lead to weight loss. If
successful, many dieters could perceive this to be easier than the Medifast
program and this would put us at a competitive disadvantage.
Our
ability to compete could be negatively affected in the event we fail to protect
our brand names, trademarks or other intellectual property
Because
our business relies heavily on direct to consumer models, brand awareness is an
important factor in our sales strategy. Failure to protect our brand
or maintain an image of good standing with the public could result in a negative
effect on our operations. Additionally, failure to protect our intellectual
property could result in the arrival of a similar competitor which could reduce
our competitive edge or decrease our market share.
The
business may grow too quickly for the current infrastructure to
handle
If our
advertising is extremely successful and our Take Shape for Life relationship
marketing division sees a large uptick in recruitment we may be unable to handle
the growth from an operational perspective. Increasing demands on our
infrastructure could cause long hold times in the call center as well as delays
on our website. In addition, there could be delays in order
processing, packaging and shipping. We could run out of a majority of
our inventory if growth exceeded our production capacity. If these
difficulties are encountered in a period of hyper-growth then our operating
results could suffer.
Any deficiencies or shortcomings in
our information technology could prevent an efficient execution of routine
business procedures
We rely
heavily on our IT infrastructure to support major business components. Any
disruption to the integrity of this support structure including but not limited
to; software, telecommunications, Electronic Resource Platform, or the
Information Technology architecture as a whole could severely limit our ability
to provide customers and vendors with adequate service and operating responses.
In addition, our financial reporting is directly correlated with our
company-wide software Microsoft Navision 4.0. Any compromise in the
veracity of this system could severely alter the accuracy of our tracking,
volumes, and general reporting including financial statements.
A
disruption in the supply of raw materials or the inability of third party
manufacturing for certain products could affect operating results
We rely
heavily on our vendors to provide quality raw materials for us to utilize in our
on-site manufacturing processes. Any disruption in the availability of these
materials could potentially interrupt our ability to provide certain products to
customers in a timely manner. Also certain products are currently
manufactured through a third party. The availability of these products is prone
to fluctuations dependent on the manufacturer’s ability to secure and produce a
quality product that satisfies our satisfaction standards.
Our
stock price may experience volatility due to fluctuations in our operating
results
Our stock price is subject to
fluctuations in response to our operating results, a competitor’s operating
results, or our ability to meet stock analysts forecasts and our yearly revenue
and EPS guidance. In addition, general trends in the weight-loss
industry as a whole can have an affect on our stock price. These
factors may have an adverse affect on the market price of our stock and cause it
to fluctuate significantly.
Since
we cannot exert the same level of influence or control over our
independent health coaches as we could were they our own employees, our health
coaches could fail to comply with our policies and procedures, which could
result in claims against us that could harm our financial condition and
operating results.
Our
health coaches are independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and oversight as we
would if health coaches were our own employees. As a result, there can be no
assurance that our health coaches will participate in our marketing strategies
or plans, accept our introduction of new products, or comply with our health
coach policies and procedures.
Extensive
federal, state and local laws regulate our business, products and direct selling
program. While we have implemented health coach policies and
procedures designed to govern their conduct and to protect the trademarks and
brand of the Company it can be difficult to enforce these policies and
procedures because of the large number of health coaches and their independent
status. Violations by our independent health coaches of applicable law or of our
policies and procedures in dealing with customers could reflect negatively on
our products and operations and harm our business reputation. In addition, it is
possible that a court could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our independent health
coaches.
We
may be subject to claims that our employees are unqualified to provide weight
loss counseling
Our
Medifast Weight Control center division provides medical assessments and
counseling to our customers. We may be subject to claims that our
employees lack the proper training and qualifications to provide proper advice
regarding weight loss. We could be subject to claims if an employee
in one of our clinics gives inappropriate weight loss advice that results in
health problems. Such claims could result in damage to our reputation
and could have an affect on our operating results.
Adverse
publicity associated with our products, ingredients, or sales channels, or those
of similar companies, could harm our financial condition, operating results, and
stock price.
Adverse
publicity, whether or not accurate, relating to the Company, our products or our
operations, our sales channels and independent health coaches could adversely
impact the Company’s financial condition, operating results, and stock
price. In addition, it could lead to lawsuits or other legal
challenges and could negatively impact our reputation, the market demand for our
products, or our general business.
Negative
publicity in the weight loss industry could adversely affect our
business
If the
press were to come out with negative media about low-calorie diets, meal
replacements, or soy protein this could harm our business. Even if
not directed at Medifast, this perception could be instilled in our target
market and cause harm to our operating results.
The
loss of key personnel could adversely affect our ability to operate and result
in a negative financial condition
Certain
members of our Company oversee integral components of our
Company. Although we do not anticipate the departure of any key
employees including but not limited to the executive management team, we cannot
guarantee their tenure indefinitely in the future.
Our
results of operations may decline as a result of a downturn in general economic
conditions or consumer confidence
Our
results of operations are highly dependent on product sales and program fees. A
downturn in general economic conditions or consumer confidence and spending in
any of our major markets could result in people curtailing their discretionary
spending, which, in turn, could lead to a decrease in product sales in our
Medifast Direct and Take Shape for Life divisions and a decrease in product and
program fees at our Medifast Weight Control Centers and Internet product
subscriptions. Any such reduction would adversely affect our results of
operations.
Our
Business is subject to regulatory and legislative restrictions
A number of laws and regulations
govern our production, operation, and advertising. The FTC and
certain states regulate advertising, disclosures to consumers, privacy, consumer
pricing or billing arrangements, and other consumer matters. Our direct selling
distribution channel is subject to risk of interpretation of certain laws
pertaining to the prevention of “pyramid” or “chain sale”
schemes. Although we believe we are in full compliance, should the
governing body alter or enforce the law in an unanticipated way, there may be a
negative result on the company’s operations. The Company’s financial reporting
is subject to various laws and regulations as well, specifically, the
Sarbanes-Oxley Act of 2002 and the SEC. These requirements demand the Company
disclose certain information and maintain specific controls to ensure fair and
legal accounting practices as outlined therein. The Company has taken
substantial measures to ensure compliance through routine internal and external
audits. Failure to correct any flaws in internal controls may constitute a
public notification of weakness and could have an adverse effect on our stock
price. Additionally, the Company is required to maintain a position of good
standing in regards to taxation on both a Federal and State level. Failure to
comply with federal and state regulations could result in additional taxes,
fines, or interest due that could financially strain the company. Future laws
and regulations could be unforeseen and potentially have a material negative
impact on the Company. Failure to comply with any regulations of current or
future authoritative entities could have a detrimental effect on the Company’s
financial standing or operating results
ITEM
1B. UNRESOLVED STAFF COMMENTS
None
ITEM
2. DESCRIPTION OF PROPERTY
The
Company owns a 49,000 square-foot facility in Owings Mills, Maryland, which
contains its Corporate Headquarters and manufacturing plant. In 2003,
the Company purchased a state-of-the-art 119,000 square-foot distribution
facility in Ridgely, Maryland. The facility gives the Company the
ability to distribute over $250 million of Medifast product sales per
year. In 2004, the Company purchased a 3,000 square foot
conference and training facility in Ocean City, Maryland. The
facility will be used to conduct corporate training meetings, Board of Director
Meetings and employee morale and wellness programs. The Company has
twenty leases for its corporately owned Medifast Weight Control clinics
throughout Florida and Texas. In addition, the Company leases a
building in Owings Mills, MD for corporate offices. The leases range
in terms from one to six years.
ITEM
3. LEGAL PROCEEDINGS
Leonard Z. Sotomeyor, on December 30,
2003, filed an action in the Supreme Court of the State of New York, County of
New York, against his former business partner, David Scheffler, and T-1
Holdings, LLC, and included Medifast, Inc., formerly Heathrite, Inc., as a
Defendant, Case 604076-03, seeking monetary damages for failure of his former
business partner to compensate him under several consulting agreements with
Medifast, Inc. made with H-T Capital, Inc. and derivatively on behalf of
T-1Holdings, LLC. All parties, including Medifast, Inc.
recently reached a global settlement including dismissal of the litigation with
prejudice and general releases. On October 17, 2008, Medifast agreed
to pay legal fees in the amount of $130,000 in cash, and 14,286 shares of
Medifast treasury stock valued at $70,000 to settle the case. Mr.
Sotomayor also received 29,647 Medifast, Inc. warrants with a strike price of
$4.80 a share from Mr. David Scheffler. The Board of Directors approved a
settlement that was considered significantly less costly than the future
litigation costs for defense. Medifast vehemently denied the alleged charges in
the complaint and had fortuitous defenses that it believes would have prevailed
in a trial. The total impact of the settlement to Medifast, Inc. was a
one time charge to earnings of approximately $200,000 in the fourth quarter of
2008.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable
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 New York Stock
Exchange. The following is a list of the low and high closing prices
by fiscal quarters for 2008 and 2007:
|
|
|
2008
|
|
|
|
|
Low
|
|
|
High
|
|
|
Quarter
ended March 31, 2008
|
|
|
3.68 |
|
|
|
4.99 |
|
|
Quarter
ended June 30, 2008
|
|
|
4.35 |
|
|
|
6.68 |
|
|
Quarter
ended September 30, 2008
|
|
|
4.80 |
|
|
|
8.85 |
|
|
Quarter
ended December 31, 2008
|
|
|
3.52 |
|
|
|
6.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
Low
|
|
|
High
|
|
|
Quarter
ended March 31, 2007
|
|
|
6.03 |
|
|
|
12.40 |
|
|
Quarter
ended June 30, 2007
|
|
|
6.32 |
|
|
|
9.25 |
|
|
Quarter
ended September 30, 2007
|
|
|
5.58 |
|
|
|
8.83 |
|
|
Quarter
ended December 31, 2007
|
|
|
3.79 |
|
|
|
6.24 |
|
(b) The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not represent actual transactions.
(c) There
were approximately 208 record holders of the Company's Common Stock as of March
13, 2009. This number does not include beneficial owners of our
securities held in the name of nominees. The Company had no preferred
holders of the Company’s stock as of December 31, 2008.
(d) No
dividends on common stock were declared by the Company during 2008 or
2007.
.
ITEM
6. SELECTED FINANCIAL DATA
The
selected condensed consolidated financial data set forth below should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included as Part II, Item 7 of this Annual
Report on Form 10-K, and the consolidated financial statements and notes
thereto of the company included in Part II Item 8 of this Annual
Report on Form 10-K. The historical results provided below are not
necessarily indicative of future results.
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
105,445,000 |
|
|
|
83,779,000 |
|
|
|
74,086,000 |
|
|
|
40,129,000 |
|
|
|
27,340,000 |
|
|
Operating
income
|
|
|
8,199,000 |
|
|
|
5,715,000 |
|
|
|
7,381,000 |
|
|
|
3,549,000 |
|
|
|
3,004,000 |
|
|
Income
from continuing operations
|
|
|
7,850,000 |
|
|
|
5,543,000 |
|
|
|
7,463,000 |
|
|
|
3,405,000 |
|
|
|
2,906,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- basic
|
|
|
0.41 |
|
|
|
0.30 |
|
|
|
0.41 |
|
|
|
0.17 |
|
|
|
0.16 |
|
|
EPS
- diluted
|
|
|
0.38 |
|
|
|
0.28 |
|
|
|
0.38 |
|
|
|
0.17 |
|
|
|
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
51,037,000 |
|
|
|
43,724,000 |
|
|
|
36,677,000 |
|
|
|
30,120,000 |
|
|
|
25,968,000 |
|
|
Current
portion of long-term debt and revolving credit facilities
|
|
|
3,421,000 |
|
|
|
1,863,000 |
|
|
|
1,804,000 |
|
|
|
1,194,000 |
|
|
|
827,000 |
|
|
Total
long-term debt
|
|
|
4,313,000 |
|
|
|
4,570,000 |
|
|
|
3,509,000 |
|
|
|
3,977,000 |
|
|
|
4,256,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,126,534 |
|
|
|
12,960,930 |
|
|
|
12,699,066 |
|
|
|
12,258,734 |
|
|
|
10,832,360 |
|
|
Diluted
|
|
|
14,329,525 |
|
|
|
13,644,149 |
|
|
|
13,482,894 |
|
|
|
12,780,959 |
|
|
|
12,413,424 |
|
ITEM
7. 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.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles. Our significant accounting policies are
described in Note 2 of the consolidated financial statements.
The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Management develops, and changes periodically, these estimates
and assumptions based on historical experience and on various other factors that
are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Management
considers the following accounting estimates to be the most critical in
preparing our consolidated financial statements. These critical accounting
estimates have been discussed with our audit committee.
Revenue
Recognition. Revenue is recognized net of discounts, rebates,
promotional adjustments, price adjustments, returns and other potential
adjustments upon shipment and passing of risk to the customer and when estimates
of are reasonably determinable, collection is reasonably assured and the Company
has no further performance obligations.
Impairment of Fixed Assets and
Intangible Assets. We continually assess the
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. Judgments
regarding the existence of impairment indicators are based on legal factors,
market conditions and our operating performance. Future events could cause us to
conclude that impairment indicators exist and the carrying values of fixed and
intangible assets may be impaired. Any resulting impairment loss would be
limited to the value of net fixed and intangible assets.
Income Taxes. In the
preparation of consolidated financial statements, the Company estimates income
taxes based on diverse legislative and regulatory structures that exist in
jurisdictions where the Company conducts business. Deferred income tax assets
and liabilities represent tax benefits or obligations that arise from temporary
differences due to differing treatment of certain items for accounting and
income tax purposes. The Company evaluates deferred tax assets each period to
ensure that estimated future taxable income will be sufficient in character
amount and timing to result in their recovery. A valuation allowance is
established when management determines that it is more likely than not that a
deferred tax asset will not be realized to reduce the assets to their realizable
value. Considerable judgments are required in establishing deferred tax
valuation allowances and in assessing probable exposures related to tax matters.
The Company’s tax returns are subject to audit and local taxing authorities that
could challenge the company’s tax positions. The Company believes it records
and/or discloses such potential tax liabilities as appropriate and has
reasonably estimated its income tax liabilities and recoverable tax
assets.
Allowance for doubtful
accounts. In determining the adequacy of the allowance for
doubtful accounts, we consider a number of factors including the aging of the
receivable portfolio, customer payment trends, and financial condition of the
customer, industry conditions and overall credibility of the
customer. Actual amounts could differ significantly from our
estimates.
CONSOLIDATED
RESULTS OF OPERATIONS
2008
COMPARISON WITH 2007
OPERATING
Revenue: Revenue
increased to $105.4 million in 2008 as compared to $83.8 million in 2007, an
increase of $21.6 million or 26%. The Take Shape for Life sales channel
accounted for 47% of total revenue, direct response marketing 42%,
brick-and-mortar clinics 8%, and doctors 3%. Take Shape for Life
sales, which are fueled by person-to-person recruiting and support increased by
79% year-over-year. The Company’s Medifast Weight Control
Center clinic division , increased sales by 68% as compared to 2007 due to the
opening of new clinics in 2008. The direct marketing sales channel,
which is fueled primarily by consumer advertising, decreased revenues by
approximately 6% year-over year on less advertising spend. The
Company’s doctor’s sales decreased by 24% compared to 2007 due to certain
doctors transitioning to the professional division of Take Shape for
Life.
The Take
Shape for Life division grew 79% year-over-year. This growth can
largely be attributed to the tools and training that led to an increase in the
ability of the division to both promote growth in recruiting of health coaches
and acquisition of clients, as well as better supporting this growth as it
occurs. This continued investment proved to be a large part of the current
growth trends in Take Shape for Life sales, as well as the number of active
health coaches and clients. The growth in this segment correlates
directly to the increase in health coaches, which began to accelerate following
our National Convention in July 2008. The number of active health
coaches grew 84% to 3,400 at the end of the fourth quarter of 2008 as compared
to 1,850 for the same time period in 2007. The Company
completed our 2008 National Convention in Orlando, FL on July 26th, 2008
where approximately 750 health coaches participated, an increase of nearly 88%
from prior year. The individuals that attended the event attended
workshops and heard lectures by accredited individuals in the areas of
recruiting, product and nutrition knowledge, and business skills.
The
Medifast Weight Control Centers, which represent approximately 8% of the
Company’s overall revenues, are currently operating in twenty locations in
Dallas, Houston, and Orlando. In 2008, the Company experienced
revenue growth of 68% versus the same time period last year. The average monthly
revenue per clinic also witnessed growth of 6%, averaging $38,000 per clinic in
2008 as compared to $36,000 in 2007. In the expanding Dallas,
TX market, the average monthly revenue per clinic is approximately $50,000. In
the estimated $40 billion weight loss and health living industry, the brick and
mortar clinic model has always made up a significant portion of overall
sales. The recent growth in the Medifast Weight Control Centers has
proven that the model is in high demand from a select portion of the weight loss
consumers. Throughout the year, the Company invested in the
infrastructure of its clinic model. The major aspects of the investment in this
division included an expanded support team, the creation of a point of sale
system, a robust customer data tracking system, and finalizing the franchise
opportunity documentation. During 2008, the Company opened
eight additional corporately owned clinics in the Houston, TX market and two
additional centers in the Dallas, TX market.
On
February 18, 2008, the Company announced that it has sold its first franchise of
Medifast Weight Control Centers. The Company sold the rights to open
four clinics in the Greater Baltimore Metropolitan Area. The
franchisee also has the rights to open four additional Medifast Weight Control
Centers in the Baltimore area over the next two years, bringing the total to
eight locations. On June 3, 2008 the Company announced that it
sold the rights to open four Medifast Weight Control Centers in Southern
California and three Medifast Weight Control Centers in Central California to
two different local business operators. On October 8, 2008, the
Company announced the opening of its first franchise clinic in the Baltimore, MD
area. In December 2008, three Medifast Weight Control Center franchise locations
opened in Southern California and one location opened in Central
California. At December 31, 2008, five franchise locations were in
operation.
Overall,
selling, general and administrative expenses increased by $15.3 million as
compared to 2007. Take Shape for Life commission expense, which
is completely variable based upon revenue, increased by approximately $10.1
million as the Company showed sales growth of 79% as compared to 2007. Salaries
and benefits increased by approximately $2 million in 2008. The increase
includes the hiring of additional expertise in critical areas such as Take Shape
for Life and the Medifast Weight Control Centers to support the strong growth in
2008 and beyond. Also, additional personnel were hired in the call
center during the first and second quarters of 2008 as the Company brought the
outsourced Take Shape for Life call center in-house early in the second quarter
of 2008. Going forward, savings will be realized on
communication expense as a result of bringing the call center
in-house. The opening of eight new corporately owned clinics in the
Houston, TX market and two in the Dallas, TX market also required the hiring of
additional center managers and support
staff. Advertising expense in 2008 was
approximately $17.8 million compared to approximately $18.4 million for the same
period last year, a decrease of $600,000. Communication expense
decreased by $200,000 as a result of the Take Shape for Life call center moving
in-house during the second quarter of 2008. Other
expenses increased by $2.4 million which included items such as depreciation,
amortization, credit card processing fees, charitable contributions, and
property taxes. Operating expenses increased by $950,000 which
primarily resulted from additional printing expense for our direct to consumer
postcard mailings and Take Shape for Life printed material, as well as
maintenance, repairs, and supplies for our manufacturing and distribution
facilities. Office expenses increased by $300,000 and stock compensation expense
increased by $225,000 as additional restricted shares were issued to key
executives and Board members in the third and fourth quarters of
2008.
Costs and
Expenses Cost of revenue increased $3.9 million to $25.3 million in 2008 from
$21.5 million in 2007. As a percentage of sales, gross margin
increased to 75.9% in 2008 from 74.4% in 2007. The margin improved
due to efficiencies gained from new machinery purchases in prior year, new
shipping rules that resulted in additional shipping revenue from customers
netting against shipping expense, as well as a price increase on July 1,
2008.
Other
Income/Expense: Other expense increased from a $172,000 in 2007 to
$349,000 at December 31, 2008. The $177,000 increase in other expense
resulted primarily from realized losses of $216,000 on the Company’s equity
investment portfolio managed by Merrill Lynch due to the weakness of the stock
market in 2008. Other income/expense consists of interest expense on
debt, gains or losses on the sale of equity investments, dividends and interest
on equity and bond investments, and interest payments received on the CCS note
receivable. In 2007, the Company also realized other income when it
exercised a stock warrant from a former business partner, and realized a loss on
disposal of assets relating to the closing of three Medifast Weight Control
Centers.
Income
taxes: In 2008, we recorded
$2,415,000 in income tax expense which represents an effective rate of
30.8%. In the
fourth quarter of 2008, the Company amended prior year tax returns to properly
roll forward prior net operating losses for tax purposes which resulted in a
$162,000 tax refund receivable at December 31, 2008. The effective
rate would have been 32.8% without the benefit of the tax refund. In
2007, we recorded $1,706,000 in income tax expense, which represents an annual
effective rate of 30.8%. The Company anticipates a tax rate of
approximately 35-37% in 2009.
Net
income: Net income was $5.4 million in 2008 as compared to $3.8 million in 2007,
an increase of 42%. The improved profitability during 2008 is
due to sales growth in the Take Shape for Life division and Medifast Weight
Control Centers, and gross margin improvement.
SEGMENT
RESULTS OF OPERATIONS
|
|
|
Net Sales by Segment as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Segments
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
Sales
|
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medifast
|
|
|
97,116,000 |
|
|
|
92 |
% |
|
|
78,861,000 |
|
|
|
94 |
% |
|
|
70,181,000 |
|
|
|
95 |
% |
|
All
Other
|
|
|
8,329,000 |
|
|
|
8 |
% |
|
|
4,918,000 |
|
|
|
6 |
% |
|
|
4,015,000 |
|
|
|
5 |
% |
|
Eliminations
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
(110,000 |
) |
|
|
0 |
% |
|
Total
Sales
|
|
|
105,445,000 |
|
|
|
100 |
% |
|
|
83,779,000 |
|
|
|
100 |
% |
|
|
74,086,000 |
|
|
|
100 |
% |
2008
vs. 2007
Medifast
Segment: The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors. As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2008 vs. 2007 above.
All Other
Segment: The All Other reporting segment consists of the sales from
Hi-Energy and Medifast Weight Control Centers. Sales increased by
$3,411,000 year-over year due to the opening of ten new centers throughout 2008,
including eight centers in Houston, TX and two centers in Dallas,
TX. The Dallas, TX market continues to mature with the average
clinic generating approximately $50,000 per month in sales. The
Company is continuing to focus on improved advertising effectiveness, improved
closing rates on walk-in sales, as well as the hiring of more experienced
clinic. At the end of 2008, there were twenty corporately owned
centers opened as compared to ten centers at the end of 2007. In
addition, the Company began franchising the Medifast Weight Control Center model
in 2008. At the end of 2008, there were five franchise centers in
operation.
2007
vs. 2006
Medifast
Segment: The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors. As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2007 vs. 2006 above.
All Other
Segment: The All Other reporting segment consists of the sales from
Hi-Energy and Medifast Weight Control Centers. Sales increased by
$903,000 year-over year as a result of an increase in Medifast Weight Control
Centers sales of $1,013,000. Sales to Hi-Energy licensees decreased
by $110,000 as fewer Hi-Energy licensee clinics remain in operation as clinics
convert to Medifast Weight Control Centers. The increase in Medifast
Weight Control Center’s sales was due to a renewed focus on the expansion of the
corporate clinics, spending increases for advertising, increased advertising
effectiveness, improved closing rates on walk-in sales, as well as the hiring of
more experienced clinic operators to manage the clinics. There were
ten clinics open at the end of 2007 as compared to twelve at the end of
2006.
|
|
|
Net
Profit by Segment as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Segments
|
|
Profit
|
|
|
% of Total
|
|
|
Profit
|
|
|
% of Total
|
|
|
Profit
|
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medifast
|
|
|
8,104,000 |
|
|
|
149 |
% |
|
|
5,937,000 |
|
|
|
155 |
% |
|
|
6,218,000 |
|
|
|
121 |
% |
|
All
Other
|
|
|
(2,669,000 |
) |
|
|
-49 |
% |
|
|
(2,100,000 |
) |
|
|
-55 |
% |
|
|
(952,000 |
) |
|
|
-18 |
% |
|
Eliminations
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
(110,000 |
) |
|
|
-2 |
% |
|
Net
Profit
|
|
|
5,435,000 |
|
|
|
100 |
% |
|
|
3,837,000 |
|
|
|
100 |
% |
|
|
5,156,000 |
|
|
|
100 |
% |
2008
vs. 2007
Medifast
Segment: The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors. As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2008 vs. 2007 above. See
footnote 17, “Business Segments” for a detailed breakout of
expenses.
All Other
Segment: The All Other reporting segment consists of the losses of
Hi-Energy, Medifast Weight Control Centers, and corporate expenses related to
the parent company operations. Year-over-year, the loss in the All
Other segment increased by $569,000. The Hi-Energy and Medifast
Weight Control Centers showed an increase in net profitability year-over-year of
$339,000. The
increase in profitability was due to improved profitability in established
centers. During the year, ten new centers were opened and should have
a positive impact on 2009 earnings. Medifast Corporate expenses
increased by $908,000 year-over-year. Corporate expenses include
items such as auditors’ fees, attorney’s fees, Board of Director expenses,
investor relations, corporate consulting, and corporate outings. In
2008, the Company had additional legal expenses associated with the Sotomayor
legal action that resulted in a $200,000 one time charge to earnings in the
fourth quarter of 2008. See Item 3 – Legal Proceedings on page 16 for
more detail. In addition, the Company had an increase in realized
losses on equity securities in its investment account in the fourth quarter of
2008 due to the weakness in the stock market. See footnote
17, “Business Segments” for a detailed breakout of expenses.
2007
vs. 2006
Medifast
Segment: The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors. As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2007 vs. 2006 above. See
footnote 17, “Business Segments” for a detailed breakout of
expenses
All Other
Segment: The All Other reporting segment consists of the losses of
Hi-Energy, Medifast Weight Control Centers, and corporate expenses related to
the parent company operations. Year-over-year, the loss in the All
Other segment increased by $1,148,000. Corporate expenses
increased by $401,000, as a result of increased fees due to increased reporting
requirements for the Company as a whole. These fees include, but are not limited
to auditors’ fees, attorneys’ fees, board of director expenses, investor
relations, corporate consulting, education and training, and corporate
outings. Hi-Energy and Medifast Weight Control Center expenses
increased by $726,000 due to increased focus on opening new Medifast Weight
Control clinics, hiring of experienced personnel, increased advertising and
developing the Franchise model. See footnote 17, “Business Segments”
for a detailed breakout of expenses.
Contractual
Obligations and Commercial Commitments
As of
December 31, 2008, our principal commitments consisted of obligations for
variable and fixed rate loans detailed in Note 12 of the financial statements,
operating leases for corporately owned Medifast Weight Control Centers detailed
in Note 9 of the financial statements, and copier equipment contracts for our
printing operation that support our marketing efforts.
The
Company has the following contractual obligations as of December 31,
2008
|
|
|
Payments
due by period
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Debt
|
|
|
3,420,000 |
|
|
|
257,000 |
|
|
|
494,000 |
|
|
|
225,000 |
|
|
|
225,000 |
|
|
|
3,113,000 |
|
|
|
7,734,000 |
|
|
Operating
Leases
|
|
|
926,000 |
|
|
|
819,000 |
|
|
|
776,000 |
|
|
|
676,000 |
|
|
|
227,000 |
|
|
|
- |
|
|
|
3,424,000 |
|
|
Copier
Equipment Service Contracts
|
|
|
399,000 |
|
|
|
355,000 |
|
|
|
334,000 |
|
|
|
283,000 |
|
|
|
- |
|
|
|
- |
|
|
|
1,371,000 |
|
|
Total
contractual obligations
|
|
|
4,745,000 |
|
|
|
1,431,000 |
|
|
|
1,604,000 |
|
|
|
1,184,000 |
|
|
|
452,000 |
|
|
|
3,113,000 |
|
|
|
12,529,000 |
|
LIQUIDITY
AND CAPITAL RESOURCES
The Company had stockholders’ equity of
$38,173,000 and working capital of $12,669,000 on December 31, 2008 compared
with $32,420,000 and $10,395,000 at December 31, 2007,
respectively. The $5.8 million net increase in stockholder’s equity
reflects $5.4 million in 2008 profits as well as equity transactions as outlined
in the “Consolidated Statement of Changes in Stockholders’ Equity and
accumulated other comprehensive income (loss).” The Company’s cash and cash
equivalents position decreased from $2.2 million at December 31, 2007 to $1.8
million at December 31, 2008. The decrease is due to large inventory
purchases in the fourth quarter of 2008 to include ten new meal replacement bars
as well as an increase in inventory levels in preparation for the “diet” season
beginning in January 2009. In addition, the Company’s capital
expenditures increased by approximately $2.3 million in 2008 as compared to
2007. In 2008, capital expenditures included the opening of ten new
Medifast Weight Control Centers, development of a point-of-sale system for the
Clinics, development of a new web shopping platform for the direct response
segment, new software system for our Take Shape for Life division, ERP
enhancements, and phone system upgrades.
In
September 2007, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals,
Inc. increased its Secured Line of Credit from $5 million to $7.5 million and
moved the line of credit from Mercantile Safe-Deposit and Trust to Merrill
Lynch. The line of credit is at LIBOR plus 1.3 percent. The increased
line may be used to finance fixed assets, advertising, and inventory of
Medifast, Inc. The Company currently has no off-balance sheet
arrangements.
In the
year ended December 31, 2008 the Company generated cash flow of $5,496,000 from
operations, primarily attributable to higher operating income. This
was offset by net changes in operating assets and liabilities that decreased
cash flow by $4,781,000. The total use of cash from
operations was $6,649,000. The largest use of cash was for the purchase of
inventory. During 2008, inventory increased by $4.7
million. Inventory increased due to our increased sales, introduction
of ten new meal replacement bars late in the fourth quarter of 2008 as well as
the typical fourth quarter inventory build-up in order to prepare for “diet
season” in the first quarter of 2009. Additional uses of cash
included an increase in prepaid taxes of $1.1 million, increase in other assets
of $251,000, and a reduction in income taxes payable of
$592,000. This was offset by sources of cash from a decrease in
accounts receivable - $43,000, decrease in prepaid expenses - $693,000, decrease
in deferred compensation - $282,000, and an increase in accounts payable -
$850,000.
In the
year ended December 31, 2008, net cash used in investing activities was
$7,313,000, which primarily consisted of the purchase of property and
equipment. The increase in property and equipment relates to the
building of a large amount of infrastructure in 2008 to support
growth. This included the opening of ten new Medifast Weight Control
Center locations, development of a point-of-sale system for the Medifast Weight
Control Centers, development of a new web shopping platform for the direct
response segment, new software system for our Take Shape for Life division, ERP
enhancements, IT infrastructure to support new systems, phone system upgrades,
and leasehold improvements to manufacturing and distribution facilities to
support future growth.
In the
year ended December 31, 2008, financing activities generated $1,463,000 in cash
flow. Sources of cash included funds drawn from the line of credit -
$1.6 million, a decrease in notes receivable - $132,000, and issuances of
warrants and options exercised with cash - $32,000. This was offset
by a use of cash in the repayment of long term debt - $264,000.
In
pursuing its business strategy, the Company may require additional cash for
operating and investing activities. The Company expects future cash
requirements, if any, to be funded from operating cash flow and cash flow from
financing activities.
There are
no current plans or discussions in process relating to any material acquisition
that is probable in the foreseeable future.
2007
COMPARISON WITH 2006
OPERATING
Revenue: Revenue
increased to $83.8 million in 2007 as compared to $74.1 million in 2006, an
increase of $9.7 million or 13%. The direct marketing sales channel accounted
for 56% of total revenue, Take Shape for Life 33%, doctors 5%, and brick and
mortar clinics 6%. The direct marketing sales channel, which is
fueled primarily by consumer advertising, increased revenues by approximately 3%
year-over year. Take Shape for Life sales, which are fueled by
person-to-person recruiting and support increased by 23%
year-over-year. The Company’s doctor’s sales increased by 8% compared
to 2006. The Company’s clinic division which began operating under
the Medifast Weight Control Center name in late 2006, increased sales by 37% as
compared to 2006.
The Take
Shape for Life division grew 23% year-over-year. This growth can
largely be attributed to the tools and training that led to an increase in the
ability of the division to both promote growth in recruiting of health coaches,
as well as better supporting this growth as it occurs. This continued investment
proved to be a large part of the current growth trends in Take Shape for Life
sales, as well as the number of active health coaches. The number of
active health coaches grew to 1,850 at the end of the fourth quarter 2007
compared to 1,200 at the same time period in 2006, an increase of 54%. This
recent growth in health coaches was recently observed in July of 2007, with over
80% attendance growth at the 2007 National Convention compared to the attendance
at the 2006 Convention. The Company believes that the growth in
health coach activity is a positive trend that should continue, and will lead to
significant revenue growth in the near future
The
Medifast Weight Control Centers, which represent approximately 6% of the
Company’s overall revenues, are currently operating in ten locations in Dallas
and Orlando. In 2007, the Company experienced revenue growth of 37%
versus the same time period last year. The average monthly revenue per clinic
also witnessed significant growth of 64%, averaging $36,000 per clinic in 2007
as compared to $22,000 in 2006. In the expanding Dallas, TX
market, the average monthly revenue per clinic is approximately $50,000. In the
estimated $40 billion weight loss and health living industry, the brick and
mortar clinic model has always made up a significant portion of overall
sales. Medifast has incorporated this model with the creation of the
Medifast Weight Control Centers. The recent growth in this
division has proven that the model is in high demand from a select portion of
the weight loss consumers. The Company believes that with the recent
industry launches of over-the-counter and anticipated launches of prescription
appetite suppressant medications that this model will continue to
grow. Therefore, throughout 2007, the Company invested in the
infrastructure of its clinic model. The major aspects of the investment in this
division included an expanded executive team, the creation of a point of sale
system, a robust customer data tracking system, finalizing the franchise
opportunity documentation, and the beginning stages of expansion into several
new locations. The Company believes this business will be a major
driver of revenues and profits for the Medifast business as it continues to
expand. The Company plans to continue the expansion of the Medifast
Weight Control Centers with both additional corporate locations as well as
offering the model through a franchise opportunity. The Company is
opening four additional corporately owned clinics in the Houston, TX market by
the end of the first quarter of 2008. In addition on February 18,
2008, the Company announced that it has sold its first franchise of Medifast
Weight Control Centers. The Company sold the rights to open four
clinics in the Greater Baltimore Metropolitan Area. The franchisee
also has the rights to open four additional Medifast Weight Control Centers in
the Baltimore area over the next two years, bringing the total to eight
locations.
Overall,
selling, general and administrative expenses increased by $8.1 million as
compared to 2006. The majority of the increase was due to investments
in the Company’s future advertising campaigns, along with the necessary
infrastructure support tools to allow the future campaigns to improve in
effectiveness. Advertising expense for 2007 was approximately $18.4
million compared to approximately $14.3 million for the same period last year,
an increase of $4.1 million. In the prior year, the Company benefited
from a substantial editorial placement in a major consumer publication at no
cost to the Company. During 2007, the Company has
invested in multiple celebrity endorsement contracts as well as increased public
relations expense to focus on increasing brand awareness that will benefit our
future advertising campaigns. Salaries and benefits increased
by approximately $1,500,000 in 2007 as the Company hired additional expertise in
critical areas in order to assist in future growth and meet regulatory
needs. This primarily includes IT, nutrition and product development,
marketing, Medifast Weight Control Centers, and Take Shape for
Life. Take Shape for Life commission expense, which is
completely variable based upon revenue, increased by approximately
$2,400,000. Communication expense which includes outsourced call
centers decreased by $50,000. The Company has spent a significant
amount of time and materials in 2007 building the future call center
infrastructure with related technology and personnel. This investment
will allow the call center to increase the percentage of advertising calls to be
handled in-house. It is believed that this initiative will amount to
significant savings and improved closing rates in the future. The
reduction in outsourced call center expenses will continue in stages throughout
2008. Other expenses increased by $550,000, which included items such
as depreciation, amortization, credit card processing fees, charitable
contributions, and property taxes. Stock compensation expense
increased by $192,000 as compared to 2006 as stock awards vest over 5 and 6 year
terms for executives. These increases were offset by an approximately
$250,000 decrease in office expense and the absence of a $323,000 loss resulting
from the sale of the Consumer Choice Systems division in the first quarter of
2006.
Costs and
Expenses: Cost of revenue increased $3.3 million to $21.5 million in
2007 from $18.2 million in 2006. As a percentage of sales, gross
margin remained at approximately 75% in 2007 and 2006.
Other
Income/Expense: Other income/expense decreased from $82,000 in other
income in 2006 to $172,000 in other expense at December 31,
2007. Other income/expense consists of interest expense on debt,
gains on the sale of equity investments, interest payments received on the CCS
note receivable, and overpayments of taxes. In 2007, the Company also
realized other income when it exercised a stock warrant from a former business
partner, and realized a loss on disposal of assets relating to the closing of
three Medifast Weight Control Centers.
Income
taxes: In
2007, we recorded $1,706,000 in income tax expense, which represents an annual
effective rate of 30.8%. In 2006, we recorded income tax
expense of $2,307,000 which reflected an estimated annual effective tax rate of
30.9%. The Company anticipates a tax rate of approximately 32-34% in
2008.
Net
income: Net income was $3.8 million in 2007 as compared to $5.2 million in 2006,
which reflected a decrease of $1.4 million or 26%. The decrease was
directly related to the initiatives of the Company to create its new advertising
campaign and improve future capabilities to increase advertising
effectiveness. Additionally, the Company did not have the benefit of
the no cost editorial publication that occurred in the first quarter of 2006
that led to significant profits.
LIQUIDITY
AND CAPITAL RESOURCES
The Company had stockholders’ equity of
$32,420,000 and working capital of $10,395,000 on December 31, 2007 compared
with $27,916,000 and $9,612,000 at December 31, 2006,
respectively. The $4.5 million net increase in stockholder’s equity
reflects $3.8 million in 2007 profits as well as equity transactions as outlined
in the “Consolidated Statement of Changes in Stockholders’ Equity and
accumulated other comprehensive income (loss).” The Company’s cash and cash
equivalents position increased from $1.1 million at December 31, 2006 to $2.2 at
December 31, 2006. The increase is due to improved sales in fourth
quarter 2007 versus 2006 as well as timing of accounts payable.
In
September 2007, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals,
Inc. increased its Secured Line of Credit from $5 million to $7.5 million and
moved the line of credit from Mercantile Safe-Deposit and Trust to Merrill
Lynch. The line of credit is at LIBOR plus 1.3 percent. The increased
line may be used to finance fixed assets, advertising, and inventory of
Medifast, Inc. The Company currently has no off-balance sheet
arrangements.
In the
year ended December 31, 2007, the Company generated cash flow of $7,954,000 from
operations, primarily attributable to higher operating income. This
was offset by net changes in operating assets and liabilities that decreased
cash flow by $1,289,000. The largest use of cash was for the purchase
of inventory. The Company builds up inventory each year in the fourth
quarter in order to prepare for “diet season” in the first quarter of
2008. Additional uses of cash included the funding of the Chairman of
the Boards deferred compensation plan outlined in Note 1 of the financial
statements as well as prepaid advertising for January of 2008. This
was offset by an increase in accounts payable and income taxes payable of
$1,367,000 and $57,000, respectively.
In the
year ended December 31, 2007, net cash used in investing activities was
$7,969,000, which primarily consisted of the purchase of intangible assets and
purchases of property and equipment. The increase in intangible
assets relates to the acquisition of customer lists in 2007 which are used in
direct response marketing campaigns. These campaigns consist of
postcards and e-mails that are sent to customers with a special offer or
discount coupon to order on our website, choosemedifast.com, or through our
in-house call center. In the fourth quarter of 2007, the Company
leased an additional Xerox Igen3 printer in order to increase its direct mailing
capabilities. Large customer mailings will be sent out bi-weekly
throughout 2008. The increase in property and equipment relates to
the building of a large amount of infrastructure in 2007. This
included the purchase of a state of the art Avaya phone system, additional
enhancements to our Enterprise Resource Planning System, IT server
and networking upgrades, the build out of our new Medifast Weight Control
Centers as well as leasehold improvements to our distribution facility in
Ridgely, MD.
In the
year ended December 31, 2007, financing activities generated $1,125,000 in cash
flow, representing principal repayments of long-term debt, and the purchase of
25,000 shares of treasury stock. This was offset by an increase in
the line of credit, decrease in the CCS note receivable, and issuances of
warrants and options exercised with cash.
In
pursuing its business strategy, the Company may require additional cash for
operating and investing activities. The Company expects future cash
requirements, if any, to be funded from operating cash flow and cash flow from
financing activities.
There are
no current plans or discussions in process relating to any material acquisition
that is probable in the foreseeable future.
SEASONALITY
The
Company's weight management products and programs have historically been subject
to seasonality. Traditionally the holiday season in November/December
of each year is considered poor for diet control products and
services. January and February generally show increases in sales, as
these months are considered the commencement of the “diet
season.” The Company did not experience the same degree of
seasonality in 2008. This is largely due to the increase in the
consumer’s awareness of the overall health and nutritional benefits accompanied
with the use of the Company’s product line. As consumers continue to
increase their association of nutritional weight loss programs with overall
health, seasonality will continue to decrease.
INFLATION
To date,
inflation has not had a material effect on the Company's business.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and a decline in the stock market. The Company
does not enter into derivatives, foreign exchange transactions or other
financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates. The
principal risks of loss arising from adverse changes in market rates and prices
to which the Company and its subsidiaries are exposed relate to interest rates
on debt. Since nearly all of our debt is variable rate based, any
changes in market interest rates will cause an equal change in our net interest
expense. At December 31, 2008, there was $7.7 million of variable
interest loans outstanding which is subject to interest rate
risk. Interest rates on our variable rate loans ranged from 1.74% to
2.94% for the year ended December 31, 2008. Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $77,000 over a 12-month period.
ITEM
8. FINANCIAL STATEMENTS.
The
information required by this item is set forth on pages 48 to 70 hereto and
incorporated by reference herein.
ITEM
9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURES.
There
were no disagreements with the Company’s independent auditors, regarding
accounting and financial disclosures for the fiscal year ending December 31,
2008.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Securities and Exchange Commission defines the term “disclosure controls and
procedures” to mean a company’s controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Based on the evaluation of the
effectiveness of our disclosure controls and procedures by our management, with
the participation of our Chief Executive Officer and our Chief Financial
Officer, as of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures at the end of the period covered by this report were
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms, and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
the Company’s financial reporting. Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
the Company’s financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes
policies and procedures that: (i) pertain to maintaining records that, in a
reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary for preparation of our financial
statements in accordance with generally accepted accounting principles and that
the receipts and expenditures of the Company are being made in accordance with
management and board of director authorization; and (iii) provide
reasonable assurance that unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on our financial statements
would be prevented or detected on a timely basis.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
evaluated the effectiveness of the Company’s internal control over financial
reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based upon that evaluation, management concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2008.
Changes
in our Internal Control
There was
no change in our internal control over financial reporting during the quarter
ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Limitations
on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure
controls or our internal controls will prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Medifast, Inc. have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with associated
policies or procedures. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Board
of Directors currently consists of 10 persons. The directors, their
ages, and the year in which they first became director are provided in the table
below:
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Director
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Name
and Experience
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Since
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Barry B. Bondroff, CPA,
age 60, is an officer and director with Gorfine, Schiller & Gardyn,
PA, a full-service certified public accounting firm offering a wide range
of accounting and consulting services. Previously,
he was a Senior Managing Director with SMART. Bondroff brings over 35
years of experience providing companies of all sizes and industries with
practical and cost-effective accounting, assurance, tax, business,
technology and financial advisory services. Prior to managing SMART,
Bondroff was the Managing Director for Grabush, Newman & Co., P.A.,
which combined with SMART in May 2003. Bondroff began his career with
Grabush Newman in 1970, and in 1976 became Officer and was promoted to
Managing Director in 1982. He earned his Bachelor of Science degree in
Accounting from the University of Baltimore. Additionally, Bondroff serves
on the Board of Directors for the publicly traded First Mariner Bank of
Maryland, a NASDAQ listed SEC registrant. He is active with First Mariner
serving on the Executive Committee, Loan Committee, Audit Committee and as
Chairman of the Compensation Committee. In addition to his professional
affiliations, Bondroff served on the Executive Committee for Israel Bonds
and was a Director of Cycle Across Maryland. He has served the National
Jewish Medical and Research Center, the Jewish Center for Business
Development and has assisted the Baltimore Symphony Orchestra in its
fundraising efforts. In addition, Barry was a past President and Treasurer
of the Edward A. Meyerberg Northwest Senior Center, and also served as a
Member of the Board of Directors for the Levindale Hebrew Geriatric Center
and Hospital. He currently serves as Treasurer for Special
Olympics of Maryland, and as a Trustee for Stevenson University in
Maryland.
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2008
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Joseph D. Calderone, age
60, is the chaplain and counselor at the Villanova University School of
Law. He most recently served as the interim President at
Merrimack College in North Andover, MA. He formerly spent over
eight years with the Loyola University Medical Center as the hospital
Chaplain and taught multiple courses including Introduction to the
Practice of Medicine and Business Ethics. Rev. Calderone
recently retired as a Captain in the US Navy Reserves. He
served as the Wing Chaplain for the 4th Marine Aircraft
Wing.
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2003
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Charles P. Connolly, age
60, is currently an independent director focusing on bank relationships,
debt refinancing, merger and acquisition strategy and executive
compensation design. Mr. Connolly spent 29 years at First Union Corp. that
merged with Wachovia Bank in 2001. He retired in 2001 as the President and
CEO of First Union Corp. Mr. Connolly serves on the Boards of
numerous non-profit organizations. He holds an MBA from the
University of Chicago and AB from Villanova University.
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2006
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George J. Lavin, Jr.,
Esq., age 80, is a senior partner at Lavin, O’Neil, Ricci, Ceprone
& Disipio. Mr. Lavin is a 1951 graduate of Bucknell University. He
attended the University of Pennsylvania School of Law, receiving an LL.B.
in 1956, and then served as a Special Agent, Federal Bureau of
Investigation, United States Department of Justice, until 1959. Mr. Lavin
is one of the dominant product liability defense attorneys in the nation.
He has had regional responsibilities in several automotive specialty
areas, and has been called upon to try matters throughout the county on
behalf of his clients. Mr. Lavin's present practice and specialty
emphasizes his commitment to defending the automotive industry. Mr. Lavin
is admitted to practice before the Supreme Court of Pennsylvania, the
United States Court of Appeals for the Third Circuit and the United States
District Courts for the Eastern and Middle Districts of Pennsylvania. He
is a member of the Faculty Advisory Board of the Academy of Advocacy, the
Association of Defense Counsel, The Defense Research Institute, The
American Board of Trial Advocates, and the Temple University Law School
faculty. He has also been elected a fellow of the American College of
Trial Lawyers. On March 1, 1994, Mr.Lavin assumed the title of Counsel to
The Firm.
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2005
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Bradley T. MacDonald,
age 61, is the Executive Chairman of the Board of Medifast,
Inc. Mr. MacDonald has been Chairman of the Board of Medifast,
Inc. since January 1998 and was also Chief Executive officer until March
of 2007. He was the principal architect of the turnaround of
Medifast and formulated the “Direct to Consumer” business models that are
the primary drivers of Revenue to this day. He also was the co-founder of
Take Shape for Life and acquired the Clinic operations in 2002. During his
time as CEO, he managed the company to 29 consecutive quarters of profits
and improved shareholders equity from negative $4 million to over $27
million in less than seven years. He also increased the Company’s market
cap from less than $1 million to over $100 million and listed the company
on the NYSE. In 2006, Mr. MacDonald received the prestigious and audited
Ernst and Young award of “Entrepreneur of the Year” for the state of
Maryland in the consumer products category. Also, he helped lead the
Company to national recognition in Forbes Magazine ranking Medifast
28th
of the top 200 small companies in America. 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 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
was appointed and served on the Defense Advisory Board for Employer
Support of the Guard and Reserve (ESGR.) He also served
on the Board of Directors of the Baltimore County Chamber of
Commerce. Currently, Mr. MacDonald serves on the Board of
Directors of Stevenson University in Maryland, and the Institute of Notre
Dame High School, Baltimore, Maryland. He is also the Vice-Chairman of the
Board of Directors of the Marine Corps Reserve Toys for Tots
Foundation. Mr. MacDonald is the father of Margaret MacDonald
who performs the role of President and Chief Operating Officer at
Medifast, Inc. Mr. Michael C. MacDonald is the brother of Mr.
Bradley T. MacDonald.
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1996
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Michael C. MacDonald,
age 56, is senior vice president, operational effectiveness for Xerox
Corporation. He leads a corporate initiative to review the company's core
functions including marketing, learning, human resources and other key
areas to ensure the Company is maximizing the effectiveness of its
resources and delivering a solid return on investment. Previously, he was
president of global accounts and marketing operations for Xerox
Corporation responsible for corporate marketing, xerox.com, advertising,
brand, public relations, and corporate communications. He was
named to this position in October 2004 and was appointed a corporate
senior vice president in July 2000. MacDonald is on the board
of directors of PAETEC and the Jimmy V Foundation. Mr.
MacDonald completed executive business and management programs at Columbia
University in 1992 and the International Senior Management Program at
Harvard University in 1998.
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1998
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Dennis M. McCarthy, age
64, practiced law for 21 years as a civil litigator in tort and contract
cases. He was the founding member and managing partner of a Columbus, Ohio
based law firm. Additionally, he served active duty in the U.S. Marine
Corps for 23 years and served 18 years in reserve service. Mr. McCarthy
retired from the Marine Corps in 2005 in the grade of Lieutenant General
after four years in command of all Marine Reserve forces. Mr. McCarthy is
currently the Executive Director of the Reserve Officers Association, a
congressionally chartered association devoted to national defense. In
addition to Medifast, he is a member of the Board of Directors of Rivada
Networks.
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2006
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Michael S. McDevitt, age
30, joined Medifast in 2002 as the Controller and was promoted to Vice
President of Finance in January 2004. In March 2005, he was promoted to
President and in January of 2006 was also named Chief Financial Officer.
In March of 2007, Mr. McDevitt was promoted to Chief Executive Officer of
the Company. Prior to joining Medifast, Mr. McDevitt worked as a Financial
Analyst for the Blackstone Group, an investment advisory firm based in New
York, NY.
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2007
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Jeannette M. Mills, age
42, currently serving as senior vice president with the Baltimore Gas and
Electric Company, a subsidiary of Constellation Energy. A Baltimore, Md.
native, Mills earned her Bachelor of Science in Electrical Engineering
from Virginia Polytechnic Institute (Virginia Tech) and she currently
serves on the Advisory Board of the Bradley Department of Electrical and
Computer Engineering. In 2006, Mills earned her Masters of Business
Administration from Loyola College. Ms. Mills also works in the community
includes serving as Chair of the Board of Directors for Voices for
Children, Howard County's Court Appointed Special Advocate Program.
Additionally, she serves on the Board of the Creative Alliance, a Program
that builds communities by bringing together artists and audiences from
diverse backgrounds to experience spectacular arts programs and engage in
the creative process.
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2008
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Donald F. Reilly, OSA,
age 61, 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, Staff at Villanova University, Personnel Director
of the Augustinian Province of St. Thomas of Villanova, Provincial
Counselor, Co-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. He also serves on the Board
of Trustees of Merrimack College, MA, St. Augustine Prep, NJ, and Malvern
Prep, PA. Fr. Reilly was recently re-elected Provincial of the
Augustinian Order at Villanova, PA. He oversees more than 220
Augustinian Friars and their service to the Church, teaching at
universities and high schools, ministering to parishes, serving as
chaplain in the Armed Forces and hospitals, ministering to AIDS victims,
and serving missions in Japan, Peru, and South Africa.
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1998
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Margaret
MacDonald–Sheetz, age 31, joined Medifast in 2000 as the Director
of Sales and Administration. In 2002, she was promoted to VP of
Operations and in 2004 promoted to Senior VP of Operations. In May of
2006, Ms. MacDonald received an Executive MBA from Loyola University. In
March 2007, she was promoted to President and Chief Operating Officer of
Medifast Inc.
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2008
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Mary T. Travis, age 57,
is currently employed with Eagle National Bank 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 40 years of diversified
experience. She is an approved instructor of the Mortgage Bankers
Association Accredited School of Mortgage Banking. Mrs. Travis was
also formally a delegate and 2nd Vice President of the Mortgage Bankers
Association of Greater Philadelphia and the Board of Governors of the
State of Pennsylvania. Mrs. Travis is currently on Board of
Governors of the Mortgage Bankers Association of Greater
Philadelphia.
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2002
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ADDITIONAL
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES
Director
Independence
The Board
consists of 12 members of which 9 are non-management
directors. Determination as to the qualifications of an
independent directors are determined under section 303A.02 of the New York
Stock Exchange, or the NYSE, Listed Company Manual and the Company’s Categorical
Standards of Independence. The NYSE’s independence guidelines and the Company’s
categorical standards include a series of objective tests, such as the director
is not an employee of the Company and has not engaged in various types of
business dealings involving the Company, which would prevent a director from
being independent. The Board of Directors has affirmatively determined that none
of the Company’s independent directors had any relationships with the
Company.
The
Board, in applying the above referenced standards has affirmatively determined
the Company’s current independent directors are: Barry B. Bondroff,
Joseph D. Calderone, Charles P. Connolly, George J. Lavin, Jr. Esq., Dennis M.
McCarthy, Jeannette M. Mills, Donald F. Reilly, and Mary T.
Travis.
Board
Meetings
For the
fiscal year ended December 31, 2008 (“Fiscal 2008”), the Board of Directors held
five meetings. All Board members attended at least 75% of the aggregate number
of Board meetings and applicable committee meetings held while such individuals
were serving on the Board of Directors, or such committees. Under the
Company’s Principles of
Corporate Governance, which is available on the Company’s website www.choosemedifast.com, by
following the link through “Investor Relations” to “Corporate Governance,” each
director is expected to dedicate sufficient time, energy and attention to ensure
the diligent performance of his or her duties, including attending meetings of
the shareholders of the Company, the Board of Directors and committees of which
he or she is a member. Twelve directors attended the 2008 annual
general meeting.
Committees
of the Board
Our
Board of Directors has a standing audit committee, nominating and corporate
governance committee, compensation committee, and executive
committee.
Audit
Committee
Our
audit committee consists of Barry B. Bondroff, Charles P. Connolly, George J.
Lavin, and Mary T. Travis, each of whom are independent as discussed above under
“Director Independence.” As required by Rule 303A.07 of the NYSE Listed
Company Manual, the Board of Directors has affirmatively determined that each
audit committee member is financially literate, and that Mr. Connolly is an
“audit committee financial expert,” as defined in Item 407(d)(5) of
Regulation S-K.
The
principal duties of the audit committee are as follows:
|
|
Ÿ
|
have
the sole authority and responsibility to hire, evaluate and, where
appropriate, replace the independent
auditors;
|
|
|
Ÿ
|
meet
and review with management and the independent auditors the interim
financial statements and the Company’s disclosures under Management’s
Discussion and Analysis of Financial Condition and Results of Operations
prior to the filing of the Company’s Quarterly Reports on
Form 10-Q;
|
|
|
Ÿ
|
meet
and review with management and the independent auditors the financial
statements to be included in the Company’s Annual Report on Form 10-K
(or the annual report to shareowners) including (i) their judgment
about the quality, not just acceptability, of the Company’s accounting
principles, including significant financial reporting issues and judgments
made in connection with the preparation of the financial statements;
(ii) the clarity of the disclosures in the financial statements; and
(iii) the Company’s disclosures under Management’s Discussion and
Analysis of Financial Condition and Results of Operations, including
critical accounting policies;
|
|
|
Ÿ
|
review
and discuss with management, the internal auditors and the independent
auditors the Company’s policies with respect to risk assessment and risk
management;
|
|
|
Ÿ
|
review
and discuss with management, the internal auditors and the independent
auditors the Company’s internal controls, the results of the internal
audit program, and the Company’s disclosure controls and procedures, and
quarterly assessment of such controls and
procedures;
|
|
|
Ÿ
|
establish
procedures for handling complaints regarding accounting, internal
accounting controls and auditing matters, including procedures for
confidential, anonymous submission of concerns by employees regarding
accounting and auditing matters;
and
|
|
|
Ÿ
|
Review
and discuss with management, the internal auditors and the independent
auditors the overall adequacy and effectiveness of the Company’s legal,
regulatory and ethical compliance
programs.
|
Our
Board of Directors has adopted a written charter for the audit committee which
is available on the Company’s website at www.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.” In fiscal 2008, the audit committee met four
times.
Nominating
and Corporate Governance Committee
The
nominating and corporate governance committee consists of Joseph D. Calderone,
Jeannette M. Mills, Donald F. Reilly, and George J. Lavin, all of whom
are independent as discussed above under “— Director
Independence.”
The
principal duties of the nominating and corporate governance committee are as
follows:
|
|
•
|
to
recommend to our Board of Directors proposed nominees for election to the
Board of Directors both at annual general meetings and to fill vacancies
that occur between general meetings; and
|
|
|
|
|
|
•
|
To
make recommendations to the Board of Directors regarding the Company’s
corporate governance matters and
practices.
|
Our Board
of Directors has adopted a written charter for the nominating and corporate
governance committee, which is available on the Company’s website at
www.choosemedifast.com by following the links through
“Investor Relations” to “Corporate Governance” or in print to any shareholder
who requests it as set forth under “Additional Information — Annual Report,
Financial and Additional Information.” In fiscal 2008, the nominating and
corporate governance committee met four times.
Compensation
Committee
The
compensation committee currently consists of Joseph D. Calderone, Dennis M.
McCarthy, Esq. Jeannette M. Mills, and Mary T. Travis, all of whom were
independent as discussed above under “— Director
Independence.”
The
principal duties of the compensation committee are as follows:
|
|
Ÿ
|
measure
the Chief Executive Officer’s performance against his goals and objectives
pursuant to the Company plans;
|
|
|
Ÿ
|
determine
the compensation of the Chief Executive Officer after considering the
evaluation by the Board of Directors of his
performance;
|
|
|
Ÿ
|
review
and approve compensation of elected officers and all senior executives
based on their evaluations, taking into account the evaluation by the
Chief Executive Officer;
|
|
|
Ÿ
|
review
and approve any employment agreements, severance arrangements, retirement
arrangements, change in control agreements/provisions, and any special
or supplemental benefits for each elected officer and
senior executive of the Company;
|
|
|
Ÿ
|
approve,
modify or amend all non-equity plans designed and intended to provide
compensation primarily for elected officers and senior executives of the
Company;
|
|
|
Ÿ
|
make
recommendations to the Board regarding adoption of equity plans;
and
|
|
|
Ÿ
|
Modify
or amend all equity plans.
|
Our
Board of Directors has adopted a written charter for the compensation committee
which is available on the Company’s website at www.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.” In fiscal 2008, the compensation committee met four
times.
Executive
Committee
Messrs.
Bradley T. MacDonald, Michael C. MacDonald, Michael S. McDevitt, Dennis M.
McCarthy, Esq., and Jeannette M. Mills are members of the Executive
Committee. The Executive Committee has all the authority of the Board
of Directors, except with respect to certain matters that by statute may not be
delegated by the Board of Directors. The Committee meets periodically
during the year to develop and review strategic operational and management
polices for the Company. The Committee held two meetings during
fiscal 2008.
ADDITIONAL
INFORMATION
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Exchange Act requires the Company’s directors and executive officers and
persons who beneficially own more than ten percent of a registered class of the
Company’s equity securities to file with the SEC and the NYSE initial reports of
ownership and reports of changes in ownership of equity securities of the
Company. Directors, officers and greater-than-ten-percent beneficial owners are
required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms filed by them. In 2008, to the Company’s
knowledge, based solely on a review of the copies of such filings on file with
the Company and written representations from the Company’s directors and
executive officers, no Section 16(a) filing requirements were applicable to
the Company’s directors, executive officers and greater-than-ten-percent
beneficial owners in fiscal 2008.
Codes
of Business Conduct and Ethics and Corporate Governance Guidelines
Our Board
of Directors has adopted a corporate Code of Business Conduct and Ethics
applicable to our directors, officers, including our principal executive
officer, principal financial officer and principal accounting officer, and
employees, as well as Corporate Governance Guidelines, in accordance with
applicable rules and regulations of the SEC and the NYSE. Each of our Code of
Business Conduct and Ethics and Corporate Governance Guidelines are available on
our website at
www.choosemedifast.com by following the links through “Investor
Relations” to “Corporate Governance.”
Any
amendment to, or waiver from, a provision of the Company’s Code of Business
Conduct and Ethics with respect to the Company’s principal executive officer,
principal financial officer, principal accounting officer or controller will be
posted on the Company’s website, www.choosemedifast.com.
ITEM
11. EXECUTIVE COMPENSATION.
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
of Compensation Program
Our
Compensation Committee of the Board of Directors has responsibility for
establishing, implementing and continually monitoring adherence with the
Company’s compensation philosophy. The Compensation Committee ensures that the
total compensation paid to our named executive officers is fair, reasonable and
competitive. Generally, the types of compensation and benefits provided to our
named executive officers are similar to those provided to other officers and
employees of the Company.
Throughout
this discussion, the individuals who served as our CEO, CFO, and President
during Fiscal 2008, as well as the other individuals included in the Summary
Compensation Table on page 35, are referred to as the “named executive
officers.”
Objectives
of Compensation Program
The main
objective of our executive compensation program is to create a competitive total
rewards package based on the attainment of short-term performance objectives and
long-term strategic goals. Accordingly, our executive compensation program
consists of the following three principal elements: base salary, cash bonus and
equity grants in the form of stock options and restricted stock, with an
emphasis on incentive compensation rather than base salary. Our executives are
also eligible to participate in employee benefit and retirement plans offered by
the Company, which currently include defined contribution, and 401(k) plans, and
health care and other insurance programs. The benefit programs available to
executives are the same as those available to all other eligible
employees.
Decision-Making;
Role of Executive Officers in Compensation Decisions
The
Compensation Committee of our Board of Directors is comprised solely of
non-affiliate independent Directors who meet the independence requirements of
the NYSE. Our Compensation Committee makes all decisions regarding the
compensation of our CEO, including establishing the performance goals and
objectives for our CEO, evaluating our CEO’s performance in light of the goals
and objectives that were set and determining and recommending to our Board the
CEO’s compensation based on that evaluation.
Our CEO
makes recommendations to our Compensation Committee for the compensation of all
other named executive officers. Our Compensation Committee and Board may accept
or adjust such recommendations as they determine in the best interests of the
Company and its stockholders and has final approval over all such compensation
decisions. To the extent not established by our Board of Directors, our
Compensation Committee is also authorized to establish compensation and benefits
for our Chairman and for new and existing non-affiliate independent
Directors.
Our
Chairman, CEO, and Vice President of Human Resources provide advice, analysis
and recommendations to our Compensation Committee.
Elements
of Executive Compensation
Our
Compensation Committee also evaluates the achievement of corporate, individual
and organizational objectives for each executive officer during the prior fiscal
year. Each element of compensation is chosen in order to attract and retain the
necessary executive talent, reward corporate performance and provide incentive
for the attainment of long-term strategic goals. The allocation of each element
of compensation is determined by our Compensation Committee for each executive
based on the following factors:
|
|
•
|
Performance
against corporate, individual and organizational objectives for the fiscal
year;
|
|
|
•
|
Importance
of particular skill sets and professional abilities to the achievement of
long-term strategic goals; and
|
|
|
•
|
Contribution
as a leader, corporate representative and member of the senior management
team.
|
These
elements support our overall compensation philosophy by creating a balanced
focus on shorter-term corporate performance and the achievement of longer-term
business goals and stockholder value. While we believe in structuring executive
compensation plans that give our executives incentive to deliver certain
objective elements of corporate financial performance over specified time
periods, we do not believe in a purely mechanical approach. Instead, part of our
executive compensation philosophy includes an element of reward for
non-quantitative achievements demonstrated by our executives in the actions and
decisions they have taken throughout the year. When establishing our executive
compensation plans for a given year, it is not possible to foresee all of the
challenges and demands that will be made of our executives, both as a management
team and in their areas of individual responsibility. We believe that by
rewarding the quality of our decision-making and leadership, in addition to the
achievement of quantifiable results, we are building a management team capable
of creating stockholder value over the longer-term, while remaining disciplined
in delivering shorter-term financial results. Accordingly, there is no
pre-established policy or target for the allocation between either cash and
non-cash or short-term and long-term incentive compensation. Rather, the
Compensation Committee reviews information provided by industry surveys and peer
company data to determine appropriate level and mix of incentive compensation.
Income from such incentive compensation is realized as a result of the
performance of the Company and the individual, depending on the type of award,
compared to established goals.
Base
Salary
Our base
salary determinations principally reflect the skills and performance levels of
individual executives, the needs of the Company, and pay practices of comparable
public companies. It is not our policy to pay our executive officers at the
highest base salary level. Instead, we establish executive base salaries
conservatively at or below a midpoint level relative to an appropriate set of
peers. We believe this policy sets a prudent and fiscally responsible tone for
the Company’s overall base salary compensation programs.
Target
Bonus
Cash
bonuses principally reflect the Company’s financial performance and achievement
of corporate objectives established by our Board prior to the fiscal year. The
executive bonus plan is designed to reward our executives for the achievement of
shorter-term financial goals, predominantly revenue growth and profitability,
with cash flow and other operating ratios also considered. The
allocation of the bonus pool among the employees, including senior executives,
is at the discretion of the Compensation Committee. The Chief Executive Officer,
Chief Financial Officer and other senior executives discuss and jointly develop
recommended bonus allocations among the staff within the various functional
areas of the Company. In addition, the Chief Executive Officer prepares an
allocation of bonus payments among the senior executive group. In consultation
with the Chief Executive Officer, the Compensation Committee evaluates, adjusts
and approves the amount and allocation of the bonus pool. In determining the
cash bonus allocation among senior executives, the Compensation Committee and
the Chief Executive Officer consider each executive’s a) contribution to current
and long-term corporate goals, and b) value in the labor
market.
Equity
Compensation
Stock
option and restricted stock awards principally reflect the responsibilities to
be assumed by each executive in the upcoming fiscal year, the responsibilities
of each executive in prior periods, the size of awards made to each executive in
prior years relative to the Company’s overall performance, available stock for
issuance under our Option Plan, and potential grants in future years. The
Committee believes that stock option and restricted stock grants (1) align
the interests of executives with long-term stockholder interests, (2) give
executives a significant, long-term interest in the Company’s success, and
(3) help retain key executives in a competitive market for executive
talent. The Company does not intend to issue stock options as part of
compensation in 2009 and beyond.
Equity
Ownership by Executives
We do not
currently have a formal equity ownership requirement for our executives.
However, we encourage our executives to own equity in the Company on a voluntary
basis. All of our named executive officers own stock, restricted stock and
vested and unvested stock options. We periodically review the vested and
unvested equity holdings of our executives and evaluate whether these holdings
sufficiently align the interests of our executives with the long-term interests
of our stockholders. We may consider adopting equity ownership requirements in
the future.
2008
Summary Compensation Table
The
following table sets forth the annual and long-term compensation for the fiscal
year ended December 31, 2008, of the Company’s Chief Executive Officer and
Chief Financial Officer and each of the three other most highly compensated
executive officers. These individuals, including the Chief Executive Officer and
Chief Financial Officer are collectively referred to as the Named Executive
Officers.
|
|
|
|
|
Salary
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Bonus
|
|
|
Nonqualified
Deferred
Compensation
Contributions
|
|
|
All
Other
|
|
|
Total
|
|
|
Name
and Pricipal Position
|
|
Year
|
|
($)
|
|
|
($)(1)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)
|
|
|
($)(3)
|
|
|
($)
|
|
|
Bradley
T. MacDonald
|
|
2008
|
|
$ |
225,000 |
|
|
|
107,000 |
|
|
|
- |
|
|
|
- |
|
|
$ |
100,000 |
|
|
$ |
6,700 |
|
|
$ |
438,700 |
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
S. McDevitt
|
|
2008
|
|
|
135,000 |
|
|
|
450,000 |
|
|
|
- |
|
|
|
75,000 |
|
|
|
|
|
|
|
2,700 |
|
|
|
662,700 |
|
|
Chief
Executive and CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
V. Williams
|
|
2008
|
|
|
132,500 |
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
|
|
|
|
2,900 |
|
|
|
160,400 |
|
|
Executive
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret
MacDonald - Sheetz
|
|
2008
|
|
|
100,000 |
|
|
|
372,000 |
|
|
|
- |
|
|
|
50,000 |
|
|
|
|
|
|
|
3,000 |
|
|
|
525,000 |
|
|
Chief
Operating Officer, President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan
N. Connors
|
|
2008
|
|
|
99,000 |
|
|
|
101,000 |
|
|
|
- |
|
|
|
20,000 |
|
|
|
|
|
|
|
3,000 |
|
|
|
223,000 |
|
|
VP
of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts
are calculated based on provisions of SFAS, No 123R, “Share Based
Payments.” See note 2 of the consolidated financial statements of the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 regarding assumptions underlying valuation of
equity awards.
|
|
(2)
|
|
Bonus
amounts determined as more specifically discussed above under
“—Compensation Discussion and Analysis”
|
|
(3)
|
|
The
amounts represent the Company’s matching contributions under the 401(K)
plan.
|
2008
Grants of Plan-Based Awards
On
January 25, 2008, the Board of Directors modified Bradley T. MacDonald’s
compensation package for his role in the succession plan and business
development initiatives as outlined in the December 31, 2006
10-K. The Board cancelled the 100,000 options granted to Mr.
MacDonald on February 8, 2006 and replaced them with a restricted stock grant of
42,000 shares. The restricted shares will vest over a period of 3
years beginning on January 25, 2009.
The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to the Named Executives with a 5 year vesting period, beginning on the
grant date. Named Executive Officers were granted 425,000 shares of
restricted common stock to retain their services over the next five years,
reward their efforts in the participation of the successful succession and
transition of the company operations to the new senior management team, and
incentivize continued sales and profit growth in accordance with targets set by
the Board of Directors.
The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives as a 2008 performance bonus for exceeding
internal sales and profit forecasts. Key executives were granted
150,000 shares of restricted common stock over a five year vesting period,
beginning on January 1, 2009.
Outstanding
Equity Awards at Fiscal Year-End Table
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
|
|
|
Option
Exercise
|
|
Option
Expiration
|
|
Number
Shares or
Units of Stock
That Have Not
Vested
|
|
|
Market
Value of
Shares or
Units of
Stock that
have not
Vested
|
|
|
Equity
incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
rights
|
|
|
Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other rights
That Have Not
Vested
|
|
|
|
|
Exercisable
|
|
|
Un-Exercisable
|
|
|
Price ($)
|
|
Date
|
|
Vested (#)(1)
|
|
|
($)(2)
|
|
|
(#)
|
|
|
($)
|
|
|
Bradley
T. MacDonald
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
107,000 |
|
|
|
590,640 |
|
|
|
- |
|
|
|
- |
|
|
Michael
S. McDevitt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer, CFO
|
|
|
100,000 |
|
|
|
- |
|
|
|
2.87 |
|
3/31/2010
|
|
|
307,085 |
|
|
|
1,695,109 |
|
|
|
- |
|
|
|
- |
|
|
Leo
V. Williams
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Vice President
|
|
|
10,000 |
|
|
|
- |
|
|
|
3.83 |
|
10/28/2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Margaret
MacDonald - Sheetz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer, President
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
255,000 |
|
|
|
1,407,600 |
|
|
|
- |
|
|
|
- |
|
|
Brendan
N. Connors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP
of Finance
|
|
|
23,334 |
|
|
|
- |
|
|
|
2.87 |
|
3/31/2010
|
|
|
83,000 |
|
|
|
458,160 |
|
|
|
- |
|
|
|
- |
|
Each option has a five year life and an
exercise price per share equal to 100% of the estimated fair value of our common
stock on the date of grant.
|
(1)
|
The
restricted stock grants vest over five and six years of service as
described below under “Narrative Disclosure to Summary Compensation Table
and Grants of Plan-Based Awards”
|
|
(2)
|
The
market value of shares of stock that have not vested is based on the
closing price of our common stock on December 31, 2008, or $5.52 per
share.
|
2008
Option Exercises and Stock Vested Table
The following table sets
forth information regarding option exercises and stock vesting for the Named
Executive Officers during 2008.
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
Number of
Shares Acquired
on Exercise
|
|
|
Value Realized
on Exercise
|
|
|
Number of
Shares
Acquired on
Vesting
|
|
|
Value
Realized on
Vesting
|
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
($)(2)
|
|
|
Bradley
T. MacDonald
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Executive
Chairman of the Board
|
|
|
- |
|
|
|
- |
|
|
|
20,000 |
|
|
|
107,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
S. McDevitt
|
|
|
- |
|
|
|
- |
|
|
|
15,000 |
|
|
|
81,000 |
|
|
Chief
Executive Officer, CFO
|
|
|
- |
|
|
|
- |
|
|
|
33,333 |
|
|
|
208,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
161,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
V. Williams
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Executive
Vice President
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret
MacDonald - Sheetz
|
|
|
- |
|
|
|
- |
|
|
|
15,000 |
|
|
|
81,000 |
|
|
Chief
Operating Officer, President
|
|
|
- |
|
|
|
- |
|
|
|
25,000 |
|
|
|
156,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
134,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan
N. Connors
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
16,200 |
|
|
VP
of Finance
|
|
|
- |
|
|
|
- |
|
|
|
5,000 |
|
|
|
31,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
53,700 |
|
|
(1)
|
Represents
the difference between the exercise price and the fair market value of the
common stock on the date of exercise, multiplied by the number of options
exercised.
|
|
(2)
|
Represents
the number of restricted shares vested, and the number of shares vested
multiplied by the fair market value of the common stock on the vesting
date.
|
Equity Compensation Plan Information
at Fiscal Year Ended December 31, 2008
|
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
|
|
Weighted
average exercise
price of
outstanding
options,
warrants and
rights
|
|
|
Number of
securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
223,334 |
(1) |
|
$ |
3.65 |
|
|
|
1,229,166 |
|
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1)
|
Consists
of 143,334 shares of common stock issuable upon the exercise of
outstanding options and 80,000 shares of common stock issuable upon the
exercise of outstanding warrants.
|
2008
Non-Qualified Deferred Compensation Table
The following table sets forth all
non-qualified deferred compensation of the Named Executive Officers for the
fiscal year ended December 31, 2008.
|
|
|
Executive
Contributions in
Last FY
|
|
|
Company
Contributions in
Last FY
|
|
|
Aggregate
Earnings in Last
FY
|
|
|
Aggregate
Withdrawals/
Distributions
|
|
|
Aggregate
Balance at Last
FYE
|
|
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Bradley
T. MacDonald
|
|
|
|
|
$ |
100,000 |
|
|
|
(381,000 |
) |
|
$ |
0 |
|
|
$ |
792,000 |
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
S. McDevitt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Chief
Executive Officer, CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
V. Williams
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Executive
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret
MacDonald - Sheetz
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Chief
Operating Officer, President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan
N. Connors
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
VP
of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All
amounts are reported in compensation on the “2008 Summary Compensation
Table”
|
Deferred
Compensation Plans
We maintain a non-qualified deferred
compensation plan, effective September 10, 2003, for Senior Executive
management. Currently, Bradley MacDonald is the only participant in
the plan. Under the deferred compensation plan that became effective
in 2003, executive officers of the Company, including the Named Executive
Officers, may defer a portion of their salary and bonus (performance-based
compensation) annually. A participant may elect to receive distributions of the
accrued deferred compensation in a lump sum or in installments upon
retirement
Each
participating officer may request that the deferred amounts be allocated among
several available investment options established and offered by the Company.
These investment options provide market rates of return and are not subsidized
by the Company. The benefit payable under the plan at any time to a participant
following termination of employment is equal to the applicable deferred amounts,
plus or minus any earnings or losses attributable to the investment of such
deferred amounts. The amount of compensation in any given fiscal year that is
deferred by each Named Executive Officer is included in the Summary Compensation
Table under the column headings “Salary” or “Non-Equity Incentive Plan
Compensation”, as appropriate.
The
Company has established a trust for the benefit of participants in the deferred
compensation plan. Pursuant to the terms of the trust, as soon as possible after
any deferred amounts have been withheld from a plan participant, the Company
will contribute such deferred amounts to the trust to be held for the benefit of
the participant in accordance with the terms of the plan and the
trust.
Retirement
payouts under the plan upon an executive officer’s retirement from the Company
are payable either in a lump-sum payment or in annual installments over a period
of up to ten years. Upon death, disability or termination of employment, all
amounts shall be paid in a lump-sum payment as soon as administratively
feasible.
In 2008,
the Company made a $100,000 contribution to Bradley MacDonald’s deferred
compensation plan as a performance bonus.
Narrative
Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards
We have
entered into employment agreements with certain Named Executive Officers,
certain terms of which are summarized below.
Bradley T.
MacDonald. Mr. MacDonald entered into a five year
employment agreement effective February 8, 2006. Mr. MacDonald was
granted 100,000 options over a five year vesting period beginning on February 8,
2007 in consideration for his five year commitment and to align his interest
with the interests of long-term shareholders On January 25, 2008, the Board of
Directors modified Bradley T. MacDonald’s compensation package for his role in
the succession plan and business development initiatives as outlined in the
December 31, 2006 10-K. The Board cancelled the 100,000 options
granted to Mr. MacDonald on February 8, 2006 and replaced them with a restricted
stock grant of 42,000 shares. The restricted shares will vest over a
period of 3 years beginning on January 25, 2009. Upon termination of Mr.
MacDonald’s employment by the Company without cause, or upon his resignation for
good reason, he would be entitled to receive an amount equal to one and a half
times the sum of his highest annualized salary payable in equal monthly
installments 30 days after his termination of employment for a period of one
year.
Michael S.
McDevitt. Mr. McDevitt entered into a six year
employment agreement effective February 8, 2006. Mr. McDevitt was
granted 200,000 shares of Medifast, Inc. restricted common stock over a six year
vesting period beginning on February 8, 2006 in consideration for his six year
commitment and to align his interests with the interests of long-term
shareholders. Upon termination of Mr. McDevitt’s employment by the Company
without cause, or upon his resignation for good reason, he would be entitled to
receive an amount equal to one and a half times the sum of his highest
annualized salary payable in equal monthly installments 30 days after his
termination of employment for a period of one year.
Margaret MacDonald -
Sheetz. Ms. MacDonald - Sheetz entered into a six year
employment agreement effective February 8, 2006. Ms. MacDonald -
Sheetz was granted 150,000 shares of Medifast, Inc. restricted common stock over
a six year vesting period beginning on February 8, 2006 in consideration for his
six year commitment and to align her interests with the interests of long-term
shareholders. Upon termination of Ms. MacDonald - Sheetz’s employment
by the Company without cause, or upon her resignation for good reason, she would
be entitled to receive an amount equal to one and a half times the sum of his
highest annualized salary payable in equal monthly installments 30 days after
her termination of employment for a period of one year.
Brendan N.
Connors. Mr. Connors entered into a six year employment
agreement effective February 8, 2006. Mr. Connors was granted 30,000
shares of Medifast, Inc. restricted common stock over a six year vesting period
beginning on February 8, 2006 in consideration for his six year commitment and
to align his interests with the interests of long-term shareholders. Upon
termination of Mr. Connors’ employment by the Company without cause, or upon his
resignation for good reason, he would be entitled to receive an
amount equal to one and a half times the sum of his highest annualized salary
payable in equal monthly installments 30 days after his termination of
employment for a period of one year.
Potential
Payments upon Termination or Change in Control
As of
December 31, 2008, the Company had entered into employment agreements with
each of the Named Executive Officers. As described in more detail above under
“Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards” The employment agreements with the Named Executive
Officers generally provide for the payment of benefits if the executive’s
employment with the Company is terminated either by the Company without Cause or
by the executive for Good Reason. The employment agreements with the Named
Executive Officers do not provide for any additional payments or benefits upon a
termination of employment by the Company for Cause, upon the executive’s
resignation other for Good Reason, as applicable, or upon the executive’s death
or disability. Upon termination by the Company without cause,
or upon his or her resignation for good reason, all of the Named Executive
officers are entitled to receive an amount equal to one and a half times his or
her highest annualized base salary payable in equal monthly installments 30 days
after his or her termination of employment. If a named executive had
been terminated without cause on December 31, 2008 they would have received the
following amounts:
|
|
|
Severance ($) (1)
|
|
|
Bradley
T. MacDonald
|
|
$ |
337,500 |
|
|
Michael
S. McDevitt
|
|
$ |
202,500 |
|
|
Margaret
MacDonald - Sheetz
|
|
$ |
150,000 |
|
|
Brendan
N. Connors
|
|
$ |
148,500 |
|
(1) Based
on 2008 salary
If there
were a change in control, which is defined as a sale of the majority of the
assets of the company or a change of control of the Board of Directors as a
result of a third party shareholder acquiring or holding over 10% of the common
stock and attempting to nominate a majority of the Board of Directors in favor
of his/her shareholder block, the executives would have received the following
amounts as of December 31, 2008:
|
|
|
Severance
($)(1)
|
|
|
Accelerated
Vesting
of
Stock
Awards
($)(2)
|
|
|
Total
|
|
|
Bradley
T. MacDonald
|
|
$ |
337,500 |
|
|
$ |
590,640 |
|
|
$ |
928,140 |
|
|
Michael
S. McDevitt
|
|
|
202,500 |
|
|
|
1,695,109 |
|
|
|
1,897,609 |
|
|
Margaret
MacDonald - Sheetz
|
|
|
150,000 |
|
|
|
1,407,600 |
|
|
|
1,557,600 |
|
|
Brendan
N. Connors
|
|
|
148,500 |
|
|
|
458,160 |
|
|
|
606,660 |
|
|
(1)
|
Based
on 2008 salary.
|
|
(2)
|
Accelerated
vesting of stock awards were based on NYSE close price of the Common
Shares on
December 31, 2008 of $5.52 per share, and for option awards the difference
between $5.52 and the exercise or base price of the
award.
|
2008
Director Compensation
The
table below summarizes the compensation paid by the Company to non-employee
directors for the fiscal year ended December 31, 2008.
|
Name
|
|
Fees
Earned
or Paid in
Cash ($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity
Incentive Plan
Compensation ($)
|
|
|
Change in Pension Value
and Nonqualified
Deferred Compensation
Earnings ($)
|
|
|
All other
Compensation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry
B. Bondroff
|
|
$ |
- |
|
|
$ |
5,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,370 |
|
|
Joseph
D. Calderone, OSA
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,940 |
|
|
Charles
P. Connolly
|
|
|
16,000 |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37,570 |
|
|
George
Lavin, Jr., Esq.
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,570 |
|
|
Michael
C. MacDonald
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,940 |
|
|
Dennis
M. McCarthy
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,570 |
|
|
Jeannette
M. Mills
|
|
|
|
|
|
|
5,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,370 |
|
|
Rev.
Donald F. Reilly, OSA
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,940 |
|
|
Mary
T. Travis
|
|
|
- |
|
|
|
21,570 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,940 |
|
Employee
Directors do not receive any additional compensation for their services as
director.
Additional
fees are paid to the Audit Committee Chairman. In 2008, the Chairman
received an additional $16,000 in cash compensation.
|
|
(1)
|
Amounts
are calculated based on provisions of Statement of Financial Accounting
Standards, or SFAS, No 123R, “Share Based Payments.” See note 2
of the consolidated financial statement of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 regarding
assumptions underlying valuation of equity
awards.
|
The table
below summarizes the equity based awards held by the Company’s non-employee
directors as of December 31, 2008.
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
|
|
|
Option
Exercise
|
|
|
Option
Expiration
|
|
|
Number
Shares or
Units of
Stock That
Have Not
Vested
|
|
|
Market Value
of Shares or
Units of
Stock that
have not
Vested
|
|
|
|
|
Exercisable
|
|
|
Un-Exercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
Vested (#)
|
|
|
($)
|
|
|
Barry
B. Bondroff
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,000 |
|
|
|
27,600 |
|
|
Joseph
D. Calderone, OSA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,000 |
|
|
|
77,280 |
|
|
Charles
P. Connolly
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,000 |
|
|
|
49,680 |
|
|
George
J. Lavin, Jr., Esq.
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,000 |
|
|
|
49,680 |
|
|
Michael
C. MacDonald
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,000 |
|
|
|
77,280 |
|
|
Dennis
M. McCarthy
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,000 |
|
|
|
49,680 |
|
|
Jeannette
M. Mills
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,000 |
|
|
|
27,600 |
|
|
Rev.
Donald F. Reilly, OSA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,000 |
|
|
|
82,800 |
|
|
Mary
T. Travis
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,000 |
|
|
|
82,800 |
|
The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to Board members with a 5 year vesting period, beginning on the grant
date. The grant was to tenured Board members that successfully
implemented the Senior Management Succession Plan over the last four years
through advice, counsel, and mentorship. A total of 55,000 shares of
restricted common stock were granted to tenured Directors.
The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives and Board members as a 2008 performance bonus for
exceeding internal sales and profit forecasts. Non-management
Board members were each granted 5,000 shares of restricted common stock vesting
over two years, beginning on January 1, 2009.
Compensation Committee
Report
We have
reviewed and discussed with management certain Compensation Discussion and
Analysis provisions to be included in this Form 10-K. Based on the reviews and
discussions referred to above, we recommend to the Board of Directors that the
Compensation Discussion and Analysis referred to above be included on the Form
10-K for the year-ended December 31, 2008.
COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
Mary T.
Travis, Chairman
Joseph D.
Calderone
Dennis M.
McCarthy, Esq.
Jeannette
M. Mills
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The
following table shows as of December 31, 2008, the amount and percentage of
our outstanding common stock beneficially owned by each person who is known by
us to beneficially own more than 5% of our outstanding common
stock.
|
Name and Address of
|
|
Shares
Beneficially
Owned (1)
|
|
|
|