-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VDySZWAFIShdqRf7Cmn4Jvv8lekl8Gz1yXVbyttGgZZ03sB5M6JVK7HSdLEygKD+ znP89KTJaYM/2R/C15jqcA== 0001144204-07-013149.txt : 20070316 0001144204-07-013149.hdr.sgml : 20070316 20070316160428 ACCESSION NUMBER: 0001144204-07-013149 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070316 DATE AS OF CHANGE: 20070316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIFAST INC CENTRAL INDEX KEY: 0000910329 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 133714405 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31573 FILM NUMBER: 07700222 BUSINESS ADDRESS: STREET 1: 11445 CRONHILL DRIVE CITY: OWINGS MILLS STATE: MD ZIP: 21117 BUSINESS PHONE: 7327640619 MAIL ADDRESS: STREET 1: 11445 CRONHILL DRIVE CITY: OWINGS MILLS STATE: MD ZIP: 21117 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHRITE INC DATE OF NAME CHANGE: 19951120 FORMER COMPANY: FORMER CONFORMED NAME: XX DATE OF NAME CHANGE: 19950619 FORMER COMPANY: FORMER CONFORMED NAME: 00 DATE OF NAME CHANGE: 19950619 10-K 1 v068679_10k.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-K
 
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2006
 
Commission File No. 000-23016
 
 
MEDIFAST, INC.
 
 DELAWARE
  
 13-3714405
 Incorporation State
  
 Tax Identification number
     
11445 CRONHILL DRIVE, OWINGS MILLS, MD
  
21117
Principal Office Address
    
 
Phone (410) 581-8042
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
COMMON STOCK, PAR VALUE $.001 PER SHARE
 
 
New York Stock Exchange
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x   No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of June 30, 2006, based upon the closing price of $17.87 per share on the American Stock Exchange on that date, was $208,000,000.
 
As of March 14, 2007, the Registrant had 13,643,998 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement for the 2007 Annual Meeting of Stockholders, which will be filed within 120 days after the end of the fiscal year, are incorporated by reference into Part III.
 
2
 
 
Table of Contents
 
  
 
  
Page
 
  
PART I
  
 
         
Item 1.
  
Business
  
4
 
 
 
    
Item 1A.
  
Risk Factors
  
10
 
 
 
    
Item 1B.
  
Unresolved Staff Comments
  
11
 
 
 
    
Item 2.
  
Properties
  
11
 
 
 
    
Item 3.
  
Legal Proceedings
  
12
 
 
 
    
Item 4.
  
Submission of Matters to a Vote of Security Holders
  
12
 
 
 
    
 
  
PART II
  
 
 
 
 
    
Item 5.
  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
12
 
 
 
    
Item 6.
  
Selected Financial Data
  
13
 
 
 
    
Item 7.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
13
 
 
 
    
Item 8.
  
Financial Statements and Supplementary Data
  
16
 
 
 
    
Item 9.
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
17
 
 
 
    
Item 9A.
  
Controls and Procedures
  
17
 
 
 
    
 
  
PART III
  
 
 
 
 
    
Item 10.
  
Directors, Executive Officers and Corporate Governance
  
19
 
 
 
    
Item 11.
  
Executive Compensation
  
19
 
 
 
    
Item 12.
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
19
 
 
 
    
Item 13.
  
Certain Relationships and Related Transactions, and Director Independence
  
19
 
 
 
    
Item 14.
  
Principal Accounting Fees and Services
  
19
 
 
 
    
 
  
PART IV
  
 
 
 
 
    
Item 15.
  
Exhibits, Financial Statement Schedules
  
20

 
3
 
PART I

ITEM 1. BUSINESS.

SUMMARY

Medifast, Inc. (the "Company", or "Medifast") is a Delaware corporation, incorporated in 1980. The Company’s operations are primarily conducted through five of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape for Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven Crondall, LLC. The Company is engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products. Medifast, Inc.’s product lines include weight and disease management, meal replacement and sports nutrition products manufactured in a modern, FDA inspected facility in Owings Mills, MD.
 
MARKETS

Over the past 20 years the obesity rates in the United States have increased dramatically. 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. 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 in Diabetes Care in 2001. In a study published in the Journal of the American Medical Association (JAMA) it was reported that in 2003-2004, 17.1% of U.S. children and adolescents were overweight and 32.2% of adults were obese. It is important to note the difference between overweight and obese. Obesity among adults is defined as a Body Mass Index (BMI) of 30 or higher; overweight is defined as a BMI of 25 to 30. The amount of overweight adolescents and children ages 6-19 years have more than tripled since 1980.

The CDC estimates that in the U.S. the associated costs with overweight and obesity reached $117 billion in 2000. The most common health problems associated with obesity are type II diabetes, coronary heart disease, hypertension and stroke, depression and certain forms of cancer. It’s also estimated that poor nutrition and physical inactivity account for more than 300,000 premature deaths per year in the U.S.

A 2003 market research study concluded consumers spend about $39 billion per year trying to lose weight or prevent weight gain. This includes consumer spending on diet foods, medically supervised and commercial weight loss programs, diet books, appetite suppressants, fitness clubs, diet sodas, and videos and cassettes.
 
Distribution Channels
 
Medifast Direct - Medifast’s primary distribution channel is the direct-to-consumer business. Here, 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, and web advertising as well as public relations initiatives. In 2006, the Medifast Direct division focused on targeted marketing initiatives and enhancements to its customer support systems by upgrading its call center and nutrition support team to better serve its clients. In addition, Medifast also began using state of the art web technology which features 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 client 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 an 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.
 
4
 
Medifast Physicians and Clinics - Many 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. Medifast also offers Medifast physicians a home delivery program “Lifestyles” for their patients. The Lifestyles Program is a network of health care professionals who support patients on the Medifast program. Medifast offers physicians a dedicated website landing page and patients order products directly from the company online or through the call center. The Lifestyles medical practitioner ensures that each patient receives personalized attention throughout the weight loss program. Management estimates that more than 15,000 physicians nationwide have 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.
 
Medifast and Hi-Energy Weight Control Centers - In 2006, Medifast changed nine of its key corporately owned weight control centers to Medifast Weight Control Centers in Texas and Florida. The centers offer a new medically 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, Inbody TM composition analysis as well as appetite suppression medications to customers who qualify. The Company intends to open additional corporately owned Medifast Weight Control Centers in a select market in 2007 in addition to franchising the model throughout the United States.

The Company continues to support the Hi-Energy licensees by providing marketing materials, ads, on-site trainings, fitness programs, nutritional programs and clinical operation materials and forms.
 
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 including products specially formulated for people with diabetes as well as products for women’s health, joint health and coronary health.

While the entire Medifast line is Diabetic Friendly, Medifast has created products tailored to meet the needs of people with diabetes. Many Medifast Plus for Diabetics products have earned the coveted Seal of Approval from the Glycemic Research Institute. The line, designated as Low Glycemic, does not overly stimulate blood glucose and insulin and does not stimulate fat-storing enzymes. Products included in the Medifast Plus for Diabetics line consist of three delicious patented shakes, and two meal replacement bars.

Most Medifast products qualify to make the FDA’s heart healthy claim, “May Reduce the Risk of Heart Disease.” In order to make this claim, a product must contain at least 6.25 grams of soy protein per serving and be low in fat, saturated fat, and cholesterol. Unlike popular fad diets and herbal supplements, Medifast 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.” An overview of Medifast clinical research is provided below.

Crowell, M.D. & Cheskin L.J, The Johns Hopkins University School of Medicine. Multicenter Evaluation of Health Benefits and Weight Loss on the Medifast Weight Management Program.
 
5
 
The purpose of this study was to retrospectively evaluate the efficacy of a medically supervised, protein-supplemented modified fasting program (Medifast) for weight reduction and to evaluate the impact of weight reduction on coexisting health problems. The results of the study concluded that medically-supervised, protein-sparing modified fasts 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 systolic and diastolic blood pressure, total cholesterol and triglycerides, as well as the normalizing of blood pressure and hypertensive patients.
 
Cheskin, MD, FACP, Mitchell, MS, Lewis, BA, Jhaveri, MD Yep, BS. Johns Hopkins University School of Bloomberg Public Health. Efficacy of 2 Diet Plans Designed for People with Type 2 Diabetes on Weight and Health Measures

The purpose of this study was to evaluate the efficacy of the standard ADA (American Diabetic Association) self-selected diet (SD) vs. a portion controlled diabetic food diet (PCD) in obese patients with NIDDM. The study also evaluated not only the metabolic effects in the long term, but also compliance and any consequent medication changes in patients of the two weight loss regimens. (16-34 weeks of active weight loss, 52 weeks of maintenance) The meal replacements (Medifast) used in this study are soy-based products (bars, shakes, soups) that are considerably lower in sugar than their non-diabetic counterparts and other popular diet products on the market.

The results discussion is as follows. Significantly greater results were achieved after the initial 34-weeks of weight loss by participants in the PCD group in pounds and percent weight loss, insulin level and hemoglobin A1c. The PCD group also saw significant improvements within group in BMI, systolic BP, diastolic BP, waist/hip measurements, cholesterol, HDL triglycerides, glucose and percent body fat. Dropout rates were less in the PCD in both weight loss and weight maintenance. During weight loss, participants in the PCD group significantly decreased their use of medications to treat Type 2 DM. Participants in the PCD group also self-reported higher ease of compliance with the diet compared to the SD group (64.2% vs. 56.0%).

Researchers recommended that a PCD be considered for type 2 diabetics desiring weight loss, but that periodic use of SD during weight maintenance will not adversely affect weight loss efforts. The research supports that using a portion-controlled diet will produce comparable if not better outcomes in type 2 diabetics attempting to control their weight.

This study was presented at American Diabetes Association’s 65th Annual Scientific Session in San Diego, CA, June 11, 2005. The information was peer reviewed and printed in ADA’s Diabetes Journal as a written published abstract. Dr. Cheskin, the principle investigator is currently pursuing publication in a leading medical journal.
 
National Institutes of Health: Impaired Capacity to Lose Visceral Adipose Tissue During Weight Reduction in Obese Postmenopausal Women With the Trp64Arg B3- Adrenoceptor Gene Variant

This study examined whether women on a weight loss program who are carriers of a genetic variant (Trp64Arg) lose less visceral fat than women who do not have this gene. Participants entered a medically supervised weight loss program aimed at reducing body weight to less than 120% of ideal value. Food was self selected with dietitian supervision, with or without the inclusion of the TakeShapeTM, a Medifast brand modified fasting supplement.

Results from the study showed that reductions in body weight, BMI, total fat mass and fat-free mass were not significantly different between carriers and non-carriers of the variant. Both groups experienced weight reduction of 31-36.1 pounds, which the study identified as a significant weight loss effect.

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. Lawrence J. Cheskin, Lisa M. Davis, Andrea Hanlon-Mitola, Amy Mitchell, Ami Jhaveri, Mary Yep, Vanessa Mitchell. Johns Hopkins Bloomberg School of Public Health, Center for Human Nutrition, Department of International Health, Baltimore, MD 21205

The 18-month study, (6-month weight loss phase, 12-month maintenance phase) examined a joint parent-child dieting approach, as opposed to an individually based approach, to improve weight loss outcomes. It compares diet using Medifast meal replacements to a non-supplemented Food Guide pyramid based diet. Comparative points include, overall weight loss, compliance, palatability, dietary quality and dietary satisfaction. The study also examines whether children who lose weight-using Medifast meal replacements as an adjunct to a Food Guide-pyramid based diet achieve health benefits compared to baseline values and are these health benefits greater than those obtained following the reference diet.

The results of this study will be released in 2007.
 
6
 
Effectiveness of Medifast Supplements Combined with Obesity Pharmacotherapy: A Clinical Program Evaluation. Principle Investigators: Drs. Walker S.C. Poston, C. Keith Haddock, Jennifer E. Taylor, John Foreyt.
 
The purpose of the study is to evaluate the long-term impact of Medifast meal-replacement supplements combined with appetite suppressant medication (ASM) among participants who received a minimum of 12-weeks of treatment.

Results of this study will be released in 2007 and presented at the American Society of Bariatric Physicians annual meeting in May 2007. This study has also been submitted to a major medical journal for publication.
 
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, LA Weight Loss, 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 and have been safely and effectively used by customers and recommended by physicians for over 25 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. Medifast Weight Control Centers also offer appetite suppression medications to patients who qualify in addition to a Medifast program to obtain desired results. 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, Medifast® Bars, Medifast® Creamy Soups, Medifast® Chicken Noodle Soup, Medifast® Chicken & Wild Rice Soup, Medifast® Minestrone 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, Medifast® Crackers and Medifast® Fast Soups. 
 
Medifast nutritional products are formulated with high-quality, low-calorie, low-fat ingredients. Many Medifast products are soy based and contain 24 vitamins and minerals, as well as other nutrients essential for good health. The Company uses 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 and meal replacement bars.
 
7
 
NEW PRODUCTS
 
The Company expanded the Medifast product line in 2006 by introducing Medifast® Scrambled Eggs, Medifast® Vanilla Pudding, Medifast® Beef Vegetable Stew, and Medifast® Soy Crisps in Apple Cinnamon, Ranch and White Cheddar flavors. In addition to these great new additions, Medifast also reformulated all of its meal replacement bars to improve flavor and texture.
 
MARKETING

In 2006, the Company continued to build and leverage its core Medifast brand through multiple marketing strategies to its target audiences. Customer Acquisition strategies include advertising in print magazines, television commercials, and radio commercials. These mediums were used to target new customers by stressing Medifast's quick, easy and safe approach to weight management. The Company also developed comprehensive public relations campaigns throughout 2006 securing media coverage in national consumer and business media outlets including People Magazine, Forbes Magazine and CNBC. Also, direct mail campaigns and e-mail newsletters have been utilized to encourage and support existing customers.

Online advertising began in 2004 and included keyword search, banner ads, affiliate programs, and targeted direct email campaigns. The online advertising has been supported by Medifast's well designed, user-friendly website, which provides a wealth of information and customer support for easy ordering functionality. In 2006, the online community, meal planner and library, “My Medifast” was added as a free service to all customers. Also in 2006, the Company began sponsoring customer blogs on its website where customers can interact with other customers and ask questions before starting a Medifast program as well as to track their success on the Medifast program.

The Company launched a new and improved branding for its Take Shape for Life division in 2006 including revised logo, messaging, web design and support materials giving it a unique positioning as a division of Medifast focused on optimal health.

SALES

The Company’s Sales division handles three primary areas:

Physician and Clinic Sales— The sales team is responsible for prospecting larger medical accounts, clinics, hospitals, and HMOs. During 2006, the sales team attended a number of medical professional trade shows, which expanded Medifast's penetration of the clinical business segment.

Medifast Weight Control Centers- 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. 

Take Shape for Life— Provides a sales force of independent Health Advisors who support patients and their primary care physicians with a defined support program. Take Shape for Life is a support program that moves beyond the scope of weight loss to show customers how to achieve optimal health through the balance of body, mind, and finances.

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 will significantly improve 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.
 
8
 
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, 2006, the Company employed 265 full-time and contracted employees, of whom 84 were engaged in manufacturing, warehouse management, and shipping, and 180 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

In November of 2005, the Company began an IT project to implement an Enterprise Resource Planning (ERP) solution to upgrade our technology infrastructure and improve manufacturing and business processes. The new IT infrastructure will enable the Company to handle additional business growth and improve the efficiencies across the business platform. The new ERP system went live in December of 2006 without incident.

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.medifastdiet.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.

EXECUTIVE OFFICERS OF THE COMPANY

Name
  
Age
  
Position
 
 
 
    
Bradley T. MacDonald
  
59
  
Chief Executive Officer and Chairman of the Board of Directors
 
 
 
    
Michael S. McDevitt
  
28
  
President and Chief Financial Officer
 
 
 
    
Leo Williams
  
59
  
Executive Vice President
 
 
 
    
Margaret MacDonald
  
29
  
Senior Vice President of Operations
         
Brendan N. Connors
  
29
  
Vice President of Finance
 
9
 
Bradley T. MacDonald
 
Mr. MacDonald became Chairman of the Board and Chief Executive Officer of Medifast, Inc. on January 28, 1998. Mr. MacDonald was previously employed by the Company as its Chief Executive Officer from September 1996 to August 1997. 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 a retail drug, consumer candy, and pilot sunglass companies. Mr. MacDonald was national president of the Marine Corps Reserve Officers Association and retired from the United States Marine Corps Reserve as a Colonel in 1997, after 27 years of service. He has been appointed to the Defense Advisory Board for Employer Support of the Guard and Reserve (ESGR). Mr. MacDonald serves on the Board of Directors of the Wireless Accessories Group (OTCBB: WIRX). He is also on the Board of Directors of the Marine Corps Reserve Toys for Tots Foundation and is a Foundation Trustee of the Marine Reserve Association.
 
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. 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 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 is a Board of Director of the Marine Corps Reserve Toys for Tots Foundation and the Direct Selling Association.

Margaret MacDonald, MBA
 
Ms. MacDonald 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. Prior to joining Medifast, Ms. MacDonald was a legal assistant at Carrington, Coleman, Sloman, and Blumenthal in Dallas, TX.

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 spend 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.
 
10
 
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. a few years ago and had an impact on many weigh loss companies. Another fad diet could sweep the nation and 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.

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.

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.

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.
 
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.

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 advertising. The FTC and certain states regulate advertising, disclosures to consumers, privacy, consumer pricing or billing arrangements, and other consumer matters.
 
Future legislation or regulations, including legislation or regulations affecting our marketing and advertising practices, relations with consumers or our food and weight management products and services, may have an adverse impact on us.
 
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 11 leases for its corporately owned Medifast Weight Control clinics throughout Florida and Texas. The leases range in terms from one to five years.
 
11
 
ITEM 3. LEGAL PROCEEDINGS.

There were no material pending legal matters as of December 31, 2006.
 
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 2006 and 2005:
 
   
2006
  
   
Low
  
High
  
Quarter ended March 31, 2006
    
5.40
    
9.23
  
Quarter ended June 30, 2006
    
8.75
    
20.90
  
Quarter ended September 30, 2006
    
8.21
    
19.49
  
Quarter ended December 31, 2006
    
8.41
    
14.52
  
   
   
2005
  
   
Low
  
High
  
Quarter ended March 31, 2005
    
2.67
    
3.62
  
Quarter ended June 30, 2005
    
2.82
    
3.30
  
Quarter ended September 30, 2005
    
3.01
    
7.08
  
Quarter ended December 31, 2005
    
3.83
    
5.70
  

(b) The quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.

(c) There were approximately 209 record holders of the Company's Common Stock as of March 14, 2007. 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, 2006.

(d) No dividends on common stock were declared by the Company during 2006 or 2005.
 
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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.
 
   
2006
 
2005
 
2004
 
2003
 
2002
  
                       
Revenue
    
74,086,000
    
40,129,000
    
27,340,000
    
25,379,000
    
12,345,000
  
Operating income
    
8,112,000
    
4,074,000
    
3,004,000
    
3,598,000
    
1,752,000
  
Income from continuing operations
    
7,338,000
    
3,930,000
    
2,906,000
    
3,558,000
    
1,698,000
  
                                 
EPS - basic
    
0.40
    
0.20
    
0.16
    
0.25
    
0.36
  
EPS - diluted
    
0.38
    
0.19
    
0.14
    
0.22
    
0.30
  
                                 
Total assets
    
36,927,000
    
30,545,000
    
25,968,000
    
24,230,000
    
9,888,000
  
current portion of long-term debt and revolving credit facilities
    
1,804,000
    
1,194,000
    
827,000
    
819,000
    
395,000
  
Total long-term debt
    
3,509,000
    
3,977,000
    
4,256,000
    
4,564,000
    
2,701,000
  
                                 
Weighted average shares outstanding
                                
Basic
    
12,699,066
    
12,258,734
    
10,832,360
    
9,305,731
    
6,722,505
  
Diluted
    
13,482,894
    
12,780,959
    
12,413,424
    
10,952,367
    
8,737,292
  

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.

2006 COMPARISON WITH 2005

OPERATING

Revenue: Revenue increased to $74.1 million in 2006 as compared to $40.1 million in 2005, an increase of $34 million or 85%. The direct marketing sales channel accounted for 60% of total revenue, Take Shape for Life 30%, doctors 5%, and clinics 5%. The direct marketing sales channel, which is fueled primarily by consumer advertising, increased revenues by approximately 142% year-over year. Take Shape for Life sales, which are fueled by person-to-person recruiting and support increased by 46% year-over-year.

The growth in revenue is primarily the result of an increased advertising campaign in 2006, which fueled growth across the Company’s multiple distribution channels. The Company has expanded into additional print media and national cable and network TV spots. The Company also continues to expand its presence on the web through multiple marketing initiatives. Additionally, the Take Shape for Life network continues to grow as the sales network expands into additional states and increased penetration in existing states. The Company continues to create new marketing tools and training materials for health advisors to help increase the recruitment of both active Health Advisors as well as the lifetime value of their customers.
 
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Due to the significant growth in the first half of 2006, Medifast, Inc. began exploring third party over-sourcing capabilities in the call center. The Company began using an outsourced call center for overflow call volume in late April. The outsourced call center allowed the company to prepare in the fourth quarter of 2006 for anticipated sales growth in the first quarter of 2007 so that a shortage of call center representatives would not be experienced as it was in the first quarter of 2006. The Company is currently exploring bringing all call center functions in-house. Capital expenditure for a new phone system would be necessary, however, the return on investment would be under a year. The Company has also invested in increasing production capacity with the purchase of two additional manufacturing lines and a larger capacity blender. The lines will significantly improve the Company's production capability, while also improving its overall efficiencies.

In addition, the Company implemented a new Enterprise Resource Planning (ERP) system in December of 2006. The system adds critical functions and controls necessary for Sarbanes Oxley compliance and significantly increases the Company’s ability to track and forecast inventory. The system provides enhanced reporting on all business units and enables the Company to handle significantly increased sales volume. The Company believes that these capabilities will provide the Company with the scalability necessary to seamlessly handle increased demands as the business continues to grow. The Company is exploring the ownership of its call center, which would require a new phone system. The Company expects that this would be the last large capital expense expected. The Company now has the manufacturing, distribution, and IT capability to handle approximately $250 - $300 million in sales volume

Costs and Expenses: Cost of revenue increased $8.1 million to $18.2 million in 2006 from $10.2 million in 2005. As a percentage of sales, gross margin increased to 75.4% in 2006 as compared to 74.7% in 2005. The slight increase in gross margin is primarily due to decreased raw material costs as a result of increased volume discounts. The new machines are expected to add to efficiency in the future.

Advertising expense in 2006 was approximately $14.3 million as compared to approximately $3.8 million in 2005, an increase of $10.5 million. The increased marketing was spent primarily for TV advertising, print, and web media. The Company continues to test, analyze and adapt the advertising message and placements on TV, print and web media to achieve the lowest cost to acquire new customers. This testing will allow the company to spend our advertising dollars most effectively as we plan on increasing our advertising budget for the year of 2007. The branding effect of advertising has proven to have impact in all channels of the business driving customers to the web and call center, leads to Take Shape for Life health advisors, patients to local Medifast practitioners and significant walk-ins to Medifast Weight Control Center clinics.

Other Income/Expense: Stock compensation expense in 2006 was $533,000 as compared to $0 in 2005. This expense represents the vesting of share-based compensation to key executives over five and six-year terms as well as FASB 123R expense for the vesting of options. In 2006, expense relating to FASB 123R amounted to $40,000. The Company has reviewed unvested options and concluded that the effects of FASB 123R are immaterial.

On January 17, 2006 the assets of Consumer Choice Systems, a division of Medifast, Inc., were sold to a former Board member. The promissory note calls for monthly principal only payments over a 10-year term. Therefore, when imputing an interest rate on the loan, a $323,000 loss had to be realized due to the difference in the present value of the note receivable compared to the amount realizable over 10-years. This is a one-time loss that will not affect any future periods. The loss is recouped monthly in interest income over a period of 120 months or upon payment of the note in its entirety.

Income taxes: In the third quarter of 2006, the Company had a $1 million federal tax refund receivable. A portion of this refund was factored into the Company’s income tax provision, which lowered the estimated tax rate for 2006.  In 2006, the Company recorded $2.3 million in income tax expense, which represents an annual effective rate of 31%. In 2005, we recorded income tax expense of $1.2 million, which reflected an estimated annual effective tax rate of 30.1%. The Company anticipates a tax rate of approximately 36-39% in 2007.

Net income: Net income increased to $5.1 million in 2006 as compared to $2.4 million in 2005, which reflected an increase of 108% or $2.6 million. The increase in net income is due to an increase in sales offset by increased selling, general, and administrative expenses, that primarily consist of increased advertising, commissions paid to Take Shape for Life health advisors, outsourced call center reps, and new employees.

LIQUIDITY AND CAPITAL RESOURCES

The Company had stockholders’ equity of $28,114,000 and working capital of $9,612,000 on December 31, 2006 compared with $22,021,000 and $9,996,000 at December 31, 2005, respectively. The $6.1 million net increase in stockholder’s equity reflects the increased profitability of the Company. The Company’s cash and cash equivalents position decreased from $1.5 million at December 31, 2005 to $1.1 at December 31, 2006. The decrease is due to increased cash outlays for infrastructure to include the new ERP system and new production lines and blender, as well as inventory build-up for the first quarter of 2007. In addition, prepaid advertisements for January and payments to our third party call center were uses of cash. On December 31, 2006 the Company’s current ratio was 3 to 1.
 
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In October 2006, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals, Inc. renewed its $5,000,000 Secured Line of Credit from Mercantile Safe-Deposit and Trust of Baltimore, Maryland. The line of credit is at LIBOR plus 1.3 percent. The increased line may be used to finance equipment, advertising, inventory, and receivables of Medifast, Inc. The Company currently has no off-balance sheet arrangements.
 
In the year ended December 31, 2006, the Company generated cash flow of $5,845,000 from operations, primarily attributable to higher operating income. This was offset by net changes in operating assets and liabilities that decreased cash flow by $3,650,000. The largest use of cash was for the purchase of inventory. We increased inventory in the fourth quarter in order to meet anticipated demand in the first quarter of 2007. This was offset by an increase in accounts payable and a reduction in our accounts receivable and prepaid balances.
 
In the year ended December 31, 2006, net cash used in investing activities was $6,747,000, which primarily consisted of the purchase of intangible assets and purchases of property and equipment. In 2006, the Company built a large amount of infrastructure. This included a new Enterprise Resource Planning system, two new state of the art manufacturing lines, larger capacity blender and improvements at our distribution facility as well as the build out of our new Medifast Weight Control Centers.
 
In the year ended December 31, 2006, financing activities generated $503,000 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 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.
 
2005 COMPARISON WITH 2004

OPERATING

Revenue: Consolidated net sales for 2005 were $40,129,000 as compared to 2004 sales of $27,340,000, an increase of $12,789,000, or 47%. A major reason for the revenue increase for the Company is attributed to the continued success of direct sales to consumers as well as the expansion of the Take Shape for Life division. The increase in direct sales was attributed to an expanded direct marketing campaign via print, mail, web and television to drive customers to the call center and website. Through the effectiveness of our online ads and improved web branding a higher percentage of customers ordered on the Company’s website in 2005. In addition, the Company expanded it remarketing campaign to drive new customers to the call center and website. The Take Shape for Life division added a Take Shape for Life replicating website option for Health Advisors, an Internet distribution program for their customers, and provided health advisors with additional sponsoring tools to make training and recruiting easier. These have proven to be effective at generating revenues and recruiting Health Advisors into the Take Shape for Life Network. The increased training and recruitment initiatives in 2005 have resulted in the expansion of the sales network into additional locations as well as growth in current locations.

Costs and Expenses: Cost of sales increased from 6,746,000 in 2004 to $10,161,000 in 2005, an increase of $3,415,000. As a percentage of sales, cost of goods sold increased slightly due to increased fuel charges charged by the major shipping companies. Gross margin was 75% at December 31, 2005 and 2004.

Selling, general and administrative (SG&A) expenses of $25,894,000 for 2005 were $8,304,000 more than the $17,590,000 in 2004, due to increased costs associated with the increased scale of the business. The Company increased its advertising expense to include additional print and web advertising as well as strategic testing of television advertising. In 2005, the Company experienced income from operations of $4,074,000. This compares with income from operations of $3,004,000 in 2004, an increase of 36%. The increase in income is primarily due to higher gross profit from increased revenue offset by higher general and administrative expenses.

Income Taxes: In 2005, the Company realized a tax expense of $1,203,000, as compared to a tax expense of $1,159,000 in 2004. The slight increase in tax expense despite the increase in sales is due to timing differences between book and tax purposes for intangible assets, and other temporary and permanent differences. Interest expense increased to $317,000 in 2005, as compared to $245,000 in 2004. This increase was due to a full year of interest expense paid on a new loan acquired in 2004.

Net Income: The Company reported net income of $2,436,000, or $0.20 per basic share ($0.19 per diluted share), versus $1,729,000 or $0.16 per basic share ($0.14 per diluted share), with a dilution increase of 368,000 shares. Earnings per share were effected by the interest associated with the conversion of the Series “B” preferred stock. This conversion included a $260,000 stock dividend on Series “B” preferred stock and a $19,000 stock dividend on Series “C” preferred stock. As of December 31, 2005 all Series “B” and Series “C” preferred stock have been converted to common stock and included in the weighed average diluted shares. There will be no additional stock dividend payments.
 
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LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2005, the Company had net working capital of $9,996,000, an increase of $2,531,000 from the $7,465,000 net working capital balance at December 31, 2004. Cash and investment securities at December 31, 2005 were $4,184,000. In November 2005, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals, Inc. renewed its $5,000,000 Secured Line of Credit from Mercantile Safe-Deposit and Trust of Baltimore, Maryland. The line of credit is at LIBOR plus 1.3 percent. The increased line may be used to finance equipment, inventory, and receivables of Medifast, Inc. The Company currently has no off-balance sheet arrangements.
 
In the year ended December 31, 2005, the Company generated cash flow of $3,213,000 from operations, primarily attributable to higher operating income. This was offset by net changes in operating assets and liabilities that decreased cash flow by $2,065,000. The largest uses of cash were for the purchase of inventory and prepaid expenses, which primarily consisted of prepaid taxes, insurance, and advertising.
 
In the year ended December 31, 2005, net cash used in investing activities was $2,032,000, which primarily consisted of the purchase of intangible assets and purchases of property and equipment.
 
In the year ended December 31, 2005, net cash used in financing activities was $309,000, representing the principal repayments of long-term debt and purchase of treasury stock offset by an increase in the line of credit. Medifast, Inc. purchased 110,000 shares of its common stock from October 6, 2005 through October 17, 2005 at an average price of $4.03 per share, aggregating $452,000.
 
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.
 
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 2006. 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 8. FINANCIAL STATEMENTS.

The information required by this item is set forth on pages 22 through 43 hereto and incorporated by reference herein.
 
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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, 2006. 
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
 
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
 
Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There are inherent limitations in the effectiveness of any internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our 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. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Bagell, Josephs, Levine & Company, LLC, independent registered public accounting firm, as stated in their report which is included below.
 
Changes in Internal Controls over Financial Reporting
 
There were no significant changes in the Company’s internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
 
17
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors
Medifast, Inc. and subsidiaries
Owing Mills, Maryland

We have audited management's assessment, included in Management’s Annual Report on Internal Control over Financial Reporting, that Medifast Inc. and subsidiaries maintained effective control over financial reporting as of December 31 2006, based on "criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria)." Medifast Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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.

In our opinion, management's assessment that Medifast, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Medifast Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Medifast Inc. and subsidiaries as of December 31, 2006 and the consolidated results of their operations and their consolidated cash flow for the year then ended and our report dated March 15, 2007 expressed an unqualified opinion thereon.

Bagell, Josephs, Levine & Co.
Gibbsboro, New Jersey
March 15, 2007
 
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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to Medifast’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2006.
 
The required information as to executive officers is set forth in Part I hereof and is incorporated herein by reference.

The Company has adopted a code of business conduct and ethics applicable to the Company’s directors, officers, and employees, knows as the Code of Business Conduct. The Code of Business Conduct is available on the Company’s website. In the event that we amend or waive any of the provision of the Code of Business Conduct applicable to one of our principal officers that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, we intend to disclose the same on the Company’s website at www.medifastdiet.com .

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference to Medifast’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2006.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated by reference to Medifast’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2006.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to Medifast’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2006.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to Medifast’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2006.
 
19
 
PART IV
 
ITEM 15. EXHIBITS AND FINACIAL STATEMENT SCHEDULES
 
MEDIFAST, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Report of Independent Registered Public Accounting Firm
  
22
     
Consolidated Balance Sheets
  
23
     
Consolidated Statements of Operations
  
24
     
Consolidated Statements of Stockholders’ Equity
  
25
 
    
Consolidated Statements of Cash Flows
  
27
     
Notes to Consolidated Financial Statements
  
29
 
21

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of Medifast, Inc.
 
We have audited the accompanying consolidated balance sheets of Medifast, Inc. as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medifast, Inc. at December 31, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
 
  
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Medifast, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion theron.
 
Bagell, Josephs, Levine & Company, LLC

Gibbsboro, New Jersey
March 15, 2007
 
22
 
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and 2005

   
2006
  
2005
  
           
ASSETS
          
Current assets:
          
Cash and cash equivalents
  
$
1,085,000
  
$
1,484,000
  
Accounts receivable-net of allowance for doubtful accounts
   
448,000
    
985,000
 
of $100,000
              
Inventory
    
8,255,000
    
5,475,000
 
Investment securities
    
1,540,000
    
2,700,000
 
Deferred compensation
    
673,000
    
525,000
 
Prepaid expenses and other current assets
    
2,599,000
    
3,273,000
 
Note receivable - current
    
174,000
        
Current portion of deferred tax asset
    
90,000
    
-
 
Total current assets
    
14,864,000
    
14,442,000
 
               
Property, plant and equipment - net
    
14,020,000
    
9,535,000
 
Trademarks and intangibles - net
    
6,274,000
    
6,508,000
 
Deferred tax asset, net of current portion
    
367,000
    
-
 
Note receivable, net of current assets
    
1,355,000
    
-
 
Other assets
    
47,000
    
60,000
 
               
TOTAL ASSETS
  
$
36,927,000
  
$
30,545,000
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
Accounts payable and accrued expenses
  
$
2,913,000
  
$
2,263,000
  
Income taxes payable
    
535,000
    
899,000
 
Dividends payable
   
-
    
-
 
Line of credit
    
1,256,000
    
633,000
 
Current maturities of long-term debt
    
548,000
    
561,000
 
Deferred tax liability - current
          
90,000
 
Total current liabilities
    
5,252,000
   
4,446,000
 
               
Other liabilities and deferred credits
              
Long-term debt, net of current portion
    
3,509,000
    
3,977,000
 
Deferred tax liability - non-current
    
-
    
101,000
 
Total liabilities
    
8,761,000
   
8,524,000
 
               
Stockholders' Equity:
              
Preferred stock, $.001 par value (1,500,000 authorized, no shares issued and outstanding)
    
-
   
-
 
Common stock; par value $.001 per share; 20,000,000 shares authorized;
              
13,631,898 and 12,782,791 shares issued and outstanding
    
14,000
   
13,000
 
Additional paid-in capital
    
26,629,000
   
21,759,000
 
Accumulated other comprehensive income
   
334,000
   
282,000
 
Retained earnings
   
6,231,000
   
1,149,000
 
     
33,208,000
   
23,203,000
 
Less: cost of 249,184 and 210,902 shares of common stock in treasury
    
(1,686,000
)
  
(1,075,000
)
Less: Unearned compensation
    
(3,356,000
)
  
(107,000
)
Total stockholders' equity
    
28,166,000
   
22,021,000
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
$
36,927,000
  
$
30,545,000
  

The accompanying notes are an integral part of these consolidated financial statements
 
23
 
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

   
Years Ended December 31,  
  
   
2006
  
 2005
  
2004
  
                
Revenue
  
$
74,086,000
  
$
40,129,000
  
$
27,340,000
  
Cost of sales
    
(18,237,000
)
  
(10,161,000
)
  
(6,746,000
)
Gross profit
    
55,849,000
    
29,968,000
    
20,594,000
  
                     
Selling, general, and administration
    
(47,737,000
)
  
(25,894,000
)
  
(17,590,000
)
                     
Income from operations
    
8,112,000
    
4,074,000
    
3,004,000
  
                     
Other income (expense):
                    
Interest expense
    
(369,000
)
  
(317,000
)
  
(245,000
)
Interest income
    
175,000
   
158,000
   
154,000
 
Stock compensation exp
    
(533,000
)
            
Loss on sale of CCS
    
(323,000
)
            
Other income (expense)
    
276,000
   
15,000
   
(7,000
)
     
(774,000
)
  
(144,000
)
  
(98,000
)
                     
Income before provision for income taxes
    
7,338,000
    
3,930,000
    
2,906,000
  
Provision for income taxes
    
(2,256,000
)
  
(1,203,000
)
  
(1,159,000
)
                     
Net income
    
5,082,000
    
2,727,000
    
1,747,000
  
                     
Less: Preferred stock dividend requirement
    
-
    
(291,000
)
  
(18,000
)
                     
Net income attributable to common shareholders
  
$
5,082,000
  
$
2,436,000
  
$
1,729,000
  
                     
Basic earnings per share
  
$
0.40
  
$
0.20
  
$
0.16
  
Diluted earnings per share
  
$
0.38
  
$
0.19
  
$
0.14
  
                     
Weighted average shares outstanding -
                   
Basic
    
12,699,066
    
12,258,734
    
10,832,360
  
Diluted
    
13,482,894
    
12,780,959
    
12,413,424
  

The accompanying notes are an integral part of these consolidated financial statements
 
24
 
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2006, 2005, and 2004

   
Series B
Preferred Stock
  
Series C 
Preferred Stock
 
Common Stock
  
   
Number
of Shares
 
Stated
Value
Amount
 
Number
of Shares
 
Stated
Value
Amount
 
Number
of Shares
 
Par Value
$0.001
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings (deficit)
  
Balance, December 31, 2003
    
403,734
    
404,000
    
267,000
    
267,000
    
10,482,609
    
10,000
    
20,120,000
    
(3,016,000
)
Preferred converted to Common Stock
    
(103,120
)
  
(103,000
)
  
(67,000
)
  
(67,000
)
  
340,240
          
170,000
        
Options exercised to Common Stock
                            
47,221
    
1,000
    
34,000
        
Warrants Converted to Common Stock
                            
46,700
          
125,000
        
Conversion of debt to equity
                            
55,400
          
28,000
        
Conversion of debt to equity out of Treasury
                                        
114,000
        
Common stock issued to Consultants
                            
15,500
          
93,000
        
Shares issued out of Treasury
                                        
(135,000
)
      
Common Stock issued for Series “C” dividend
                            
13,400
          
7,000
    
(7,000
)
Dividend paid in stock
                                              
(11,000
)
Net Income
                                              
1,747,000
  
Balance, December 31, 2004
    
300,614
    
301,000
    
200,000
    
200,000
    
11,001,070
    
11,000
    
20,556,000
    
(1,287,000
)
                                                   
Preferred converted to Common Stock
    
(300,614
)
  
(301,000
)
  
(200,000
)
  
(200,000
)
  
1,001,228
    
1,100
    
500,000
        
Warrants Converted to Common Stock
                            
2,000
   
-
    
2,000
       
Options excercised to common stock
                            
138,335
   
100
   
190,000
       
Common Stock issued for Series “C” dividend
                            
38,000
   
-
    
19,000
   
(19,000
)
Dividend paid in stock
                                              
(11,000
)
Common stock issued for Series “B” dividend
                            
521,158
   
600
   
260,000
   
(261,000
)
Common stock issued to Employees
                            
81,000
   
100
   
271,000
       
Treasury shares issued to employees
                                  
100
   
(39,000
)
      
Shares issued to officer with two year vesting period
                                                  
Vesting of unearned compensation
                                                  
Treasury shares repurchased
                                                  
Net income
                                              
2,727,000
  
Balance, December 31, 2005
    
0
  
$
0
    
0
  
$
0
    
12,782,791
  
$
13,000
  
$
21,759,000
  
$
1,149,000
  
                                                   
Warrants converted to common stock
                            
142,810
    
200
    
762,000
        
Common stock issued to Directors
                            
10,750
    
100
    
69,000
        
Common stock issued to consultants
                            
2,500
    
100
    
17,000
        
Dividend paid in stock
                                                  
Options excercised to common stock
                            
128,047
    
100
    
240,000
        
Options granted to CEO
                                        
383,000
        
FASB 123R vesting
                                        
41,000
        
Shares issued to executives with 5 & 6 year vesting period
                            
565,000
    
600
    
3,374,000
        
Treasury shares issued to employees
                                  
(100
)
  
(16,000
)
      
Net income
                                              
5,082,000
  
Balance, December 31, 2006
    
0
  
$
0
    
0
  
$
0
    
13,631,898
  
$
14,000
  
$
26,629,000
  
$
6,231,000
  
 
The accompanying notes are an integral part of these consolidated financial statements
 
25
 
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS) - (CONTINUED)
 
Years Ended December 31, 2006, 2005, and 2004
 
Consolidated Statement of Changes in Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)
Years Ended December 31, 2006, 2005, 2004
 
   
Common Stock
  
   
Accumulated other comprehensive income (loss )
 
Total
 
Treasury Stock
 
Unearned Compensation
 
Balance, December 31, 2003
   
(25,000
)
  
17,760,000
    
(683,000
)
  
-
  
Preferred converted to Common Stock
                         
Options exercised to Common Stock
         
35,000
    
(31,000
)
      
Warrants Converted to Common Stock
         
125,000
    
(123,000
)
      
Conversion of debt to equity
         
28,000
              
Conversion of debt to equity out of Treasury
         
114,000
    
166,000
        
Common stock issued to Consultants
         
93,000
    
135,000
        
Shares issued out of Treasury
         
(135,000
)
  
135,000
        
Common Stock issued for Series “C” dividend
                         
Dividend paid in stock
         
(11,000
)
            
Net Income
   
(14,000
)
  
1,733,000
              
Balance, December 31, 2004
   
(39,000
)
  
19,742,000
    
(536,000
)
  
-
  
Preferred converted to Common Stock
               
(124,000
)
      
Warrants Converted to Common Stock
         
2,000
              
Options excercised to common stock
         
190,000
              
Common Stock issued for Series “C” dividend
                         
Dividend paid in stock
         
(11,000
)
            
Common stock issued for Series “B” dividend
                         
Common stock issued to Employees
         
271,000
              
Treasury shares issued to employees
         
(39,000
)
  
38,000
        
Shares issued to officer with two year vesting period
                     
(122,000
)
Vesting of unearned compensation
                     
15,000
  
Treasury shares repurchased
               
(453,000
)
      
Net income
   
321,000
    
3,048,000
              
Balance, December 31, 2005
 
$
282,000
  
$
23,203,000
    
($1,075,000
)
  
($107,000
)
Warrants converted to common stock
         
763,000
    
(137,000
)
      
Common stock issued to Directors
         
69,000
              
Common stock issued to consultants
         
17,000
              
Dividend paid in stock
                         
Options excercised to common stock
         
241,000
    
(490,000
)
      
Options granted to CEO
         
383,000
          
(383,000
)
FASB 123R vesting
         
41,000
              
Shares issued to executives with 5 & 6 year vesting period
         
3,374,000
          
(3,374,000
)
Vesting of unearned compensation
                     
508,000
  
Treasury shares issued to employees
         
(16,000
)
  
16,000
        
Net income
   
52,000
    
5,133,000
              
Balance, December 31, 2006
 
$
334,000
  
$
33,208,000
    
($1,686,000
)
  
($3,356,000
)

The accompanying notes are an integral part of these consolidated financial statements
 
26

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
 
   
2006
  
2005
  
2004
  
Cash flows from Operating Activities:
                    
Net income
  
$
5,082,000
  
$
2,727,000
  
$
1,747,000
  
Adjustments to reconcile net income to net cash provided by operating activities from operations:
                   
Depreciation and amortization
   
2,396,000
    
1,741,000
    
1,210,000
  
Realized (gain) loss on investment securities
    
(79,000
)
  
10,000
    
19,000
  
Loss on sale of Consumer Choice Systems
    
323,000
    
-
    
-
  
Common stock issued for services
    
86,000
    
150,000
    
93,000
  
Vesting of unearned compensation
    
509,000
    
15,000
    
-
  
Stock options vested during year
    
40,000
    
-
    
-
  
Excess tax benefits from share-based payment arrangements
    
16,000
    
-
    
-
  
Net change in other accumulated comprehensive income (loss)
    
52,000
    
321,000
    
(14,000
)
Provision for bad debts
    
-
    
13,000
    
-
  
Deferred income taxes
    
(648,000
)
  
301,000
    
486,000
  
Changes in Assets and Liabilities:
                    
Decrease (increase) in accounts receivable
    
379,000
    
65,000
    
(422,000
)
(Increase) in inventory
    
(3,138,000
)
  
(1,225,000
)
  
(1,263,000
)
(Increase) decrease in prepaid expenses and other current assets
    
675,000
    
(2,194,000
)
  
(143,000
)
(Increase) in deferred compensation
    
(148,000
)
  
(204,000
)
  
-
  
Decrease (increase) in other assets
    
13,000
    
10,000
    
(25,000
)
Increase (decrease) in accounts payable and accrued expenses
    
651,000
    
1,323,000
    
(460,000
)
Increase (decrease) in income taxes payable
    
(364,000
)
  
160,000
    
674,000
  
Net cash provided by operating activities
    
5,845,000
    
3,213,000
    
1,902,000
  
Cash Flows from Investing Activities:
                    
Sale (purchase) of investment securities, net
    
1,237,000
    
(84,000
)
  
1,338,000
  
Purchase of building
    
-
    
-
    
(566,000
)
Purchase of property and equipment
    
(5,557,000
)
  
(1,672,000
)
  
(1,490,000
)
Purchase of intangible assets
    
(2,427,000
)
  
(276,000
)
  
(2,792,000
)
Net cash (used in) investing activities
   
(6,747,000
)
  
(2,032,000
)
  
(3,510,000
)
Cash Flows from Financing Activities:
                    
Issuance of common stock, options and warrants
    
795,000
    
66,000
    
7,000
  
Increase in line of credit, net
    
623,000
    
561,000
    
314,000
  
Excess tax benefits from share-based payment arrangements
    
(14,000
)
  
-
    
-
  
Purchase of treasury stock
    
(420,000
)
  
(452,000
)
  
-
  
Proceeds from long-term debt
   
-
    
-
    
475,000
  
Principal repayments of long-term debt
   
(481,000
)
  
(473,000
)
  
(1,089,000
)
Dividends paid on preferred stock
   
-
    
(11,000
)
  
(11,000
)
Net cash provided by (used in) financing activities
   
503,000
    
(309,000
)
  
(304,000
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(399,000
)
  
872,000
    
(1,912,000
)
Cash and cash equivalents - beginning of the year
    
1,484,000
    
612,000
    
2,524,000
  
Cash and cash equivalents - end of year
  
$
1,085,000
  
$
1,484,000
  
$
612,000
  
Supplemental disclosure of cash flow information:
                    
Interest paid
 
$
369,000
  
$
317,000
  
$
245,000
  
Income taxes
  
$
3,403,000
  
$
1,983,000
  
$
-
  
Supplemental disclosure of non cash activity:
                    
Common stock issued to executives over 6-year vesting period
  
$
3,373,000
  
$
-
  
$
-
  
Common shares issued for options and warrants
  
$
591,000
  
$
-
  
$
-
  
Options vested during period
  
$
40,000
  
$
-
  
$
-
  
Conversion of preferred stock B and C to common stock
  
$
-
  
$
501,000
  
$
170,000
  
Common stock for services
  
$
86,000
  
$
150,000
  
$
93,000
  
Conversion of debt to equity
  
$
-
  
$
-
  
$
307,000
  
Preferred B and C Stock Dividends
  
$
-
  
$
287,000
  
$
7,000
  
Line of credit converted to long-term debt
  
$
-
  
$
369,000
  
$
-
  
Common stock issued for compensation to be earned upon vesting
  
$
-
  
$
122,000
  
$
-
  
 
The accompanying notes are an integral part of these consolidated financial statements
 
27
 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
 
   
Years Ended December 31,
  
   
2006
  
2005
  
2004
  
Supplemental disclosure of non cash activity:
                    
Sale of Consumer Choice Systems
                    
Inventory
  
$
358,000
  
$
-
  
$
-
  
Accounts Receivable
    
131,000
    
-
    
-
  
Intangible assets, net
    
1,337,000
    
-
    
-
  
Note receivable
    
(1,503,000
)
  
-
    
-
  
Loss on sale of Consumer Choice Systems
    
(323,000
)
  
-
    
-
  
 
  
 $
-
  
$
-
  
$
-
  
 
The accompanying notes are an integral part of these consolidated financial statements
 
28
 
Medifast, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006, 2005, 2004

1. BACKGROUND

Nature of the Business

Medifast, Inc. (the "Company", or "Medifast") is a Delaware corporation, incorporated in 1980. The Company’s operations are primarily conducted through five of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape for Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven Crondall, LLC. The Company is engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products. Medifast, Inc.’s product lines include weight and disease management, and meal replacement products manufactured in a modern, FDA approved facility in Owings Mills, Maryland.

The Company is engaged in the manufacturing and distribution of Medifastâ and Hi-Energyâ branded and private label weight and disease management products. These products are sold through various channels of distribution, to include web, call center, independent health advisors, medical professionals, weight loss clinics, direct consumer marketing supported via the phone and the web. The processing, formulation, packaging, labeling and advertising of the Company’s products are subject to regulation by one or more federal agencies, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, and the United States Environmental Protection Agency.

2. Summary of Significant Accounting Policies

Significant accounting policies followed in the preparation of the consolidated financial statements are as follows:

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., Take Shape For Life, Inc., Seven Crondall Associates, LLC, Jason Properties, LLC and Jason Enterprises, Inc. All inter-company accounts have been eliminated.

Cash and Cash Equivalents

For the purposes of the consolidated statements of cash flow, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. At December 31, 2006, the Company had $979,000 in miscellaneous short-term investments through Merrill Lynch that are considered cash equivalents due to terms of maturity, and $106,000 in operating checking accounts.

At December 31, 2005, the Company had $789,000 in a money market account, $365,000 in miscellaneous short-term investments through Merrill Lynch that are considered cash equivalents due to terms of maturity, and $330,000 in operating checking accounts.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded net of reserves for sales returns and allowances, and net of provisions for doubtful accounts. Allowances for sales returns and discounts are based on an analysis of historical trends, and allowances for doubtful accounts are based primarily on an analysis of aging accounts receivable balances and on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

Inventory

Inventory is stated at the lower of cost or market, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs.

Advertising

Advertising costs such as preparation, layout, design and production of advertising are deferred. They are expensed when the advertisement is first used, except for the costs of executory contracts, which are amortized as performance under the contract is received. Advertising costs deferred at December 31, 2006 and 2005, were $960,000 and $585,000 respectively. Advertising expense for the years ended December 31, 2006 and 2005 amounted to $14,300,000 and $3,784,000, respectively
 
29
 
Property, Plant, and Equipment

 Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:

Building and building improvements
  
39 years
Equipment and fixtures
 
3 - 15 years
Vehicles
 
5 years
 
The carrying amount of all long-lived assets is evaluated periodically to determine whether adjustment to the useful life or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected undiscounted cash flows of the operations in which the long-lived assets are used.

Income Taxes

The Company accounts for income taxes in accordance with Statements of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Earnings Per Common Share

Basic earnings per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. Basic earnings per share exclude any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share.

Revenue Recognition

Revenue is recognized for product sales upon shipment and passing of risk to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable which also include estimated sales returns, allowances and discounts.

Outbound shipping charges to customers and outbound shipping-related costs are netted and included in “cost of sales.”

Returns - Consistent with industry practice, the Company maintains a return policy that allows its customers to return product within a specified period (30 days). Because the period of payment generally approximates the period revenue was originally recognized, refunds are recorded as a reduction of revenue when paid. The Company’s estimate for returns is based upon its historical experience with actual returns. While such experience has allowed for reasonable estimation in the past, history may not always be an accurate indicator of future returns. The Company continually monitors its estimates for returns and makes adjustments when it believes that actual product returns may differ from the established accruals.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

30

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash, certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of the financial instruments.

The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, certificates of deposit, investment securities and trade receivables. Cash, money markets and investments exceed the federal insurance coverage by $2,610,000 and $2,248,000, respectively. The Company securities at December 31, 2006 and 2005, include amounts deposited with multiple financial institutions markets its products primarily to medical professionals, clinics, and Internet medical sales and has no substantial concentrations of credit risk in its trade receivables.

As of December 31, 2006 and 2005, the Company had two customers that individually represented over 10% of the accounts receivable and in the aggregate, approximately 12% and 21% of the accounts receivable, respectively.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payments,” which establishes the accounting for employee stock-based awards. Under the provisions of SFAS No.123(R), stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company adopted SFAS No. 123(R) using the modified prospective method and, as a result, periods prior to December 31, 2005 have not been restated. The Company recognized stock-based compensation for awards issued under the Company’s stock option plans in other income/expenses included in the Condensed Consolidated Statement of Operations. Additionally, no modifications were made to outstanding stock options prior to the adoption of SFAS No. 123(R), and no cumulative adjustments were recorded in the Company’s financial statements.

Prior to December 31, 2005, the Company accounted for stock-based compensation in accordance with provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. Under APB No. 25, compensation cost was recognized based on the difference, if any, on the date of grant between the fair value of the Company’s stock and the amount an employee must pay to acquire the stock. The Company grants stock options at an exercise price equal to 100% of the market price on the date of grant. Accordingly, no compensation expense was recognized for the stock option grants in periods prior to the adoption of SFAS No. 123(R).

Unearned compensation represents shares issued to executives that will be vested over a 5-6 year period. These shares will be amortized over the vesting period in accordance with FASB 123(R). The expense related to the vesting of unearned compensation was $509,000 and $0 at December 31, 2006 and December 31, 2005, respectively. Expense related to vesting of options under FASB 123R was $40,000 and $0 at December 31, 2006 and December 31, 2005, respectively.

SFAS No. 123(R) requires disclosure of pro-forma information for periods prior to the adoption. The pro-forma disclosures are based on the fair value of awards at the grant date, amortized to expense over the service period. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, for the period prior to the adoption of SFAS No. 123(R), and the actual effect on net income and earnings per share for the period after the adoption of SFAS No. 123(R).

31
 
If compensation expense for the Company's stock-based compensation plans had been determined consistent with SFAS 123, the Company's net income and net income per share including pro forma results would have been the amounts indicated below:

   
Years Ended December 31
  
   
2006
  
2005
  
2004
  
Net income:
                    
As reported
    
5,082,000
    
2,727,000
    
1,747,000
  
Add: Stock-based employee compensation expense included in net income, net of related tax effects
    
24,000
              
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects
    
(24,000
)
  
(280,000
)
  
(108,000
)
Net income, pro forma
    
5,082,000
    
2,447,000
    
1,639,000
  
Net income per share:
                    
as reported:
                    
Basic
  
$
0.40
  
$
0.20
  
$
0.16
  
Diluted
  
$
0.38
  
$
0.19
  
$
0.14
  
Pro forma:
                    
Basic
  
$
0.40
  
$
0.20
  
$
0.15
  
Diluted
  
$
0.38
  
$
0.19
  
$
0.13
  
 
The pro forma effect on net income may not be representative of the pro forma effect on net income of future years due to, among other things: (i) the vesting period of the stock options and the (ii) fair value of additional stock options in future years.

For the purpose of the above table, the fair value of each option granted is estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions:

   
2006
  
2005
  
2004
  
Dividend yield
   
0.0
%
  
0.0
%
   0.0 %
Expected volatility
   
0.70
    
0.70
    
0.40
  
Risk-free interest rate
    
4.50
%
  
4.50
%
   4.50 %
Expected life in years
   
1-5
    
1-5
    
1-5
  
 
Recent Accounting Pronouncements
 
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of SFAS No. 155 will have on its financial position or results of operations.
 
32
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. Additionally, SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. SFAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of SFAS No. 156 will have on its financial position or results of operations.
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (“FAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of FAS 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB also issued in September 2006 Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R), (“FAS 158”) . This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. FAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement elements to be effective for fiscal years ending after December 15, 2008. The Company has not yet analyzed the impact FAS 158 will have on its financial condition, results of operations, cash flows or disclosures.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Quantifying Misstatements.” SAB 108 provides interpretative guidance on how public companies quantify financial statement misstatements. There have been two common approaches used to quantify such errors. Under an income statement approach, the “roll-over” method, the error is quantified as the amount by which the current year income statement is misstated. Alternatively, under a balance sheet approach, the “iron curtain” method, the error is quantified as the cumulative amount by which the current year balance sheet is misstated. In SAB 108, the SEC established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. SAB 108 is effective for the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial position and results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
 
Investments

In accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities are classified into three categories: held-to-maturity, available-for-sale and trading. The Company’s investments consist of debt and equity securities classified as available-for-sale securities. Accordingly, they are carried at fair value in accordance with FAS No. 115. Further, according to FAS No. 115 the unrealized holding gains and losses for available-for-sales securities are excluded from earnings and reported, net of deferred income taxes, as a separate component of stockholders’ equity, unless the loss is classified as other than a temporary decline in market value.
 
33
 
Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Upon the sale of Consumer Choice Systems, Inc. on January 17, 2006, the goodwill balance of $894,000 was removed from the Company’s books.

In addition, the Company has acquired other intangible assets, which include: customer lists, non-compete agreements, trademarks and patents. The non-compete agreements are being amortized over the legal life of the agreements ranging between 3 to 7 years. The customer lists are being amortized over a period ranging between 5 to 10 years based on management’s best estimate of the expected benefits to be consumed or otherwise used up. Trademarks and patents are regularly reviewed to determine whether the facts and circumstances exist to indicate that the useful life is shorter than originally estimated or the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of its trademarks and patents by comparing the projected discounted net cash flows associated with the related asset, over their remaining lives, in comparison to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. 
 
Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities. The Company presents comprehensive income in its consolidated statements of stockholders equity.
 
Reclassifications

Certain amounts for the years ended December 31, 2005 and 2004 have been reclassified to conform to the presentation of the December 31, 2006 amounts. The reclassifications have no effect on net income for the years ended December 31, 2005 and 2004.
 
3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITES

The following summarizes cash, cash equivalents, and marketable securities:

   
Cost
  
Accrued interest
  
Fair value
  
Cash and cash equivalents
                    
Demand deposits
  
$
106,000
  
$
-
  
$
106,000
  
Money market accounts
    
979,000
   
-
   
979,000
 
December 31, 2006
  
$
1,085,000
  
$
-
  
$
1,085,000
  
Marketable Securities
                    
Marketable securities
  
$
1,206,000
  
$
334,000
  
$
1,540,000
  
December 31, 2006
  
$
1,206,000
  
$
334,000
  
$
1,540,000
  
Cash and cash equivalents
                    
Demand deposits
  
$
330,000
  
$
-
  
$
330,000
  
Money market accounts
    
1,154,000
   
-
   
1,154,000
 
December 31, 2005
  
$
1,484,000
  
$
-
  
$
1,484,000
  
Cash equivalents and marketable securities
                    
Marketable securities
  
$
2,418,000
  
$
282,000
  
$
2,700,000
  
December 31, 2005
  
$
2,418,000
  
$
282,000
  
$
2,700,000
  
 
34
 
4. INVENTORY

Inventory consists of the following at December 31, 2006 and 2005:

   
2006
  
2005
  
Raw materials
  
$
1,872,000
  
$
1,906,000
  
Packaging
    
1,625,000
    
1,142,000
  
Finished goods
    
4,758,000
    
2,427,000
  
   
$
8,255,000
  
$
5,475,000
  
 
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS 
 
Prepaid expense and other current assets as of December 31, 2006 and 2005, consist of the following:

   
2006
  
2005
  
Marketing and advertising
    
1,830,000
    
1,592,000
  
Taxes
    
-
    
779,000
  
Supplies
    
158,000
    
393,000
  
Insurance
    
519,000
    
294,000
  
Services
          
50,000
  
Other
    
92,000
    
165,000
  
     
2,599,000
    
3,273,000
  
 
6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2006 and 2005, consist of the following:

   
2006
  
 2005
  
Land
  
$
650,000
  
$
650,000
  
Building and building improvements
    
7,182,000
    
6,871,000
  
Equipment and fixtures
   
10,805,000
    
5,583,000
  
Vehicle
    
43,000
    
19,000
  
     
18,680,000
    
13,123,000
  
Less accumulated depreciation and amortization
    
4,660,000
    
3,588,000
  
Property, plant and equipment - net
  
$
14,020,000
  
$
9,535,000
  

Substantially all of the Company's property, plant and equipment are pledged as collateral for various loans (see Note Payable footnote).

Depreciation expense for the years ended December 31, 2006, 2005, and 2004 were $1,072,000, $835,000 and $804,000, respectively.

35
 
7. TRADEMARKS AND INTANGIBLES
 
   
As of December 31, 2006
 
As of December 31, 2005
  
   
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
  
                   
Customer lists
  
$
6,346,000
  
$
1,636,000
  
$
4,514,000
  
$
873,000
  
Non-compete agreements
    
840,000
   
840,000
   
840,000
   
566,000
 
Trademarks and patents
    
1,707,000
   
143,000
   
1,821,000
   
121,000
 
Goodwill
    
-
         
894,000
   
-
 
                           
Total
  
$
8,893,000
  
$
2,619,000
  
$
8,069,000
  
$
1,560,000
  
 
Amortization expense for the years ended December 31, 2006, 2005 and 2004 was as follows:
 
   
 2006
  
 2005
  
 2004
  
Customer lists
  
$
966,000
  
$
479,000
  
$
244,000
  
Non-compete agreements
    
273,000
   
369,000
   
162,000
 
Trademarks and patents
    
85,000
   
58,000
   
-
 
                     
Total trademarks and intangibles
  
$
1,324,000
  
$
906,000
  
$
406,000
  
 
On January 17, 2006 the Consumer Choice Systems division of the Company was sold which included the sale of $1,601,000 in gross intangible assets and $265,000 in accumulated amortization.
 
The estimated future amortization expense of trademarks and intangible assets is as follows:
 
For the years ending December 31,
  
Amount
  
2007
  
$
1,640,000
  
2008
    
1,615,000
  
2009
    
675,000
  
2010
    
600,000
  
2011
    
590,000
  
 
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses as of December 31, 2006 and 2005 consist of the following:
 
   
2006
 
2005
  
Trade payables
  
$
2,214,000
  
$
1,695,000
  
Accrued payroll and related taxes
    
328,000
    
314,000
  
Sales commissions payable
    
371,000
    
254,000
  
Total
  
$
2,913,000
  
$
2,263,000
  
 
36
 
9. COMMITMENTS AND CONTINGENCIES

The Company leases office space for its eleven corporately owned Medifast Weight Control Centers under lease terms ranging from one to five years with leases commencing in 2004, 2005, 2006 and 2007. Monthly payments under the leases range in price from $1,200 to $3,500. The Company is required to pay property taxes, utilities, insurance and other costs relating to the leased facilities.

The following is a schedule by years of future minimum rental payments required under operating lease that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2006:
 
For the Years Ending December 31,
     
       
2007
  
$
253,000
  
2008
    
221,000
 
2009
    
215,000
 
2010
    
110,000
 
2011
    
70,000
 
Total minimum payments required
  
$
869,000
  
 
Rent expense for the years ended December 31, 2006, 2005, and 2004 was $116,000, $211,000, and $229,000, respectively.

There is no pending or threatened legal action that would have material adverse on the Company’s consolidated financial position, results or operations or cash flows in future years.
 
10. INCOME TAXES

Significant components of the income tax benefit for the years ended December 31 are as follows:

   
2006
 
2005
 
2004
  
Current:
                    
Federal
  
$
1,184,000
  
$
685,000
  
$
600,000
  
State
    
314,000
   
217,000
   
90,000
 
Total Current
  
$
1,498,000
  
$
902,000
  
$
690,000
  
Deferred:
                    
Federal
  
$
657,000
  
$
261,000
  
$
408,000
  
State
    
101,000
   
40,000
   
61,000
 
Total deferred
    
758,000
   
301,000
   
469,000
 
Income tax expense
  
$
2,256,000
  
$
1,203,000
  
$
1,159,000
  

37
 
A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax benefit in the consolidated statements of income for the years ended December 31 is as follows:
 
   
2006
 
2005
 
2004
  
Provision at the U.S. federal statutory rate
  
$
2,492,000
  
$
1,272,000
  
$
1,087,000
  
State taxes, net of federal benefit
    
366,000
   
198,000
   
145,000
 
Intangible assets
    
(298,000
)
  
(153,000
)
  
(73,000
)
Other temporary differences
    
-
   
(98,000
)
  
-
 
Cost segregation study
    
(275,000
)
  
-
   
-
 
Permanent differences
    
(29,000
)
  
(16,000
)
  
-
 
Income tax expense
  
$
2,256,000
  
$
1,203,000
  
$
1,159,000
  
 
Medifast, Inc.’s deferred income taxes reflect the net tax effect of temporary differences between the bases of assets and liabilities for financial reporting purposes and their bases for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:
 
   
2006
  
2005
  
Deferred tax assets
          
Intangible assets
  
$
330,000
  
$
-
  
Accounts receivable
    
37,000
   
-
 
Inventory overhead and write downs
    
49,000
   
-
 
Deferred compensation
    
41,000
   
-
 
Total deferred tax assets
  
$
457,000
  
$
-
  
               
               
Deferred Tax Liabilities
              
Intangible assets
  
$
-
  
$
(113,000
)
Accounts receivable
    
-
   
(37,000
)
Inventory overhead and write downs
    
-
   
(41,000
)
Total deferred tax liabilities
  
$
-
  
$
(191,000
)
 
The 2006 effective income tax rate of 30.7% differed from the federal statutory rate of 34% due to the amortization of intangible assets, a cost segregation study performed on fixed assets, as well as timing differences for other temporary and permanent differences, and state income taxes.

The 2005 effective income tax rate of 30.6% differed from the federal statutory rate of 34% due to the amortization of intangible assets, timing differences for other temporary and permanent differences, and state income taxes.

The 2004 effective income tax rate differed from the federal statutory rate due to state taxes, amortization of intangible assets, and for a net operating loss deduction carried forward from 2003.
 
38
 
11. STOCK OPTION PLAN

On October 9, 1993 and as amended in May 1995, the Company adopted a stock option plan ("Plan") authorizing the grant of incentive and non-incentive options for an aggregate of 500,000 shares of the Company's common stock to officers, employees, directors and consultants. Incentive options are to be granted at fair market value. Options are to be exercisable as determined by the stock option committee.

In November 1997, June 2002 and July 2004, the Company amended the Plan by increasing the number of shares of the Company's common stock subject to the Plan by an aggregate of 200,000 shares, 300,000 shares and 250,000 shares respectively.

The Company has elected to continue to account for stock option grants in accordance with APB 25 and related interpretations. Under APB 25, where the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation is recognized.

The following summarizes the stock option activity for the years ended December 31:
 
   
2006
 
2005
 
2004
  
   
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
  
                           
Outstanding at beginning of year
    
359,727
 
$
2.71
    
389,397
 
$
1.51
    
439,455.00
 
$
1.76
  
Options granted
    
100,000
   
6.25
   
333,333
   
2.64
   
30,000.00
   
8.60
 
Options reinstated
    
16,666
   
6.36
   
-
   
0.00
   
-
   
0.00
 
Options exercised
    
(128,147
)
  
(2.11
)
  
(138,335
)
  
(1.83
)
  
(47,221
)
  
(1.19
)
Options forfeited or expired
    
(26,667
)
  
(8.36
)
  
(224,668
)
  
(1.17
)
  
(32,837
)
  
(7.01
)
                                       
Outstanding at end of year
    
321,579
 
$
3.88
    
359,727
 
$
2.71
    
389,397.00
 
$
1.51
  
Options exercisable at year end
    
211,577
 
$
2.77
    
329,725
 
$
2.56
    
350,336.00
 
$
1.11
  
 
The weighted average fair value at date of grant for options granted during the years 2006, 2005, and 2004 were $6.25, $2.64, and $8.60, respectively.

In 2005, the Company incorrectly cancelled 75,000 options to a former consultant. The options were correctly added back to the 2005 and 2006 option schedule above. The omission from the schedule in prior year had no impact on earnings per share. During 2006, the former consultant exercised 25,000 options and 50,000 remain outstanding.
 
39
 
The following table summarizes information about stock options outstanding and exercisable at December 31, 2006:
 
   
Options Outstanding
 
 Options Exercisable
  
Range of Exercise Prices
  
Number Outstanding
 
Weighted Average Contractual Life Remaining (in Years)
 
Weighted Average Exercise Price
 
Number Exercisable
 
Weighted Average Exercise Price
  
$0.50
    
50,000
    
1.0
  
$
0.50
    
50,000
  
$
0.50
  
$1.60
    
2,779
    
.7
  
$
1.60
    
2,779
  
$
1.60
  
$2.87
    
123,334
    
3.3
  
$
2.87
    
123,334
  
$
2.67
  
$3.83
    
23,334
    
3.9
  
$
3.83
    
13,332
  
$
3.83
  
$4.80
    
15,000
    
1.3
  
$
4.80
    
15,000
  
$
4.80
  
$6.25
    
100,000
    
4.1
  
$
6.25
    
-
  
$
6.25
  
$11.12
    
7,132
    
1.4
  
$
11.12
    
7,132
  
$
11.15
  
     
321,579
        
$
3.88
    
211,577
  
$
2.77
  

12. LONG-TERM DEBT AND LINE OF CREDIT

Long-term debt as of December 31, 2006 and 2005, consist of the following:

   
2006
 
2005
  
$3,539,000 ten year term loan secured by two buildings and land at a variable rate which was 7.1% at December 31, 2006. Due 2016
  
$
3,480,000
  
$
2,201,000
  
$200,000 five-year term loan secured by equipment fixed rate was 3% at December 31, 2006. Due 2008
   
49,000
    
90,000
  
$475,000 seven-year loan secured by the building and land at a variable rate at LIBOR plus 250 bps, which was 7.85 % on December 31, 2006. Due 2011
   
396,000
    
428,000
  
$366,000 three-year term loan secured by certain assets at LIBOR plus 250 basis points, which was at 7.82% at December 31, 2006. Due 2008
    
132,000
    
254,000
 
$1,256,000 ten-year reducing revolver line of credit rate at LIBOR plus 220 bps , which was 6.62% on December 31, 2006
    
-
    
1,506,000
  
$186,976 three-year term loan secured by 20,000 restricted common shares variable rate which was 10.25%
    
-
    
59,000
  
     
4,057,000
   
4,538,000
 
Less current portion
    
548,000
   
561,000
  
   
$
3,509,000
  
$
3,977,000
  
 
40
 
Future principal payments on long-term debt for the next 5 years are as follows:
 
2007
 
$
548,000
  
2008
    
404,000
  
2009
    
386,000
  
2010
   
386,000
  
2011
    
386,000
  
Thereafter
    
1,947,000
  
   
$
4,057,000
  
 
The Company has established a $5 million revolving line of credit at the LIBOR rate plus 1.30% with Mercantile Safe Deposit and Trust Company secured by substantially all of the assets of Jason Pharmaceuticals, Inc. The outstanding balance on this line was $1,256,000 and $633,000 at December 31, 2006 and 2005, respectively. Effective October 2, 2006, the 10-year revolver with an original balance of $1,256,000 was refinanced with the Company’s other building loan for a total of $3,539,000 with Mercantile Safe Deposit and Trust Company secured by two buildings and land at a variable rate which was 7.1% on December 31, 2006.
 
13. EMPLOYMENT AGREEMENTS 

The Board of Directors of Medifast, Inc. is in the process of implementing a management succession plan which will take place over the next 24 months. In doing so, they have had 3 key executive officers sign 6-year employment contracts to ensure that there will be minimal turnover in selected key management positions. The Executives associated with this succession plan include Michael S. McDevitt, President and Chief Financial Officer, Margaret MacDonald, VP of Operations and Brendan Connors, CPA, VP of Finance. Bradley T. MacDonald, the Executive Chairman of the Board of Directors and CEO has signed and executed a new 5 year employment agreement as the Executive Chairman of the Board of Directors and will provide on-going executive mentoring, financial and M&A advice, and new business development for the Company.
 
On February 8, 2006, three executive officers of the Company signed 6-year employment contracts. The officers received shares of common stock in varying amounts totaling 380,000 shares at $6.25 per share that will be vested over 6 years. In addition, Bradley T. MacDonald, Chairman and CEO signed a new 5-year employment agreement and was granted 100,000 stock options at $6.25 that will vest over 5 years beginning on February 8, 2007.
 
14. WARRANTS
 
During 2003, the Company issued 200,000 warrants to James Paradis and Anthony Burrascono, both affiliated with Villanova University and 200,000 warrants an investment banker, for advisory and consulting services provided to the Company. The warrants vest in five equal installments of 40,000 warrants per year over a five-year period. These are five-year warrants to purchase common shares at an exercise price of $4.80 per share. These warrants may be cancelled, with a 90-day notice, if the consultants fail to perform to the satisfaction of the Company. During 2005, 120,000 unvested warrants issued to James Paradis and Anthony Burrascono were cancelled. In 2006, James Paradis and Anthony Burrascano exercised 80,000 warrants at $4.80. In 2005, the Company incorrectly cancelled 80,000 warrants to a former consultant. The warrants were correctly added back to the 2005 and 2006 warrant schedule. The omission from the schedule in prior year had no impact on earnings per share. During 2006, the former consultant exercised 40,000 warrants and 120,000 remain outstanding.

During 2003, the Company issued 50,000 warrants to Consumer Choices Systems, Inc. (“CCS”) as part of the payment for the purchase of the assets of CCS. These warrants are three-year warrants to purchase common shares at an exercise price of $10.00 per share. Of this amount, 25,000 warrants were exercised in 2004. Of the remaining 25,000 warrants, 22,810 were exercised in 2006 and the remaining 2,190 expired.

During 2003, the Company issued 63,750 warrants and 18,750 warrants to Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund. These warrants are five-year warrants to purchase common shares at exercise prices of $16.78 per share, which was equal to one hundred fifteen percent (115%) of the five-day volume weighted average price, all pursuant to the terms of that certain Securities Purchase Agreement by and between the Company and Mainfield Enterprises, Inc. and Portside Growth & Opportunity Fund dated as of July 24, 2003.
 
41

During 2006, there were 120,000 warrants exercised at $4.80 and 22,810 warrants exercised at $10. In addition, 2,190 warrants expired.
 
The fair value of these warrants was estimated using the Black-Scholes pricing model with the following assumptions: interest rate 4.5%, dividend yield 0%, volatility 0.70 and expected life of five years.
 
The Company has the following warrants outstanding for the purchase of its common stock:
 
     
Years Ended December 31,
  
Exercise Price
  
Expiration Date
 
2006
 
2005
 
2004
  
$0.35
   
March, 2005
    
-
    
-
    
2,000
  
$4.80
   
January, 2009
    
120,000
    
240,000
    
360,000
  
$10.00
   
June, 2006
    
0
    
25,000
    
25,000
  
$16.78
   
July, 2008
    
82,500
    
82,500
    
82,500
  
           
202,500
    
347,500
    
469,500
  
   
Weighted average exercise price 
    
9.68
    
8.02
  
$
7.16
  

As of December 31, 2006, 82,500 of the warrants are exercisable.

15. QUARTERLY RESULTS (Unaudited)

   
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
  
2006
                  
Revenue
  
$
19,183,000
  
$
19,954,000
  
$
19,642,000
  
$
15,307,000
  
Gross Profit
    
14,405,000
   
15,101,000
   
14,937,000
   
11,406,000
 
Operating Income
    
3,054,000
   
2,541,000
   
1,970,000
   
547,000
 
Net Income
    
1,694,000
   
1,475,000
   
1,470,000
   
443,000
 
Earnings per common share - diluted (1)
    
0.13
    
0.11
   
0.11
   
0.03
 
                           
2005
                          
Revenue
  
$
8,326,000
  
$
10,555,000
  
$
10,985,000
  
$
10,264,000
  
Gross Profit
    
6,253,000
   
7,932,000
   
8,310,000
   
7,473,000
 
Operating Income
    
912,000
   
1,154,000
   
1,266,000
   
742,000
 
Net Income
    
507,000
   
753,000
   
607,000
   
849,000
 
Earnings per common share - diluted (1)
    
0.04
    
0.06
   
0.05
   
0.04
 

(1) - Earnings per common share is computed independently for each of the quarters presented; accordingly, in the sum of the quarterly earnings per common share may not equal the total computed for the year.
 
42
 
16. DISPOSAL OF A BUSINESS SEGMENT

On January 17, 2006, Jason Enterprises, Inc., a wholly owned subsidiary of Medifast, Inc. sold certain assets of its Consumer Choice Systems division. Consumer Choice Systems distributes products focused on women's well being to include supplements for menopause relief and urinary tract infections. The sale price was $1.82 million which included $358,000 in inventory, $131,000 in receivables, and $1,337,000 in net intangible assets. Consumer Choice Systems was sold to a former Medifast, Inc. board member. The sale price was $1.8 million and will be recorded as a note receivable by Medifast, Inc. over a 10-year term. The loan is collateralized by 50,000 shares of Medifast, Inc. stock. The following table illustrates segment information from the date Consumer Choice Systems was purchased by Medifast, Inc. on June 11, 2003 through December 31, 2005.
 
   
2005
 
2004
 
2003
  
Revenues, net
  
$
958,000
  
$
1,498,000
  
$
851,000
  
Cost of Sales
    
733,000
   
686,000
   
343,000
 
Gross Profit
    
225,000
   
812,000
   
508,000
 
Compensation and Professional Fees
    
290,000
   
213,000
   
254,000
 
Selling, General and Adminstrative Expenses
    
208,000
   
256,000
   
212,418
 
Depreciation and Amortization
    
209,000
   
90,000
   
95,000
 
Interest (net)
    
8,000
   
17,000
   
8,000
 
Net income (loss)
    
(490,000
)
  
236,000
   
(61,418
)
Earnings per share - basic
    
(0.04
)
  
0.02
   
(0.01
)
Earnings per share - diluted
    
(0.04
)
  
0.02
   
(0.01
)
                     
Segment Assets
    
2,216,000
   
2,625,000
   
2,497,000
 
Fixed assets, net of depreciation
    
54,000
   
71,000
   
91,000
 
Inventory
    
293,000
   
391,000
   
470,000
 
Prepaid expenses
    
327,000
   
-
   
53,000
 
Accounts receivable
    
171,000
   
629,000
   
221,000
 
Intangible assets
    
443,000
   
635,000
   
635,500
 
Goodwill
    
893,500
   
893,500
   
893,500
 
 
43
 
INDEX TO EXHIBITS
 
 
No.
   
3.1
  
Certificate of Incorporation of the Company and amendments thereto*
     
3.2
  
By-Laws of the Company*
     
10.1
  
1993 Stock Option Plan of the Company as amended*
     
10.3
  
Lease relating to the Company's Owings Mills, Maryland facility**
     
10.4
  
Employment agreement with Bradley T. MacDonald***
     
31.1
  
Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

* Filed as an exhibit to and incorporated by reference to the Registration Statement on Form SB-2 of the Company, File No. 33-71284-NY.

** Filed as an exhibit to and incorporated by reference to the Registration Statement on Form S-4 of the Company, File No. 33-81524.

***Filed as an exhibit to 10KSB, dated April 15, 1999 of the Company, file No. 000-23016.

(b) Reports on Form 8-K

September 21, 2005 to report the Annual Meeting of Shareholders September 16, 2005

October 19, 2005, to report the repurchase of 110,000 shares of common stock

January 17, 2006, to report the sale of Consumer Choice Systems assets, the promotion of Michael S. McDevitt to Chief Financial Officer, and 2006 financial guidance

August 14, 2006, to report the acceptance by the New York Stock Exchange to list common shares on the NYSE

September 25, 2006, to report the results of the Annual Meeting of Shareholder on September 8, 2006

October 2, 2006, to announce the election of two new Board of Directors

March 1, 2007, to announce Michael S. McDevitt promoted to CEO, Margaret MacDonald promoted to President and COO, and Bradley T..MacDonald named Executive Chairman of the Board.

March 7, 2007, to announce full-year 2007 revenue and diluted earnings per share guidance
 
44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MEDIFAST, INC.
(Registrant)
 
       
BRADLEY T. MACDONALD      
Bradley T. MacDonald
Executive Chairman of the Board
Dated: March 16, 2007
    
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities and on the dates indicated have signed this Report below.
 
 Name
  
 Title
  
 Date
         
         
/s/ BRADLEY T. MACDONALD
 
Chairman of the Board,
 
March 16, 2007
Bradley T. MacDonald
 
Director
    
         
         
/s/ GEORGE LAVIN
  
Director
 
March 16, 2007
George Lavin
        
       
         
/s/ MICHAEL C. MACDONALD
  
Director
 
March 16, 2007
Michael C. MacDonald
        
       
         
/s/ MARY T. TRAVIS
  
Director
 
March 16, 2007
Mary T. Travis
        
       
         
/s/ REV. DONALD F. REILLY, OSA
  
Director
 
March 16, 2007
Rev. Donald F. Reilly, OSA
        
       
         
/s/ MICHAEL J. MCDEVITT
  
Director
 
March 16, 2007
Michael J. McDevitt
        
       
         
/s/ JOSEPH D. CALDERONE
  
Director
 
March 16, 2007
Joseph D. Calderone
        
       
         
/s/ CHARLES P. CONNOLLY
  
Director
 
March 16, 2007
Charles P. Connolly
        
       
         
/s/ DENNIS M. MCCARTHY
  
Director
 
March 16, 2007
Dennis M. McCarthy
        
 
45
 EX-31.1 2 v068679_ex31-1.htm

Exhibit 31.1
 
CEO Certification

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
 
I, Michael S. McDevitt, certify that:
 
1.
I have reviewed this report on Form 10-K of Medifast, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: March 16, 2007
 
       
/s/ Michael S. McDevitt      
Michael S. McDevitt
Chief Executive Officer, Chief Financial Officer
    
 
 EX-31.2 3 v068679_ex31-2.htm
 
Exhibit 31.2
 
CFO Certification
    CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)
 
I, Michael S. McDevitt, certify that:
 
1.
I have reviewed this report on Form 10-K of Medifast, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: March 16, 2007 
 
       
/s/ Michael S. McDevitt      
Michael S. McDevitt
Chief Executive Officer, Chief Financial Officer
    

EX-32.1 4 v068679_ex32-1.htm
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
 
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Medifast, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael S. McDevitt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1)  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)  
The information contained in the report fairly presents, in all material respects, the financial condition and results of the operations of the Company.
 
       
By: /s/ Michael S. McDevitt
    
Michael S. McDevitt
    
Chief Executive Officer, Chief Financial Officer
March 16, 2007
    
 
 
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