UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10KSB/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] For the transition period from to .
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Commission File Number 000-26463
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MILITARY RESALE GROUP, INC.
(Name of small business issuer in its charter)
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New York 11-2665282
----------------------------------- -----------------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
2180 Executive Circle, Colorado Springs, Colorado 80906
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (719) 391-4564
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
--------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure is contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State registrant's revenues for its most recent fiscal year. $4,851,433
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As of March 15, 2002, the registrant had outstanding 7,805,004 shares of its
common stock.
As of March 15, 2002, the aggregate market value of the registrant's common
stock held by non-affiliates was $1,597,902 (based upon the closing price
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($0.58) of the registrant's common stock on the OTC Bulletin Board on such
date).
MILITARY RESALE GROUP, INC.
2001 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
PAGE NO.
INTRODUCTORY NOTE II
PART I
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION 1
ITEM 7. FINANCIAL STATEMENTS F-1
i
INTRODUCTORY NOTE
We are filing this Form 10-KSB/A in order to amend and restate the
information disclosed in Items 6 and 7 of Part I. The principal changes we made
were as follows: (i) we revised our statement of operations to recognize
additional interest expense relating to the beneficial conversion feature of
$35,000 aggregate principal amount of convertible promissory notes that were
issued in the fourth quarter of 2001 and (ii) we revised the manner in which we
accounted for the issuance of 875,000 shares of our common stock to certain of
our employees and directors in the fourth quarter of 2001. This Form 10-KSB/A
does not necessarily reflect events occurring after the filing of the original
Form 10-KSB.
ii
PART I
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"believe", "expect", "anticipate", "intend" and "plan" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. Because our common stock is considered a "penny stock"
as defined by the regulations of the Securities and Exchange Commission, the
safe harbor for forward-looking statements does not apply to statements by our
company.
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Report.
Our business and results of operations are affected by a wide variety of
factors that could materially and adversely affect us and our actual results,
including, but not limited to: (1) the availability of additional funds to
enable us to successfully pursue our business plan; (2) the uncertainties
related to the effectiveness of our technologies and the addition of new
products and suppliers; (3) our ability to maintain, attract and integrate
management personnel; (4) our ability to complete the development of our
proposed product line in a timely manner; (5) our ability to effectively market
and sell our products and services to current and new customers; (6) our ability
to negotiate and maintain suitable strategic partnerships and corporate
relationships with suppliers and manufacturers; (7) the intensity of
competition; and (8) general economic conditions. As a result of these and
other factors, we may experience material fluctuations in future operating
results on a quarterly or annual basis, which could materially and adversely
affect our business, financial condition, operating results and stock price.
Any forward-looking statements herein speak only as of the date hereof. We
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Prior to November 15, 2001, we did not generate any signification revenue,
and accumulated no significant assets, as we explored various business
opportunities. On November 15, 2001, we acquired 98.2% of the issued and
outstanding capital stock of Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), in exchange for a controlling interest in our publicly-held
"shell" corporation ("the Reverse Acquisition"). For financial reporting
purposes, MRG-Maryland was considered the acquirer in such transaction. As a
result, our historical financial statements for any period prior to November 15,
2001 are those of MRG-Maryland.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED
DECEMBER 31, 2000
Revenue. Total revenue for the year ended December 31, 2001 of $4,851,433
reflected an increase of $371,128, or approximately 8.3%, compared to total
revenue of $4,480,305 for the year ended December 31, 2000. Our revenues are
derived in either one of two ways. In the majority of instances, we purchase
products from manufacturers and suppliers for resale to the commissaries we
service. In such cases, we resell the manufacturer's or supplier's products to
the commissaries at generally the same prices we pay for such products, which
prices generally are negotiated between the manufacturer or supplier and the
Defense Commissary Agency ("DeCA"). Revenue is recognized as the gross sales
amount received by us from such sales ("resale revenues"), which includes (i)
1
the purchase price paid by the commissary plus (ii) a negotiated storage and
delivery fee paid by the manufacturer or supplier. In the remaining instances,
we act as an agent for the manufacturer or supplier of the products we sell, and
earn a commission paid by the manufacturer or supplier, generally in an amount
equal to a percentage of the manufacturer's or supplier's gross sales amount
("commission revenues"). In such cases, revenue is recognized as the commission
we receive on the gross sales amount.
Resale revenue for the year ended December 31, 2001 of $4,560,347 reflected
an increase of $528,072, or approximately 13.1%, compared to resale revenue of
$4,032,275 for the year ended December 31, 2000.
For the year ended December 31, 2001, approximately 49.1% of our gross profit
was derived from sales involving resale revenue compared to approximately 36.9%
for the year ended December 31, 2000. These increases were attributable
primarily to the addition of the new products we began supplying to commissaries
during the fourth quarter of fiscal 2001, including Slimfast, L'eggs, Bush Beans
and Rayovac Batteries, and during the first quarter of fiscal 2002, including a
line of feminine hygiene products and a line of infant feeding products supplied
by Playtex Products, Inc. which we sell on a resale basis, as well as the
implementation of our long-term strategy to increase our ratio of sales of
products we sell on a resale basis, rather than a commission basis, due to the
payment discounts we often receive from the manufacturers and suppliers of the
goods we purchase for resale.
Commission revenues for the year ended December 31, 2001 of $291,086
reflected a decrease of $156,944, or approximately 35%, compared to commission
revenues of $448,030 for the year ended December 31, 2000. For the year ended
December 31, 2001, approximately 50.9% of our gross profit was derived from
sales involving commission revenues as compared to approximately 63.1% for the
year ended December 31, 2000. These decreases were attributable primarily to the
implementation of our long-term strategy to increase our ratio of sales of
products sold on a resale basis, rather than a commission basis. We cannot be
certain as to whether or not these trends will continue; however, in the long
term we are seeking to increase the ratio of our sales of products sold on a
resale basis, rather than a commission basis, because we believe we can increase
our profitability on such sales by taking advantage of payment discounts
frequently offered by the manufacturers and suppliers of such products. To do
so, we intend to continue to seek to add new products that we can offer to
commissaries on a resale basis from our existing manufactures and suppliers and
from others with whom we do not currently have a working relationship.
In March 2002, we entered into an agreement with Playtex Products, Inc. to
distribute, on a resale basis, approximately 70 Stock Keeping Units (SKUs)
manufactured or supplied by Playtex, including a line of feminine hygiene
products and a line of infant feeding products. We have been advised by
Playtex, and verified with DeCA, that sales by Playtex in 2001 to the
commissaries we currently service amounted to approximately $350,000. However,
there can be no assurance that our annual sales of Playtex products will reach
such amount, and the amount of our actual sales of Playtex products may differ
materially from the amounts sold by Playtex in 2001 as a result of one or more
of the factors described above, among others.
In April 2002, we began distributing products for Pfizer, Inc. under an
agreement that provided for the distribution of approximately 114 SKUs of Pfizer
products. In June 2002, the agreement was terminated by Pfizer because we were
unable to consistently meet our delivery obligations due to our insufficient
working capital. During the term of our agreement with Pfizer, we received
revenue from the sale of Pfizer products of approximately $168,000. Management
believes the termination of the Pfizer agreement will not have a material
adverse impact on our results of operations for fiscal 2002.
In October 2002, we added to our supplier network the Hillshire Farm and
Kahn's product groups of Sara Lee Foods-USA and certain consumer products
distributed by Chattem, Inc. Hillshire Farm and Kahn's are product lines of
packaged meats and hams. Chattem is a manufacturer of branded consumer
products, principally over-the-counter healthcare products, including
Aspercreme, Gold Bond, Sportscreme, Pamprin, Dexatrim, Rejuvex and Flexall. We
have been advised by Sara Lee Foods-USA, and verified with DeCA, that sales of
Hillshire Farm and Kahn's products in 2001 to the commissaries we currently
service amounted to approximately $950,000. We have been advised by Chattem, and
verified with DeCA, that sales of Chattem's line of products in 2001 to the
commissaries we currently service amounted to approximately $200,000. However,
there can be no assurance that our annual sales of these products will reach
such amounts, and the amount of our actual sales of Hillshire Farm and Kahn's
Products and Chattem products may differ materially from the amounts sold by
Sara Lee Foods-USA and Chattem, respectively, in 2001.
2
Management believes our long-term success will be dependent in large part
on our ability to add additional product offerings to enable us to increase our
sales and revenues. However, we believe our ability to add additional product
offerings is dependent on our ability to obtain additional capital to fund new
business development and increased sales and marketing efforts. We are
currently in discussions with a number of other manufacturers and suppliers in
an effort to reach an agreement under which we can distribute their products to
the military market. While there can be no assurance that we will do so, we
believe we will be successful in negotiating agreements with a number of such
suppliers and manufacturers.
To date, all of our sales revenue has been generated from customers located
in the United States.
Cost of Goods Sold. Cost of goods sold consists of our cost to acquire
products from manufacturers and suppliers for resale to commissaries. In
instances where we sell products on a commission basis, there is no cost of
goods sold because we act as an agent for the manufacturer or supplier and earn
only a commission on such sales. During the year ended December 31, 2001, cost
of goods sold increased by $509,355, or approximately 13.5%, to $4,279,449 from
$3,770,094 for the year ended December 31, 2000. This increase was attributable
primarily to the addition of new products in the 2001 fiscal year that we sell
on a resale basis.
Gross Profit. Gross profit for the year ended December 31, 2001 decreased
by $138,227, or approximately 19.5%, compared to the year ended December 31,
2000, from $710,211 for the year ended December 31, 2000 to $571,984 for the
year ended December 31, 2001. This decrease was attributable primarily to an
increase in our inventory on hand as of December 31, 2001 compared to December
31, 2000.
Operating Expenses. Total operating expenses aggregated approximately
$1,271,223 for the year ended December 31, 2001 as compared to approximately
$711,763 for the year ended December 31, 2000, representing an increase of
$559,460, or approximately 44.0%. The increase in total operating expenses for
the 2001 period was attributable primarily to increased professional fees of
approximately $103,000 resulting primarily from the costs of the Reverse
Acquisition in November 2001 and the costs of the preparation of the
registration statement under the Securities Act of 1933 relating to this
offering; increased occupancy expense of approximately $75,000 resulting from
our move to larger office and warehouse facilities in September 2001; increased
salary and wages of approximately $54,000 due primarily to the addition of
office and warehouse personnel and, to a lesser extent, increased wages;
increased general and administrative expenses of $284,734 due primarily to the
issuance of 875,000 shares of our common stock in the fourth quarter as bonus
compensation to certain employees and directors for services rendered in 2001;
and increased trucking expense of approximately $42,000 due primarily to the
addition of one truck and the renewal of two truck leases at higher rates.
Interest Expense. Interest expense of $46,755 for the year ended December
31, 2001 reflected an increase of $34,634 as compared to interest expense of
$12,121 for the year ended December 31, 2000. The increase in interest expense
was attributable primarily to interest expense resulting from the recognition of
the beneficial conversion feature (the right to convert debt into shares of our
common stock at a discount to the fair market value of our common stock) of
$35,000 aggregate principal amount of convertible promissory notes issued in the
fourth quarter of 2001.
Net Loss. Primarily as a result of the increased expenses discussed above,
we incurred a net loss of $745,994 for the year ended December 31, 2001 as
compared to a net loss of $13,673 for the year ended December 31, 2000.
3
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had a zero cash balance. Our principal source of
liquidity has been borrowings. Since November 2001, we have funded our
operations primarily from borrowings of approximately $410,000. In the fourth
quarter of 2001 and the first and second quarters of 2002, we issued $260,000
aggregate principal amount of convertible promissory notes (the "9% Convertible
Notes") that mature on December 31, 2002 and bear interest at the rate of 8% per
annum prior to June 30, 2002 and 9% per annum thereafter. In April 2002,
$150,000 aggregate principal amount of 9% Convertible Notes (and $2,380 accrued
interest thereon) was converted by the holders into an aggregate of 1,993,573
shares of our common stock. The remaining 9% Convertible Notes are convertible
at any time and from time to time by the noteholders into a maximum of 1,153,900
shares of our common stock (subject to certain anti-dilution adjustments) if the
9% Convertible Notes are not in default, or a maximum of 2,307,800 shares of our
common stock (subject to certain anti-dilution adjustments) if an event of
default has occurred in respect of such notes. The terms of the 9% Convertible
Notes require us to register under the Securities Act of 1933 the shares our
common stock issuable upon conversion of the 9% Convertible Notes not later than
December 31, 2002.
In the third quarter of 2002, we issued $105,000 aggregate principal amount
of convertible promissory notes (the "8% Convertible Notes") that mature on
either June 30, 2003 or July 30, 2003 and bear interest at the rate of 8% per
annum. The 8% Convertible Notes are convertible at any time and from time to
time by the noteholders into a maximum of 489,667 shares of our common stock
(subject to certain anti-dilution adjustments). The terms of the 8% Convertible
Notes require us to register under the Securities Act of 1933 the shares of our
common stock issuable upon conversion of the 8% Convertible Notes not later than
December 31, 2002.
Our current cash levels, together with the cash flows we generate from
operating activities, are not sufficient to enable us to execute our business
strategy. As a result, we intend to seek additional capital through the sale of
up to 5,000,000 shares of our common stock. In December 2001, we filed with the
Securities and Exchange Commission a registration statement relating to such
shares. Such registration statement has not yet been declared effective, and
there can be no assurance that the Securities and Exchange Commission will
declare such registration statement effective in the near future, if at all. In
the interim, we intend to fund our operations based on our cash position and the
near term cash flow generated from operations, as well as additional borrowings.
In the event we sell only a nominal number of shares (i.e. 500,000 shares) in
our proposed offering, we believe that the net proceeds of such sale, together
with anticipated revenues from sales of our products, will satisfy our capital
requirements for at least the next 12 months. However, we would require
additional capital to realize our strategic plan to expand distribution
capabilities and product offerings. These conditions raise substantial doubt
about our ability to continue as a going concern. Our actual financial results
may differ materially from the stated plan of operations.
Assuming that we receive a nominal amount of proceeds from our proposed
offering of common stock, we expect capital expenditures to be approximately
$200,000 during the next twelve months, primarily for the acquisition of an
inventory control system. It is expected that our principal uses of cash will
be to provide working capital, to finance capital expenditures, to repay
indebtedness and for other general corporate purposes, including sales and
marketing and new business development. The amount of spending for any
particular purpose is dependent upon the total cash available to us and the
success of our offering of common stock.
At December 31, 2001, we had liquid assets of $441,058, consisting of
accounts receivable derived from operations, and other current assets of
$279,544, consisting primarily of inventory of products for sale and/or
distribution. Long term assets of $192,411 consisted primarily of warehouse
equipment used in operations.
Current liabilities of $1,369,735 at December 31, 2001 consisted of
$1,047,207 of accounts payable and $260,522 for the current portion of notes
payable, of which approximately $210,000 was payable to our officers or our
other affiliates.
Our working capital deficit was $649,133 as of December 31, 2001 for the
reasons described above.
4
We used cash of $87,386 in operating activities during the year ended
December 31, 2001, primarily as a result of the net loss incurred during the
periods.
We used net cash of $123,502 in investing activities during the year ended
December 31, 2001, all of which was used for capital expenditures.
Financing activities consisting primarily of short-term borrowings provided
net cash of $211,338 during the year ended December 31, 2001.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements for the years ended December 31, 2001 and 2000 are
attached and included as a part of this report.
5
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, in Colorado Springs,
Colorado, on November 4, 2002
MILITARY RESALE GROUP, INC.
By: /s/Ethan D. Hokit
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Ethan D. Hokit
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates stated:
SIGNATURE TITLE DATE
/s/Edward T. Whelan Chairman of the Board, November 4, 2002
---------------------- Chief Executive Officer
Edward T. Whelan (Principal Executive Officer)
/s/Ethan D. Hokit President, Chief Operating Officer, November 4, 2002
---------------------- Director (Principal Accounting Officer
Ethan D. Hokit and Principal Financial Officer)
/s/Richard H. Tanenbaum Director November 4, 2002
--------------------------
Richard H. Tanenbaum
6
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Edward T. Whelan, certify that:
1. I have reviewed this annual report on Form 10-KSB of Military Resale Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Edward T. Whelan
------------------------------------
Name: Edward T. Whelan
Title: Chief Executive Officer
NOVEMBER 4, 2002
7
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Ethan D. Hokit, certify that:
1. I have reviewed this annual report on Form 10-KSB of Military Resale Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ Ethan D. Hokit
------------------------------------
Name: Ethan D. Hokit
Title: Chief Financial Officer
November 4, 2002
8
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors F-2
Balance Sheets as of December 31, 2000 and 2001 F-3
Statements of Operations for the years ended December 31, 2000 and 2001 F-4
Statements of Cash Flows for the years ended December 2000 and 2001 F-5
Statements of Shareholders' Equity for the years ended
December 31, 2000 and 2001 F-6
Notes to Financial Statements F-7
F-1
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheets of Military Resale Group, Inc.
as of December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity and cash flow for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of Military Resale Group, Inc.,
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the years ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's recurring losses from operations and its
difficulties in generating sufficient cash flow to meet its obligation and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 8. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MICHAEL B. JOHNSON & CO., LLC
By: /s/Michael B. Johnson
-----------------------
Michael B. Johnson
Denver, Colorado
February 18, 2002
October 25, 2002
F-2
MILITARY RESALE GROUP, INC.
Balance Sheets
December 31,
ASSETS 2001 2000
---- ----
CURRENT ASSETS:
Accounts receivable -trade ...................... $ 441,058 $ 457,574
Inventory ....................................... 252,430 90,936
Deposits ........................................ 20,406 --
Prepaid expenses ................................ 6,708 --
----------- -----------
Total Current Assets .................................. 720,602 548,510
----------- -----------
FIXED ASSETS:
Office Equipment ................................ 9,121 1,691
Warehouse Equipment ............................. 203,132 83,110
Vehicles ........................................ 64,366 64,366
Leasehold Improvements .......................... 2,440 2,440
Software ........................................ 15,609 15,609
----------- -----------
294,668 167,216
Less Accumulated Depreciation ................... (102,257) (67,217)
----------- -----------
Net Fixed Assets ............................. 192,411 99,999
----------- -----------
OTHER ASSETS:
Goodwill , net of amortization .................. -- 1,834
----------- -----------
TOTAL ASSETS .......................................... $ 913,013 $ 650,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable - trade ........................ $ 1,047,207 $ 544,698
Bank Overdraft .................................. 1,349 38,223
Accrued Interest Payable ........................ 60,657 23,540
Notes Payable - current portion ................. 260,522 86,073
----------- -----------
Total Current Liabilities ...................... 1,369,735 692,534
----------- -----------
LONG-TERM DEBT:
Notes Payable - long-term portion ............... 91,121 17,358
----------- -----------
Total Long-term Debt ............................ 91,121 17,358
----------- -----------
TOTAL LIABILITIES ..................................... 1,460,856 709,892
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, par value $.0001, 60,000,000 shares
7,505,004 and 5,360,000 issued and outstanding at
December 31, 2001 and 2000 respectively ........ 750 536
Additional Paid-In Capital ...................... 407,150 149,664
Retained Deficit ................................ (955,743) (209,749)
----------- -----------
Total Stockholders' Equity ...................... (547,843) (59,549)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 913,013 $ 650,343
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
MILITARY RESALE GROUP, INC.
Statement of Operations
for the years ended December 31,
2001 2000
---- ----
REVENUES:
Gross Sales ................ $ 4,560,347 $ 4,032,275
Commissions sales - net .... 291,086 448,030
----------- -----------
Total Revenues ............ 4,851,433 4,480,305
----------- -----------
COST OF GOODS SOLD ......... (4,279,449) (3,770,094)
----------- -----------
GROSS PROFIT ............... 571,984 710,211
----------- -----------
OPERATING EXPENSES:
Salary & payroll taxes ..... 415,525 361,623
Professional Fees .......... 153,856 50,795
Occupancy .................. 155,503 80,805
General and administrative . 333,881 49,147
Amortization/Depreciation .. 36,874 36,039
Lease and auto/truck expense 175,584 133,354
----------- -----------
Total Expenses ............. 1,271,223 711,763
----------- -----------
NET LOSS FROM OPERATIONS ... (699,239) (1,552)
----------- -----------
OTHER INCOME/(EXPENSES)
Interest expense ........... (46,755) (12,121)
----------- -----------
NET LOSS ................... $ (745,994) $ (13,673)
=========== ===========
Per Share Information:
Weighted average number
of common shares outstanding 5,644,584 5,360,000
----------- -----------
Net Loss per common share .. $ (0.13) $ (0.01)
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-4
MILITARY RESALE GROUP, INC.
Statement of Stockholders' Equity (Deficit)
Common Stock Additional Retained Total
--------------------- Paid-In Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
-------------------------------------------- ------ ------ ------------- ------------- -------------
Balance, October 6, 1997 ............... -- $ -- $ -- $ -- $ --
Issuance of common stock for cash ...... 800,000 80 120 -- 200
Net loss for period ended .............. -- -- -- (6,756) (6,756)
--------- --------- --------- --------- ---------
Balance, December 31, 1997 ............. 800,000 80 120 (6,756) (6,556)
--------- --------- --------- --------- ---------
Issuance of common stock for cash ...... 40,000 4 14,996 -- 15,000
Issuance of common stock for services .. 3,000,000 300 (300) -- --
Net loss for year ended ................ -- -- -- (43,372) (43,372)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 ............. 3,840,000 384 14,816 (50,128) (34,928)
--------- --------- --------- --------- ---------
Issuance of common stock ............... 1,520,000 152 134,848 -- 135,000
Net loss for year ended ................ -- -- -- (145,948) (145,948)
--------- --------- --------- --------- ---------
Balance, December 31, 1999 ............. 5,360,000 536 149,664 (196,076) (45,876)
--------- --------- --------- --------- ---------
Net loss for year ended ................ -- -- -- (13,673) (13,673)
--------- --------- --------- --------- ---------
Balance, December 31, 2000 ............. 5,360,000 536 149,664 (209,749) (59,549)
--------- --------- --------- --------- ---------
Issuance of common stock for services .. 875,000 87 253,663 -- 253,750
Acquisition of Bactrol Technologies, Inc 1,270,004 127 3,823 -- 3,950
Net loss for year ended ................ -- -- -- (745,994) (745,994)
--------- --------- --------- --------- ---------
Balance, December 31, 2001 ............. 7,505,004 $ 750 $ 407,150 $(955,743) $(547,843)
--------- --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements.
F-5
MILITARY RESALE GROUP, INC.
Statement of Cash Flows
For the years ended December 31,
2001 2000
---- ----
Cash Flows from Operating Activities:
Net Loss .................................... $(745,994) $ (13,673)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation .............................. 35,040 35,039
Amortization .............................. 1,834 1,000
Stock issued for services ................. 253,750 --
Changes in Assets & Liabilities:
Decrease (Increase) in accounts receivable 16,516 (157,932)
(Increase) in inventory ................... (161,494) (202)
Increase in prepaid expenses .............. (6,708) --
Increase in notes receivable .............. (20,406) --
Increase in accounts payable .............. 502,509 135,130
Increase in accrued expenses .............. 37,117 7,758
--------- ---------
Net Cash Used In Operating Activities .............. (87,836) 7,120
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business ..................... 3,950 --
Purchase of fixed assets .................... (127,452) (14,515)
--------- ---------
Cash Flows Used In Investing Activities ............ (123,502) (14,515)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft .............................. (36,874) 38,223
Short-term borrowings ....................... 248,212 --
Note principal payments ..................... -- (34,604)
--------- ---------
Cash Flows Provided By Financing Activities ........ 211,338 3,619
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents -- (3,776)
Cash and Cash Equivalents at Beginning of Period ... -- 3,776
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ -- $ --
========= =========
SUPPLEMENTAL INFORMATION:
Interest Paid ............................... $ 9,263 $ 4,365
========= =========
Income Taxes Paid ........................... $ -- $ --
========= =========
The accompanying notes are an integral part of the financial statements.
F-6
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL
-------
THE COMPANY
On October 15, 2001, the Company, formerly Bactrol Technologies, Inc. and
Military Resale Group, Inc. ("MRG"), a Maryland corporation which was formed on
October 6, 1997 executed a Stock Purchase Agreement pursuant to which 98.2% of
MRG's stock was effectively exchanged for a controlling interest in a publicly
held "shell" corporation that concurrently changed its name to Military Resale
Group, Inc. This transaction is commonly referred to as a 'reverse acquisition."
For financial accounting purposes, this transaction has been treated as the
issuance of stock for the net monetary assets of the Company, accompanied by a
recapitalization of MRG with no goodwill or other intangible assets recorded.
For financial reporting purposes, MRG is considered the acquirer, and
therefore, the historical operating results of Bactrol Technologies, Inc. are
not presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-----------------------------------------------
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all cash
and highly liquid investments with initial maturities of three months or less to
be cash equivalents.
ACCOUNTS RECEIVABLE
The Company's trade accounts primarily represent unsecured receivables.
Historically, the Company's bad debt write-offs related to these trade accounts
have been insignificant.
PROPERTY AND EQUIPMENT
The Company follows the practice of capitalizing property and equipment
over $250 at cost. The cost of ordinary maintenance and repairs is charged to
operations while renewals and replacements are capitalized. Depreciation is
computed on the straight-line method over the following estimated useful lives.
Office Equipment & Software 3 to 5 years
Warehouse Equipment 5 to 7 years
Vehicles 5 years
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
and common shares equivalent outstanding during the period.
F-7
REVENUE RECOGNITION
The Company's revenues are derived in either one of two ways: resale
revenue or commission revenue.
Resale Revenue. In the majority of instances, the Company purchases
products from manufacturers and suppliers for resale to the commissaries its
services. Revenue is recognized in the amount of the gross sales amount received
by the Company (subject to an appropriate provision for returns and allowances
from such sales), which includes (i) the purchase price paid by the commissary
plus (ii) a negotiated storage and delivery fee paid by the manufacturer or
supplier. The Company records revenue on a gross sales basis because the Company
(a) is the primary obligor in the transaction as it is responsible for
fulfillment of the order and for the customer's acceptance of the goods or
services sold, (b) bears inventory risk (it takes title to the goods before the
customer's order is placed or upon the customer's return), and (c) bears
physical loss of inventory risk.
Commission Revenue. In the remaining instances, the Company acts as an
agent for the manufacturer or supplier of the products it sells, and earns a
commission paid by the manufacturer or supplier, generally in an amount equal to
a percentage of the manufacturer's or supplier's gross sales amount. In such
cases, revenue is recognized on the date goods are shipped in the amount of the
commission received by the Company on the gross sales amount.
The Company recognizes both resale revenue and commission revenue on the
date goods are shipped because title to the goods passes, and the payment
obligation of the customer or supplier to the Company arises, upon shipment of
the goods to the commissaries.
The Company believes that adoption of Staff Accounting Bulletin (SAB) 101-
"Revenue Recognition in Financial Statements" had no effect on its financial
statements.
COMPENSATORY EQUITY ISSUANCES
The Company applies the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) for options granted to employees, directors and
non-employees. As allowed under the provisions of SFAS No. 123, the Company
applies Accounting Principal Board Opinion No. 25 and related interpretations,
in accounting for its stock plans.
Information with respect to all stock options is summarized below:
Weighted
2001 Plan Average Exercise
Options Price
---------- ------------------
Outstanding at December 31, 2000
Granted 1,000,000 $0.50
Exercised 0 0
Expired 0 0
---------- --------
Outstanding at December 31, 2001 1,000,000 $0.50
========== ========
On August 1, 2001, in connection with a consulting arrangement, the
Company, issued options to purchase 1,000,000 shares of common stock at an
exercise price of $0.50 per share, which price was in excess of the fair market
value of the common stock on the date of grant. The options expired on August
1, 2002. As none of such options were exercised prior to expiration, no amounts
have been accrued in respect of such options.
F-8
In 2001, the Company issued 875,000 shares of its restricted common stock
to participating employees based upon salary levels and minimum service
requirements. Compensation costs of $0.29 per share (representing the closing
bid price on the date of issuance of $0.32 per share less a discount of
approximately 10% due to the fact that such shares were " restricted stock" and
were subject to statutory transfer restrictions on the date of issue) have been
charged against operations for 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of accounts payable and accrued expenses are considered
to be representative of their respective fair values because of the short-term
nature of these financial instruments.
OTHER COMPREHENSIVE INCOME
The Company has no material components of other comprehensive income (loss)
and accordingly, net loss is equal to comprehensive loss in all periods.
FEDERAL INCOME TAXES
The Company accounts for income taxes under SFAS No 109, which requires the
asset and liability approach to accounting for income taxes. Under this
approach, deferred income taxes are determined based upon differences between
the financial statement and tax bases of the Company's assets and liabilities
and operating loss carryforwards using enacted tax rates in effect for the years
in which the differences are expected to reverse. Deferred tax assets are
recognized if it is more likely than not that the future tax benefit will be
realized.
NOTE 2 INVENTORY
---------
Inventories at December 31, 2001 by major classification, were comprised of
the following:
Finished goods $252,430
--------
$252,430
========
Inventory consists primarily of grocery items and are stated at the lower
of costs or market. Cost is determined under the first-in, first-out method
(FIFO) valuation method. All items of inventory are finished goods resold to
military commissaries and wholesale food chains.
SEGMENT INFORMATION
The Company operates primarily in a single operating segment, distributing
and marketing resale grocery products to military commissaries.
F-9
NOTE 3 - NOTES PAYABLE
--------------
The following is a summary of notes payable as of December 31, 2001:
Note payable to finance company, collateralized by auto, monthly
payments of $1,053, maturity date - June 2003 $ 18,240
Note payable to investment company, unsecured loan, 10% interest, Due
on demand 60,000
Note payable - freezer, secured by property leased, 19% interest,
Maturity dated October 2006 72,266
Note payable - cooler, secured by property leased, 24% interest,
Maturity date November 2004 31,137
Convertibles Notes, unsecured loan, 8% interest, maturity date
December 31, 2002 35,000
Notes payable, unsecured, 8% interest, due on demand 135,000
==========
351,643
Less: Current Portion (260,522)
----------
Total Long-Term Debt $ 91,121
==========
Maturities of long-term debt at December 31, 2001, were as follows:
2002 $260,522
2003 28,963
2004 25,807
2005 17,311
2006 19,040
--------
Total $351,643
========
The terms of the Company's convertible notes provide generally, that, if
the convertible notes are not in default, the holders may convert, at any time
and from time to time, all or a portion of the outstanding balance under each
convertible note into a number of shares (subject to certain anti-dilution
adjustments) of the Company's common stock that will allow the noteholder to
receive common stock having a market value equal to 150% of the converted
balance of the note. If an event of default has occurred in respect of such
convertible notes, the holder may convert the outstanding balance into a number
of shares (subject to certain anti-dilution adjustments) of the Company's common
stock equal to twice the number of shares the holder would have otherwise
received if the convertible notes were not in default. Among other events of
default, the terms of the convertible notes require the Company to register
under the Securities Act of 1933 the shares its common stock issuable upon
conversion of the convertible notes not later than December 31, 2002.
The Company follows EITF 98-5 in accounting for convertible notes with
"beneficial conversion features" (i.e., the notes may be converted into common
stock at the lower of a fixed rate at the commitment date or a fixed discount to
the market price of the underlying common stock at the conversion date).
Because the Company's convertible notes contained a beneficial conversion
feature on the date of issuance, the Company measured and recognized the
intrinsic value of the beneficial conversion feature of the convertible notes
when the convertible notes were issued. During the year ended December 31,
2001, interest expense of $35,000 (representing the aggregate proceeds to the
Company from convertible notes issued during such period), was recognized as the
intrinsic value of the beneficial conversion feature of the convertible notes
that were issued during such period.
F-10
NOTE 4 - COMMITMENTS AND CONTIGENCIES
--------------------------------
OPERATING RENTAL LEASE
In August 2001, the Company entered into lease agreements for office and
warehouse space in Colorado Springs, Colorado that expire in August 2006. Rental
expense for the year was $80,805.
Minimum future lease payments under current lease agreements at December 31,
2001 are as follows:
2002 $182,839
2003 191,030
2004 199,216
2005 207,402
2006 141,908
--------
$922,395
========
NOTE 5- CAPITAL STOCK TRANSACTION
---------------------------
On May 24, 1999, the Company's Board of Directors and shareholders approved
the following capital stock transaction: authorizing a 40,000-to-1 split of
common stock. On October 15, 2001, the Company's Board of Directors and
shareholders authorized increasing the number of authorized common shares to
60,000,000 and designating a par value of $.0001 per share for the Common Stock.
All shares and per share amounts in the accompanying financial statements of the
Company and notes thereto have been retroactively adjusted to give effect to the
stock splits and new par value per share.
NOTE 6- CONCENTRATION OF RISK
-----------------------
The Company's revenues from military commissary sales provide approximately
ninety eight percent of their base of operations. Management believes that
concentration of customers with respect to risk is minimal due to the sales
being primary through government contracts.
NOTE 7- INCOME TAXES
-------------
Significant components of the Company's deferred tax liabilities and assets
at December 31, 2001 are as follows:
Deferred Tax Assets
Net Operating Loss Carryforwards $955,743
Less Valuation Allowance (955,743)
---------
Total Deferred Tax Assets $ -
=========
As of December 31, 2001, the Company had a net operating loss carryforward
for federal income tax purposes approximately equal to the accumulated deficit
recognized for book purposes, which will be available to reduce future taxable
income. The full realization of the tax benefit associated with the
carryforward depends predominantly upon the Company's ability to generate
taxable income during the carryforward period. Because of the current
uncertainty of realizing such tax assets in the future, a valuation allowance
has been recorded equal to the amount of the net deferred tax assets, which
caused the Company's effective tax rate to differ from the statutory income tax
rate. The net operating loss carryforward, if not utilized, will begin to expire
in the year 2007.
F-11
NOTE 8 - GOING CONCERN:
--------------
The financial statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the normal course of business. The Company's current liabilities
exceed current assets by $649,133 and the Company lost $745,994 in operations in
2001.
The Company's management is currently pursuing equity and/or debt financing
in an effort to restart operations. The future success of the Company is likely
dependent on its ability to attain additional capital to develop its proposed
products and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations.
NOTE 9 - RELATED PARTY TRANSACTIONS
----------------------------
CONSULTING AGREEMENTS
In February 2001, the Company entered into a (11) eleven month consulting
agreement with Edward Whelan , chairman of Board and principal shareholder, and
Edward Meyer, Jr., one of the principals shareholders. In consideration for
consulting services rendered, the Company issued 145,000 shares of common stock
to each individual.
In January 2002, the Company entered into a one-year business consulting
agreement with Edward Whelan and Edward Meyer, Jr. for the provision of
marketing and managerial consulting services. In consideration of the services
to be rendered by Messrs. Whelan and Meyer, the Company will issue in respect of
each month the number of shares determined by dividing $12,000 by the product of
80% and the average closing bid price for the Company's common stock during such
month.
LOANS PAYABLE
In October 1997, the Company borrowed $60,000 from Shannon Investments,
which is controlled by Edward Whelan. The note is payable on demand and bears
interest at the rate of 10% per annum.
On August 14, 2001, the Company borrowed $100,000 from Oncor Partners,
Inc., a company of which Edward Whelan, is president and shareholder.
In December 2001, the Company borrowed $25,000 from Ethan Hokit, one of the
company's directors, and Atlantic Investment Trust, of which Richard Tanenbaum,
one of the Company's directors is a trustee. In connection with each such loan,
the Company executed a demand promissory note that bears interest at the rate of
8% per annum.
In December 2001, the Company issued $35,000 aggregate principal amount of
convertible notes to two purchasers. Such notes are convertible at any time and
from time to time by the noteholders into a maximum of 367,150 shares of the
Company's common stock (subject to certain anti-dilution adjustments) if such
convertible notes are not in default, or a maximum of 734,300 shares of the
Company's common stock (subject to certain anti-dilution adjustments) if an
event of default has occurred in respect of such convertible notes. The terms of
such convertible notes require the Company to register under the Securities Act
of 1933 the shares its common stock issuable upon conversion of such convertible
notes not later than December 31, 2002.
F-12