AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ________, 2004
REGISTRATION NO. 333-75630
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 6
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
MILITARY RESALE GROUP, INC.
(Name of Small Business Issuer in Its Charter)
NEW YORK 5141 11-2665282
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(719) 391-4564
(Address and Telephone Number of Principal Executive Offices)
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(Address of Principal Place of Business or Intended Principal Place of
Business)
ETHAN D. HOKIT, PRESIDENT
MILITARY RESALE GROUP, INC.
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(719) 391-4564
(Name, address and telephone number of agent for service)
-----------
COPIES TO:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022-4441
(212) 421-4100
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
10,000,000 SHARES
MILITARY RESALE GROUP, INC.
COMMON STOCK
Military Resale Group, Inc., a New York corporation, is offering up to
10,000,000 shares of its common stock at a price of $0.25 per share. We may
offer the shares for cash from the date of this Prospectus until the termination
of this offering.
Our common stock is traded in the over-the-counter market and prices are
reported on the OTC Bulletin Board under the symbol "MYRG."
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR RISKS OF AN INVESTMENT IN THE
SECURITIES OFFERED BY THIS PROSPECTUS, WHICH YOU SHOULD CONSIDER BEFORE YOU
PURCHASE ANY SHARES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
We are offering the shares on a "best efforts, no minimum" basis. In a
"best efforts, no minimum offering," we do not need to reach a specific level of
subscriptions before the proceeds are available to us. There will be no escrow
of funds. There is no underwriter assisting us in the offer and sale of the
shares.
We intend to keep the offering open until November 30, 2004. However, if
we have not sold all of the shares by that date, we may extend the offering
period at our sole discretion for an additional 120 days.
================================================================================
Underwriting Discounts Proceeds to
Price to Public and Commissions Company(1)
Per Share............ $0.25 $0.00 $0.25
Total................ $2,500,000 $0.00 $2,500,000
================================================================================
(1) Assumes the sale of the maximum number of shares offered by this
Prospectus before deducting expenses, including professional fees,
printing costs, and filing fees related to the offering payable by us,
estimated at $250,000.
The date of this Prospectus is __________, 2004
To comply with the securities laws of certain jurisdictions, the shares of
common stock offered by this Prospectus may have to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with. We currently plan to register all of the 10,000,000 shares
offered hereby for offer and sale in the States of Colorado and New York and a
limited number of shares in the States of Connecticut, Florida and New Jersey.
Brokers or dealers effecting transactions in the shares should confirm that the
shares have been registered under the securities laws of the state or states in
which sales of the shares occur as of the time of such sales, or that there is
an available exemption from the registration requirements of the securities laws
of such states.
This prospectus is not an offer to sell any securities other than the
shares. This prospectus is not an offer to sell securities in any circumstances
in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, Military Resale Group,
Inc., or the shares that is different from the information included in this
Prospectus. You should not assume that the information in this Prospectus, or
any supplement to this Prospectus, is accurate at any date other than the date
indicated on the cover page of this Prospectus or any supplement to it.
TABLE OF CONTENTS
Page
Prospectus Summary.................................................... 1
Risk Factors.......................................................... 3
Special Note Regarding Forward-Looking Statements..................... 10
Use of Proceeds....................................................... 11
Dilution.............................................................. 13
Determination of Offering Price....................................... 14
Market for Common Equity and Related Shareholder Matters.............. 15
Management's Discussion and Analysis of Financial Condition and
Results of Operation.................................................. 18
Business.............................................................. 24
Management............................................................ 33
Principal Stockholders................................................ 37
Certain Relationships and Related Transactions........................ 38
Description of Securities............................................. 40
Plan of Distribution.................................................. 41
Legal Matters......................................................... 42
Experts............................................................... 43
Disclosure of Commission Position on Indemnification for Securities
Act Liabilities....................................................... 43
Where You Can Find Additional Information............................. 43
Index to Financial Statements......................................... F-1
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus
and may not contain all of the information that you should consider before
investing in the shares. You are urged to read this Prospectus in its entirety.
------------------
We are a regional distributor of grocery and household items specializing
in distribution to the military market. We distribute a wide variety of items,
including fresh and frozen meat and poultry, seafood, frozen foods, canned and
dry goods, beverages, dairy products, paper goods and cleaning and other
supplies. Our operations are currently directed to servicing the commissary at
each of six military installations located in Colorado, Wyoming and South
Dakota, including the Air Force Academy located in Colorado Springs, Colorado.
We are approved by the Department of Defense to contract with military
commissaries and exchanges.
Military commissaries are large supermarket-type stores operated by the
United States Defense Commissary Agency ("DeCA") to provide grocery items for
sale to authorized patrons at the lowest practicable prices in facilities
designed and operated under standards similar to those in commercial food
stores. As of April 30, 2004, there were 275 commissaries worldwide, of which
171 were located in the Continental U.S. and 104 were located overseas.
Commissaries are authorized by law to sell goods only to authorized patrons,
which include the approximately 1.4 million active duty U.S. military personnel,
their dependents and certain authorized reservists and retirees. As of April 30,
2004, these authorized patrons totaled approximately 12.4 million individuals.
Annual worldwide commissary sales totaled approximately $5 billion in DeCA's
fiscal year ended September 30, 2003.
We were formed as a New York corporation on August 31, 1983 under the name
Owl Capital Corp. On June 17, 1988, we changed our name to Bactrol Technologies,
Inc. On November 15, 2001, we acquired 98.2% of the issued and outstanding
shares of Military Resale Group, Inc., a Maryland corporation, in a reverse
acquisition (the "Reverse Acquisition") and subsequently changed our name to
Military Resale Group, Inc. In connection with the Reverse Acquisition, we
commenced operations in our current line of business. Prior to the Reverse
Acquisition, we were inactive and had nominal assets and liabilities. Our
principal address is 2180 Executive Circle, Colorado Springs, Colorado 80906,
and our telephone number at that address is (719) 391-4564. In this Prospectus,
reference to the terms "Military Resale Group," "we," "us" and "the company"
refer collectively to Military Resale Group, Inc. (a New York corporation)
unless otherwise indicated.
ABOUT THIS OFFERING
We are offering up to 10,000,000 shares of common stock at a price of
$0.25 per share. At June 18, 2004, we had 29,928,071 shares of common stock
issued and outstanding. If we were to sell all of the shares offered by us in
this offering, there would be 39,928,071 shares of common stock outstanding
after the offering. There is no underwriter of this offering. We are offering
the shares on a best efforts, no minimum basis. This means that, although we are
offering up to 10,000,000 shares, we are not required to sell a specified number
of shares in this offering prior to accepting any subscriptions. As a result, we
may only sell a nominal amount of shares and receive minimal proceeds from this
offering. In addition, we may terminate the offering at any time before we have
sold all 10,000,000 shares. We will not escrow any of the proceeds we receive
from this offering. There is no minimum offering and the proceeds from any
subscription accepted by us will be immediately available to us. We may reject
any subscription in whole or in part. If we reject a subscription we will return
the investor's check or other funds without deduction and without the payment of
any interest.
1
Common Stock Offered...................... 10,000,000 shares
Common Stock Outstanding Immediately
Prior to the Offering.................. 29,928,071 shares(1)
Common Stock to be Outstanding Following
the Offering........................... 39,928,071(1) (2)
Use of Proceeds........................... The net proceeds of this
offering will be used (i) to
acquire an inventory control
system; (ii) for sales and
marketing; (iii) to repay
indebtedness; (iv) for
acquisitions and new business
development; and (v) for
working capital and general
corporate purposes. See "Use
of Proceeds"
OTC Bulletin Board Ticker Symbol.......... MYRG
----------------
(1) Does not include (i) 9,782,560 shares reserved for issuance upon the
exercise of outstanding options and warrants and (ii) up to 2,805,980
shares issuable upon the conversion of outstanding bridge notes.
(2) Assumes the sale of all 10,000,000 shares of our common stock offered in
this Offering.
SELECTED FINANCIAL INFORMATION
The selected financial information presented below is derived from and
should be read in conjunction with our financial statements, including notes
thereto, appearing elsewhere in this Prospectus. See "Financial Statements."
SUMMARY OPERATING INFORMATION
FISCAL YEAR THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
2002 2003 2003 2004
---- ---- ---- ----
Total revenues..................................... $ 6,359,803 $6,049,445 $1,758,963 $2,134,976
Net loss........................................... (2,319,221) (2,631,749) (500,695) (515,812)
Net loss per common share.......................... (0.25) (0.18) (0.04) (0.02)
Weighted average number of common
shares outstanding............................... 9,156,648 14,619,599 11,684,156 23,497,984
SUMMARY BALANCE SHEET INFORMATION DECEMBER 31, MARCH 31,
----------------- --------------
2003 2004
---- ----
Working capital.................................... (1,195,614) $ (1,024,066)
Total assets....................................... 1,930,818 2,018,970
Total liabilities.................................. 3,586,840 3,505,554
Stockholders' equity (deficit)..................... (1,656,022) (1,486,584)
2
RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. If any of the following risks actually occur, our
business, results of operations and financial condition could be seriously
harmed, the trading price of our common stock could decline and you may lose all
or part of your investment.
OUR OPERATING HISTORY IS LIMITED, SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS IN MAKING AN INVESTMENT DECISION.
Although we were incorporated in 1983, we commenced operations in our
current line of business in November 2001 (at which time we acquired Military
Resale Group, Inc., a Maryland corporation that commenced operations in November
1998) and have a limited operating history. We are still in the early stages of
our development, which makes the evaluation of our business operations and our
prospects difficult. Before buying our common stock, you should consider the
risks and difficulties frequently encountered by early stage companies. These
risks and difficulties, as they apply to us in particular, include:
o our need to expand the number of products we distribute;
o potential fluctuations in operating results and uncertain
growth rates;
o limited market acceptance of the products we distribute;
o concentration of our revenues in a single market;
o our dependence on the military market for most of our revenue;
o our need to expand our direct sales force;
o our need to manage rapidly expanding operations; and
o our need to attract and train qualified personnel.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE MAY BE UNABLE TO ACHIEVE
PROFITABILITY OR GENERATE POSITIVE CASH FLOW.
We incurred net losses of $2,319,221 in 2002, $2,631,749 in 2003 and
$515,812 in the first quarter of 2004 and we may be unable to achieve
profitability in the future. If we continue to incur net losses in future
periods, we may be unable to achieve one or more of the key elements of our
business strategy, including the following:
o increase the number of products we distribute;
o increase our sales and marketing activities, including the
number of our sales personnel;
o increase the number of regions in which we distribute
products; or
o acquire additional distributorships.
As of March 31, 2004, we had an accumulated deficit of $6,422,525. We may
not achieve profitability if our revenues increase more slowly than we expect,
or if operating expenses exceed our expectations or cannot be adjusted to
compensate for lower than expected revenues. If we do achieve profitability, we
may be unable to sustain or increase profitability on a quarterly or annual
basis. Any of the factors discussed above could cause our stock price to
decline.
3
OUR BUSINESS RELATIONSHIPS WITH THE PRODUCERS AND MANUFACTURERS FOR WHICH WE
DISTRIBUTE AND SELL PRODUCTS MAY BE TERMINATED AT ANY TIME, AND THE LOSS OF ANY
SUCH RELATIONSHIP WOULD REDUCE OUR REVENUES AND OUR PROSPECTS FOR ACHIEVING
PROFITABILITY.
Although we have good working relationships with our principal suppliers,
we do not have long-term arrangements with these entities. Our relationships
with the suppliers for which we distribute products may be terminated at any
time by any supplier. Therefore, we cannot be assured that we will be able to
maintain a business relationship with the producers and manufacturers for which
we currently distribute and sell products. Any disruption in our relationship
with the producers and manufacturers for which we distribute goods could result
in the termination of our representation of such producers and manufacturers and
their products, which would reduce our revenues and our prospects for achieving
profitability.
PRODUCTS SUPPLIED BY CERTAIN SUPPLIERS ACCOUNT FOR A MATERIAL PERCENTAGE OF OUR
REVENUES, AND THE LOSS OF ANY OF THESE SUPPLIERS COULD DRAMATICALLY REDUCE OUR
REVENUES.
We derive a significant portion of our revenues from the distribution of
products that are supplied by a limited number of suppliers. The loss of any
major supplier could dramatically reduce our revenues. In 2002, products
supplied by Tyson Foods Inc. accounted for approximately 40% of our revenues. In
2003, products supplied by Tyson Foods Inc. accounted for approximately 25% of
our revenues and products supplied by S&K Sales, Inc. accounted for
approximately 12% of our revenues. In the first quarter of 2004, products
supplied by Tyson Foods Inc. accounted for approximately 30% of our revenues and
products supplied by S&K Sales, Inc. accounted for approximately 15% of our
revenues.
VARIOUS CHANGES IN THE DISTRIBUTION AND RETAIL MARKETS IN WHICH WE OPERATE HAVE
LED AND MAY CONTINUE TO LEAD TO REDUCED SALES AND MARGINS AND LOWER
PROFITABILITY FOR OUR CUSTOMERS AND, CONSEQUENTLY, FOR US.
The distribution and retail markets in which we operate are undergoing
accelerated change as distributors and retailers, including military
commissaries, seek to lower costs and provide additional services in an
increasingly competitive environment. For example, there is a growing trend of
large self-distributing chains consolidating to reduce costs and gain
efficiencies. Eating away from home and alternative format food stores, such as
warehouse stores and supercenters, have taken market share from traditional
supermarket operators, including military commissaries, some of which are our
customers. In an effort to ensure that more of their promotional fees and
allowances are used by retailers to increase sales volume, vendors increasingly
direct promotional dollars to large self-distributing chains. We believe that
these changes have led to reduced sales, reduced margins and lower profitability
among many of our customers and, consequently, for us.
OUR SALES MAY DECLINE UPON A GENERAL DECREASE IN THE PRICE OF CONSUMABLE GOODS
OR AN ECONOMIC DOWNTURN.
We derive most of our revenues from the consumable goods distribution
industry. This industry is characterized by a high volume of sales with
relatively low profit margins. A significant portion of our sales are at prices
that are based on product cost plus a percentage markup. Consequently, our sales
may decline when the prices of consumable goods go down, even though our
percentage markup may remain constant. The consumable goods industry is also
sensitive to national and regional economic conditions, and the demand for our
consumable goods has declined from time to time as a result of economic
downturns.
4
AN INCREASE IN FUEL AND OTHER TRANSPORTATION-RELATED COSTS COULD REDUCE OUR
PROFITS OR INCREASE OUR LOSSES.
Our distribution business is sensitive to increases in fuel and other
transportation-related costs. In 2003, we transported approximately 5,800 tons
of product and our trucks traveled in excess of 145,000 miles. Any significant
increase in fuel or other transportation-related expenses would increase our
operating expenses, which would have the effect of reducing our profits or
increasing our losses.
REDUCTIONS IN THE ARMED FORCES MAY LEAD TO LOWER DEMAND FOR THE PRODUCTS WE
DISTRIBUTE AND SELL, WHICH COULD RESULT IN REDUCTIONS IN OUR REVENUES AND REDUCE
OUR PROFITS OR INCREASE OUR LOSSES.
We distribute and sell products for resale to active and retired military
personnel. Since the end of the Cold War, the United States has streamlined its
Armed Forces by reducing the number of military personnel and closing military
bases. Reductions in funding for force modernization and military end strength
have outpaced reductions in support services and overhead. Proposals have been
made to decrease the cost to taxpayers of operating commissaries, including:
o increasing the surcharge charged to commissary patrons;
o merging commissaries with exchanges; and
o privatizing the commissary system.
Funding for commissaries has decreased since the early 1990s. In October 1996,
DeCA became a "Performance Based Operation," which has resulted in DeCA's
obtaining special waivers from Federal procurement regulations for the purpose
of striving to operate more efficiently by adopting some characteristics of
private-sector companies. The impact of these trends on our business is
uncertain and could lead to reduced demand for the products we distribute and
sell, which could result in reductions in our revenues and reduce our profits or
increase our losses.
THERE IS NO MINIMUM NUMBER OF SHARES TO BE SOLD IN THIS OFFERING AND THERE IS A
RISK THAT WE WILL BE UNABLE TO SELL A SUFFICIENT NUMBER OF SHARES TO ENABLE US
TO CARRY OUT OUR BUSINESS PLAN OR TO GENERATE NET PROCEEDS FROM THIS OFFERING IN
AN AMOUNT SUFFICIENT TO ENABLE US TO CONTINUE OPERATIONS.
There is no minimum number of shares of common stock that we must sell in
this offering prior to the initial closing, and we expect to accept
subscriptions for shares of common stock as they are received. In addition, this
offering is a self-underwritten offering, and therefore there is no guarantee
that we will sell all or any part of the shares offered in this offering. As a
result, there can be no assurance that we will raise sufficient funds in this
offering to carry out our business plan as currently proposed, or that the net
proceeds from the initial subscriptions for shares will be in an amount
sufficient to enable us to continue operations in any meaningful manner.
WE MAY NEED ADDITIONAL FINANCING TO IMPLEMENT OUR BUSINESS PLAN AND WE CANNOT BE
SURE WE WILL BE ABLE TO OBTAIN ADDITIONAL FUNDING WHEN NEEDED OR ON ACCEPTABLE
TERMS.
Assuming at least 4,000,000 shares of common stock offered hereby are sold
in this offering, we believe the net proceeds from this offering, together with
our projected cash flow from operations, will be sufficient to fund our
operations as currently conducted for at least the next 12 months. Such belief,
however, cannot give rise to an assumption that our cost estimates are accurate
or that unforeseen events will not occur that will require us to seek additional
funding to meet our operational needs. As a result, we may require substantial
5
additional financing in order to implement our business objectives. There can be
no assurances that we will be able to obtain additional funding when needed, or
that such funding, if available, will be obtainable on terms we find acceptable.
In the event our operations do not generate sufficient cash flow, or we cannot
obtain additional funds if and when needed, we may not be able to:
o attract additional suppliers;
o expand into additional regions; o develop or enhance our
product line;
o take advantage of future opportunities; or
o respond to competitive pressures or unanticipated
requirements.
For additional information on our anticipated future capital
requirements, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources."
OUR RELATIONSHIPS WITH THIRD PARTY BROKERS TO STOCK AND DISPLAY THE PRODUCTS WE
DISTRIBUTE MAY BE TERMINATED AT ANY TIME AND THE LOSS OF CERTAIN THIRD PARTY
BROKER RELATIONSHIPS COULD CAUSE THE TERMINATION OF OUR RELATIONSHIPS WITH THE
COMMISSARIES WE SERVE OR THE SUPPLIERS WITH WHICH WE HAVE RELATIONSHIPS.
We rely on a network of brokers to ensure that sufficient inventories of
products are received by commissaries and that products are properly stocked and
displayed. Our arrangements with brokers may be terminated at any time by any
broker. Although we have good working relationships with our brokers, there can
be no assurance that we will be successful in maintaining our existing
arrangements with brokers or in acquiring, or entering into arrangements with,
additional brokers. In addition, we do not have exclusive relationships with the
brokers we utilize. Many of these brokers may represent other products in
addition to the products we distribute. There can be no assurance that the
representation by brokers of multiple products does not result in conflicts of
interest. The loss of certain of our brokers could cause the termination of our
relationships with the commissaries we serve or with the manufacturers or
suppliers of the products such brokers service.
WE CARRY ONLY A LIMITED AMOUNT OF PRODUCT LIABILITY INSURANCE AND ANY
SIGNIFICANT PRODUCT LIABILITY CLAIM MAY IMPAIR OUR ABILITY TO FUND CURRENT
OPERATIONS OR PREVENT US FROM CARRYING OUT OUR STRATEGIC PLANS.
The marketing and sale of products of the type we distribute entails a
risk of product liability claims by consumers and others. Although we have
obtained product liability insurance in the amount of $2,000,000, there is no
assurance that such policy will be sufficient to cover us against all possible
liabilities or that the policy can be maintained in force at a cost we find
acceptable. In the event of a successful product liability claim against us,
lack or insufficiency of insurance coverage could impair our ability to fund
current operations or prevent us from carrying out our strategic plans.
6
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE AND A DECLINE IN THE VALUE OF YOUR INVESTMENT.
Our quarterly operating results have varied significantly in the past and
will likely fluctuate significantly in the future. Significant annual and
quarterly fluctuations in our results of operations may be caused by, among
other factors:
o the volume of revenues we have generated;
o the timing of our announcements for the distribution of new
products, and any such announcements by our competitors;
o the acceptance of the products we distribute in the military
marketplace; and
o general economic conditions.
There can be no assurance that the level of revenues and profits, if any,
achieved by us in any particular fiscal period will not be significantly lower
than in other, including comparable, fiscal periods. We believe
quarter-to-quarter comparisons of our revenues and operating results are not
necessarily meaningful and should not be relied on as indicators of future
performance. Operating expenses are based on management's expectations of future
revenues and are relatively fixed in the short term. We plan to increase
operating expenses to:
o expand our product line;
o expand our sales and marketing operations;
o increase our services and support capabilities; and
o improve our operational and financial systems.
If our revenues do not increase along with these expenses, our operating margins
will decline and our net losses in a given quarter would be larger than
expected. It is possible that in some future quarter our operating results may
be below the expectations of public market analysts or investors, which could
cause a reduction in the market price of our common stock.
WE MAY PURSUE ACQUISITIONS THAT, BY THEIR NATURE, PRESENT RISKS AND THAT MAY NOT
BE SUCCESSFUL AND MAY REDUCE OUR PROFITS OR INCREASE OUR LOSSES.
Our growth strategy includes the acquisition of additional distributors
and, possibly, of brokers in the business of selling consumer goods in the
military market. Our ability to accomplish our acquisition strategy will depend
upon a number of factors, including, among others, our ability to:
o identify acceptable acquisition candidates;
o consummate the acquisition of such businesses on terms that we
find acceptable;
o retain, hire and train professional management and sales
personnel at each such acquired business; and
o promptly and profitably integrate the acquired business
operations into our then-existing business.
No assurance can be given that we will be successful with respect to such
factors or that any acquired operations will be profitable or be successfully
integrated into our then-existing business without substantial costs, delays or
7
other problems. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates may
be bid to higher levels. In any event, there can be no assurance that businesses
acquired in the future will achieve sales and profitability that justify the
investments we make therein.
THE LOSS OF THE SERVICES OF ETHAN D. HOKIT, OUR PRESIDENT, COULD IMPAIR OUR
ABILITY TO SUPPORT CURRENT OPERATIONS AND DEVELOP NEW BUSINESS AND TO RUN OUR
BUSINESS EFFECTIVELY.
Our success will be dependent on the efforts of Ethan D. Hokit, our
President. We have no employment agreement with Mr. Hokit. In addition, we have
no key man life insurance on the life of any of our employees, and we have not
entered into any employment agreements or non-competition arrangements with any
of our key personnel. Our key personnel at the present time, however, are our
executive officers and directors, and we believe such persons have certain
fiduciary obligations to our company. The loss of the services of Mr. Hokit, or
our inability to attract and retain other qualified personnel, could impair our
ability to support current operations and develop new business or to run our
business effectively.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Assuming all shares of common stock offered hereby are sold in this
offering, upon completion of this offering our executive officers and directors
and their affiliates will beneficially own, in the aggregate, approximately
22.4% of the outstanding shares of our common stock. As a result, these
stockholders will be able to exercise significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions, which could delay or present an outside
party from acquiring or merging with us. In the event we sell less than half
(5,000,000) of the shares offered hereby, our executive officers and directors
and their affiliates will beneficially own approximately 25.26% of the
outstanding shares of our common stock. For a full presentation of the equity
ownership of these stockholders, see "Principal Stockholders."
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE PUBLIC OFFERING PRICE.
There has been only a limited public market for our common stock prior to
this offering. The public offering price for our common stock has been
determined arbitrarily by our management and bears no relationship to our
assets, book value, net worth or other economic or recognized criteria of value.
This public offering price may vary from the market price of our common stock
after the offering. If you purchase shares of common stock, you may not be able
to resell those shares at or above the public offering price. The market price
of our common stock may fluctuate significantly in response to factors, some of
which are beyond our control, including the following:
o actual or anticipated fluctuations in our operating results;
o changes in market valuations of other companies in our
industry;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o additions or departures of key personnel; and
o sales of common stock in the future.
8
In addition, the stock market has experienced extreme volatility that
often has been unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to fall regardless of our
performance.
You should read the information under the heading "Market For Common
Equity and Related Shareholder Matters" for a more complete discussion of the
factors that were considered in determining the public offering price of our
common stock.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The public offering price is expected to be substantially higher than the
book value per share of our outstanding common stock immediately after this
offering. For example, if we sell all 10,000,000 shares offered hereby and you
purchase common stock in this offering, you will incur immediate dilution of
approximately $0.22 in the book value per share of our common stock from the
price you pay for our common stock. If we sell half (5,000,000) of the shares
offered hereby, you will incur immediate dilution of approximately $0.25, or the
full amount of your investment, in such book value per share, and if we sell
only 2,500,000 of the shares offered hereby, you will incur immediate dilution
of $0.25, or the full amount of your investment, in such book value per share.
As a result, if all of our assets are sold in a liquidation of our company, you
may not receive in respect of your shares an amount that is equal to or greater
than the price you paid for your shares in this offering. For additional
information on these calculations, see "Dilution."
WE FACE SIGNIFICANT COMPETITION FROM COMPETITORS WITH GREATER RESOURCES THAN
OURS, AND SUCH COMPETITION COULD RESULT IN A REDUCTION IN OUR PRICES OR
OPERATING MARGINS AND THE LOSS OF SOME OF THE PRODUCTS WE OFFER.
We operate in a highly competitive industry. Many companies are engaged in
the sale and distribution of consumer products to the military market, and we
compete on the basis of price, quality and assortment, schedules and reliability
of deliveries and the range and quality of services provided. Many of our
competitors have financial resources, research and development capabilities,
marketing staffs and facilities substantially greater than ours. This
competition could result in the reduction of our prices or operating margins and
the loss of one or more of the products we offer. This competition may also
hinder our ability to expand into other regions or to enter into relationships
with new suppliers.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE AND COULD RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT.
We currently have approximately 18,815,603 shares of our common stock
utstanding that are "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act of 1933, as amended (the "Securities
Act").
In general, under Rule 144, a person who has satisfied a one-year holding
period may, under certain circumstances, sell within any three-month period a
number of shares of common stock that does not exceed the greater of 1% of the
then outstanding shares of our common stock or the average weekly trading volume
in such shares during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of shares without any quantity or
other limitation by a person who is not one of our affiliates and who has
satisfied a two-year holding period. Any substantial sale of restricted
securities under Rule 144 could significantly depress the market price of our
common stock. In addition, the sale of these shares could reduce demand for our
shares in the event we seek to raise capital through the additional sale of
stock.
9
We have reserved 1,500,000 shares of our common stock for issuance to key
employees, officers, directors and consultants under our existing equity
incentive plan. As of June 18, 2004, we had issued and outstanding under our
equity incentive plan options to purchase an aggregate of 800,000 shares of our
common stock, and exclusive of our equity incentive plan, we had issued and
outstanding, options and warrants to purchase an aggregate of 8,982,560 shares
of our common stock. In addition, we have reserved 2,805,980 shares of common
stock for issuance upon the conversion of bridge notes issued to certain
creditors which, in most cases, mature in 2006. The existence of any outstanding
options, warrants or convertible notes may prove to be a hindrance to future
financings as the holders of such options, warrants or convertible notes may be
expected to exercise such notes to purchase, or to convert such notes into,
shares of our common stock at a time when we would otherwise be able to obtain
additional equity capital on terms we would find more favorable.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE,
WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR
INVESTMENT TO DECLINE.
The holders of our common stock are entitled to receive dividends when, as
and if declared by our board of directors out of funds legally available
therefor. To date, we have not paid any cash dividends. Our board of directors
does not intend to declare any cash dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in our business
operations.
WE MAY FAIL TO CONTINUE AS A GOING CONCERN, IN WHICH EVENT YOU MAY LOSE YOUR
ENTIRE INVESTMENT IN OUR SHARES.
Our audited financial statements have been prepared on the assumption that
we will continue as a going concern. Our independent auditors have indicated in
its report on our 2003 financial statements that our recurring losses from
operations and our difficulties in generating sufficient cash flow to meet our
obligations and sustain our operations raise substantial doubt about our ability
to continue as a going concern. If we fail to continue in business, you will
lose your investment in the shares you acquire in this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus constitute
forward-looking statements. These statements involve risks known to us,
significant uncertainties, and other factors which may cause our actual results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by those forward-looking statements.
You can identify forward-looking statements by the use of the words "may,"
"will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential," "proposed," or "continue" or
the negative of those terms. These statements are only predictions. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined above. These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the exceptions reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
10
USE OF PROCEEDS
We expect to incur expenses in connection with this offering of
approximately $250,000 for our legal fees, accounting fees, printing, Blue Sky
legal and filing fees and other miscellaneous expenses. The net proceeds of this
offering, estimated to be $2,250,000 if the maximum of 10,000,000 shares is
sold, $1,625,000 if 75% (7,500,000) of the shares are sold, $1,000,000 if 50%
(5,000,000) of the shares are sold, $625,000 if 35% (3,500,000) of the shares
are sold, and $375,000 if only 25% (2,500,000) of the shares are sold are
expected to be allocated as follows:
2,500,000 3,500,000 5,000,000 7,500,000 10,000,000
Shares Shares Shares Shares Shares
---------- ---------- ---------- ---------- ----------
Acquisition of Inventory
Control System $ 75,000 $ 75,000 $ 75,000 $ 75,000 $ 75,000
Sales and marketing -- 75,000 75,000 300,000 300,000
Repayment of indebtedness(1) 150,000 250,000 350,000 500,000 750,000
Acquisitions and new business
development -- -- -- 250,000 500,000
Working capital 150,000 225,000 500,000 500,000 625,000
---------- ---------- ---------- ---------- ----------
Totals $ 375,000 $ 625,000 $1,000,000 $1,625,000 $2,250,000
========== ========== ========== ========== ==========
--------------
(1) Includes interest and principal on approximately (a) $605,000 aggregate
principal amount of convertible bridge notes, of which $540,000 aggregate
principal amount matures on or about June 3, 2006, and $65,000 aggregate
principal amount that have matured but have not yet been paid and (b)
$130,000 aggregate principal amount of demand notes. In the event any
holders of any convertible notes elect to convert all or a portion of the
principal and interest due on such notes into shares of our common stock
pursuant to the terms of such notes, the net proceeds allocated to the
repayment of such indebtedness will be reallocated to working capital
purposes.
As reflected in the table above, the amounts of net proceeds that we
intend to use for the repayment of indebtedness will depend upon the number of
shares sold in this offering. If we only sell a nominal amount of shares
(2,500,000), we intend to use approximately $150,000 for the repayment of past
due indebtedness and for payment of accrued interest thereon. If all 10,000,000
shares are sold in this offering, we intend to use approximately $750,000 for
the repayment of indebtedness, which is comprised of approximately $605,000
aggregate principal amount of convertible indebtedness and approximately
$145,000 of accrued interest as of June 18, 2004. Of such $750,000 of net
proceeds to be used for the repayment of indebtedness, approximately $370,000
will be used to repay the principal portion of our outstanding indebtedness to
our officers and directors or their respective affiliates, of which, at June 18,
2004, the following amounts were outstanding:
o $60,000 of principal owed to Shannon Investments, Inc., one of
our principal shareholders that is controlled by Edward
Whelan, our Chairman of the Board and Chief Executive Officer;
o $100,000 of principal owed to Oncor Partners, Inc., a company
of which Mr. Whelan is a principal shareholder;
11
o $82,500 of principal owed Atlantic Investment Trust, the
trustee of which is Richard Tanenbaum, one of our directors;
o $72,500 of principal owed to Eastern Investment Trust, the
trustee of which is Mr. Tanenbaum;
o $25,000 of principal owed to Ethan Hokit, our President and
one of our directors; and
o $30,000 of principal owed to Edward T. Whelan, our Chairman of
the Board and our Chief Executive Officer.
The proceeds of the convertible bridge notes that were issued between December
2001 and June 2003, the demand notes and the loans from our officers and
directors or their respective affiliates were used for short-term working
capital purposes. For additional information on the demand note indebtedness and
the loans from our officers and directors or their respective affiliates, see
"Certain Relationships and Related Transactions."
If the net proceeds from this offering are less than $625,000 (3,500,000
shares), such proceeds will be applied first to the acquisition of an inventory
control system, next, up to $150,000 will be applied for working capital
purposes, primarily to finance accounts receivable and for the acquisition of
inventory, and thereafter, to the extent necessary, to the repayment of past due
bridge note indebtedness discussed above. Any remaining net proceeds will be
applied to working capital and for general corporate purposes. In the event we
sell only a nominal number of shares offered hereby (2,500,000), the proceeds of
such sale will be used to acquire an inventory control system, repay $150,000 of
indebtedness and any remaining proceeds will be used for working capital
purposes. We believe the net proceeds of the sale of at least 4,000,000 shares
in this offering, together with anticipated revenues from sales of our products,
will satisfy our capital requirements for at least the next 12 months.
In the event that we do not sell at least 7,500,000 shares in this
offering, we may be forced to alter, delay or abandon our acquisition strategy.
In such case, we may decide to allocate funds to alternative uses, such as the
direct purchase of warehouses and operating facilities in markets in which we
seek to develop business. At this time, we have no pending or planned
acquisitions.
One of the purposes of this offering is to raise funds for working capital
purposes, including to finance our accounts receivable until such time as we are
able to obtain alternative financing sources, to purchase additional inventory
and to fund other day-to-day operating expenses, including unforeseen cash
requirements. Depending on the number of shares of common stock sold in this
offering and the amount of the net proceeds of this offering that are applied to
the repayment of indebtedness, a significant portion of the net proceeds of this
offering (which may exceed 50% of the aggregate net proceeds) may be available
for working capital purposes. We are unable to estimate the amounts of such net
proceeds that will be applied for particular working capital purposes, and
management will have broad discretion in the use of funds allocated for working
capital purposes. As a result, you will be relying on the judgment of our
management regarding the application of a significant portion of the net
proceeds of this offering. Pending the application of the net proceeds, we
intend to invest these funds in short-term, interest-bearing, investment-grade
obligations.
12
DILUTION
If you purchase shares in this offering, you will experience immediate and
substantial dilution in your investment. "Dilution" is the reduction in the
value of a purchaser's investment and represents the difference between the
price paid for the shares and the "net tangible book value" per share of the
common stock acquired in the offering. Net tangible book value per share
represents the book value of our tangible assets less the amount of our
liabilities, divided by the number of shares of common stock outstanding.
At March 31, 2004, there were 26,895,571 shares of common stock issued and
outstanding. Without taking into account any changes in our net tangible book
value after that date other than to give effect to (i) 1,920,000 shares issued
in connection with our purchase of Ohio Street Partners LLC subsequent to March
31, 2004, (ii) 1,050,000 shares issued to our consultants subsequent to March
31, 2004, (iii) 62,500 shares issued to one of our investors for liquidated
damages pursuant to the terms of such investor's subscription agreement and (iv)
the estimated net cash proceeds of $2,250,000 from the sale of the 10,000,000
shares offered hereby (after deducting estimated expenses of the offering that
total approximately $250,000), at an offering price of $0.25 per share, the
amount of increase in net tangible book value as of that date attributable to
the sale of shares offered hereby would have been $0.03 per share, representing
an immediate dilution to investors in this offering of $0.22 per share and an
immediate increase of $0.07 per share to present shareholders.
The following table illustrates the per share dilution if we sell all
10,000,000 shares at a price of $0.25 per share, less offering expenses of
$250,000.
Net tangible book value per share at March 31, 2004............ $ (0.04)
Pro forma net tangible book value per share after the offering. 0.03
Pro forma increase in net tangible book value per share
attributable to investors in this offering................... 0.07
Pro forma dilution per share to investors in the offering...... 0.22
The following table illustrates the per share dilution if we sell only
5,000,000 shares at a price of $0.25 per share, less the offering expenses of
$250,000.
Net tangible book value per share at March 31, 2004.. $ (0.04)
Pro forma net tangible book value per share after the offering. (0.01)
Pro forma increase in net tangible book value per share........
attributable to investors in this offering................... 0.03
Pro forma dilution per share to investors in the offering...... 0.25
The following table illustrates the per share dilution if we sell only
2,500,000 shares at a price of $0.25 per shares, less the offering expenses of
$250,000.
Net tangible book value per share at March 31, 2004............ $ (0.04)
Pro forma net tangible book value per share after the offering. (0.03)
Pro forma increase in net tangible book value per share........
attributable to investors in this offering................... 0.01
Pro forma dilution per share to investors in the offering 0.25
13
The following table summarizes the investments of all existing
shareholders at March 31, 2004, the above issuances subsequent to March 31,
2004, and the new investors as of such date after giving effect to the sale of
all of the shares offered hereby (after deducting estimated expenses of the
offering that total approximately $250,000):
Shares Purchased
--------------------- Total
Number Percent Investment
---------- ------- -----------
Existing Shareholders... 29,928,071 75.0% $(1,198,681)
New Investors(1)........ 10,000,000 25.0% 2,250,000
---------- ------- -----------
Total................. 39,928,071 100.0% $ 1,051,319
========== ======= ===========
---------------
(1) Assumes the sale of all 10,000,000 shares offered under this Prospectus.
The dilutive effect of the offering would be different if we are
unsuccessful in selling all of the shares. For example, if we were to sell
only (A) 2,500,000 shares in this offering, or (B) half of the shares
offered by this Prospectus, the investment by the new investors and
existing shareholders would be as follows:
Shares Purchased
--------------------- Total
Number Percent Investment
(A) ---------- ------- -----------
Existing Shareholders... 29,928,071 92.3% $(1,198,681)
New Investors........... 2,500,000 7.7% 375,000
---------- ------- -----------
Total................. 32,428,071 100.0% $ (823,681)
========== ======= ===========
Shares Purchased
--------------------- Total
Number Percent Investment
(B) ---------- ------- -----------
Existing Shareholders... 29,928,071 85.7% $(1,198,681)
New Investors........... 5,000,000 14.3% 1,000,000
---------- ------- -----------
Total................. 34,928,071 100.0% $ (198,681)
========== ======= ===========
DETERMINATION OF OFFERING PRICE
Our management has arbitrarily determined the offering price of the shares
offered hereby. The offering price bears no relationship to our assets, book
value, net worth, or other economic or recognized criteria of value. You should
not regard the offering price to be an indication of future market price of our
securities. In determining the offering price, we considered factors such as the
prospects for our products, our management's previous experience, our historical
and anticipated results of operations and our present financial resources.
14
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS
MARKET FOR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"MYRG."
Our shares began trading on the OTC Bulletin Board on January 10, 2001.
Prior to that date, there was no public market for our shares.
The following table contains information about the range of high and low
bid prices for our common stock for each full quarterly period since our shares
began publicly trading, based upon reports of transactions on the OTC Bulletin
Board.
High Low
---- ---
2002
First Quarter ................... 1.54 0.31
Second Quarter .................. 0.51 0.23
Third Quarter.................... 0.41 0.17
Fourth Quarter................... 0.43 0.13
2003
First Quarter.................... 0.40 0.11
Second Quarter................... 0.29 0.11
Third Quarter.................... 0.41 0.15
Fourth Quarter................... 0.19 0.07
2004
First Quarter.................... 0.26 0.11
Second Quarter (through June 18). 0.14 0.10
The source of these high and low prices was the OTC Bulletin Board. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions. The high and low prices
listed have been rounded up to the next highest two decimal places.
The market price of our common stock is subject to significant
fluctuations in response to variations in our quarterly operating results, our
public announcements regarding our then-pending acquisition of Military Resale
Group, general trends in the market for the products we distribute, and other
factors, over many of which we have little or no control. In addition, board
market fluctuations, as well as general economic, business and political
conditions, may adversely affect the market for our common stock, regardless of
our actual or projected performance. On June 18, 2004, the closing bid price of
our common stock as reported by the OTC Bulletin Board was $0.12 per share.
As of June 18, 2004, there were approximately 125 shareholders of record
of our common stock.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and do not intend to
pay any cash dividends in the foreseeable future.
15
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of June 18, 2004 with respect
to shares of our common stock that are issuable under equity compensation plans.
Number of securities
remaining available to
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
------------------------------------------ -------------------------- ------------------------ ---------------------------
Equity compensation plans
not approved by security holders
2001 Equity Incentive Plan (1) 800,000 $0.50 700,000
Stern/Farbman (Vintage Filings) 600,000 $0.25 -
Consulting Agreement (2)
Howard Ash Consulting Agreement (3) 500,000 $0.50 -
Louis Weiner Consulting Agreement (4) 500,000 $0.50 -
-------
Howard Edrich Consulting Agreement (5) 250,000 $0.25
-------------- ------------------------ --------------
Edward Whelan Compensation Plan (6)
Total (7) 2,650,000 700,000
============== ==============
----------------------------------------
(1) Our 2001 Equity Incentive Plan allows for the granting of share options to
directors, officers, non-officer employees and consultants. See the
disclosure entitled "Equity Incentive Plan" in Item 10 of this report.
(2) Pursuant to an agreement dated November 4, 2003, Shai Stern and Seth
Farbman of Vintage Filings, LLC agreed to provide us with consulting
services to help us manage our filings with the Commission through the
EDGAR (Electronic Data Gathering and Reporting) filing system. In
consideration of their services, we issued to each of Messrs. Stern and
Farbman 50,000 shares of our common stock and warrants to purchase shares
of our common stock at a price of $0.25 per share.
(3) Pursuant to a Business Consulting Agreement dated May 15, 2003, Howard Ash
agreed to provide us marketing consultation services. In consideration for
his services, we issued to Mr. Ash 500,000 shares of our common stock and
options to purchase 500,000 shares of our common stock at a price of $0.50
per share. Mr. Ash's agreement had an original term of six months and was
renewed for two additional three-month periods.
16
(4) Pursuant to a Business Consulting Agreement dated August 1, 2003, Louis
Weiner agreed to provide us marketing consultation services. In
consideration for his services, we issued to Mr. Weiner options to
purchase 500,000 shares of our common stock at a price of $0.50 per share.
Such agreement has a one-year term.
(5) Pursuant to a Business Consulting Agreement dated December 15, 2003,
Howard Edrich agreed to provide us marketing consultation services. In
consideration for his services, we issued to Mr. Edrich 300,000 shares of
our common stock and options to purchase 250,000 shares of our common
stock at a price of $0.25 per share.
(6) In January 2004, our board of directors approved a one-year executive
compensation arrangement with Edward T. Whelan, our Chief Executive
Officer, pursuant to which we will issue Mr. Whelan restricted shares of
our common stock in consideration for his services as Chief Executive
Officer. Under the terms of the arrangement, we will issue in respect of
each month during 2004 a number of shares determined by dividing $12,000
by the product of 80% and the average low price for our common stock
during such month. We will also issue to Mr. Whelan five-year options to
purchase an equivalent number of shares of our common stock at a price of
0.25 per share. Such amounts cannot be reasonably determined at this time
and, thus, no such amounts are reflected in the table above. As of June
18, 2004, an aggregate of 247,560 shares of our common stock and options
to purchase an aggregate of 247,560 shares of our common stock were issued
to Mr. Whelan under his executive compensation arrangement.
(7) The total amount does not include the shares issuable to Mr. Whelan
described in footnote 6 above.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain statements in this discussion and analysis 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 and analysis of the financial condition and
results of operations should be read in conjunction with our financial
statements and notes appearing elsewhere in this Prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth under the caption "Risk Factors" beginning
on page 3 of this Prospectus.
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.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2003
Revenues. Total revenue for the three months ended March 31, 2004 of
$2,134,976 reflected a increase of $376,013, or approximately 21.4%, compared to
total revenue of $1,758,963 for the three months ended March 31, 2003. 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) the purchase price paid by the commissary plus (ii) a negotiated
storage and delivery fee paid by the manufacturer or supplier. In the remaining
18
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. The increase in our total
revenues was primarily due to the addition of the frozen chicken line of Tyson
Foods, Inc. in December 2003, a line of health and beauty aids manufactured by
Alberto Culver, Inc. in January 2004 and a frozen vegetable line produced by VIP
Sales Company Inc. in January 2004, all of which we sell to commissaries on a
resale basis.
Resale revenue for the three months ended March 31, 2004 of $1,961,544
reflected an increase of $348,947, or approximately 21.6%, compared to resale
revenue of $1,612,597 for the three months ended March 31, 2003. For the three
months ended March 31, 2004, approximately 50.8% of our gross profit was derived
from sales involving resale revenue compared to approximately 40.7% for the
three months ended March 31, 2003. These increases were attributable primarily
to addition of the suppliers discussed above. We cannot be certain as to whether
this trend 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. Provided we can generate
sufficient cash from operations or financing activities, we intend to do so by
seeking 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.
Commission revenues for the three months ended March 31, 2004 of $173,432
reflected an increase of $27,066, or approximately 18.5%, compared to commission
revenues of $146,366 for the three months ended March 31, 2003. For the three
months ended March 31, 2004, approximately 49.2% of our gross profit was derived
from sales involving commission revenues as compared to approximately 59.3% for
the three months ended March 31, 2003. The increase in commission revenues was
attributable primarily to a change in our supplier of fresh chicken products in
the third quarter of 2003 from Tyson Foods, Inc., whose products we sold on a
resale basis, to ConAgra Foods, Inc., whose products we sell on a commission
basis.
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 when 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 three months ended March 31, 2004, cost of
goods sold increased by $270,235, or approximately 17.9%, to $1,782,561 from
$1,512,326 for the three months ended March 31, 2003. This increase was
attributable primarily to increased sales of products that we sold on a resale
basis as discussed above. We cannot be certain as to whether or not this trend
will continue; however, in the long term we are seeking to increase the ratio of
our sales on a resale basis, as discussed above.
19
Gross Profit. Gross profit for the three months ended March 31, 2004
increased by $105,778, or approximately 42.9%, compared to the three months
ended March 31, 2003, from $246,637 for the three months ended March 31, 2003 to
$352,415 for the three months ended March 31, 2004. This increase was
attributable primarily to slightly higher storage and delivery fees that we
began charging to new customers in December 2003.
Operating Expenses. Total operating expenses aggregated $811,120 for the
three months ended March 31, 2004 as compared to $611,947 for the three months
ended March 31, 2003, representing an increase of $199,173, or approximately
32.5%. The increase in total operating expenses was attributable primarily to an
increase of $204,458 in stock-based compensation expense resulting primarily
from the issuance of shares of our common stock and options to purchase shares
of our common stock to our consultants. In addition, salary and payroll taxes
increased by $45,651 resulting primarily from the addition of new employees.
Interest Expense. Interest expense of $57,107 for the three months ended
March 31, 2004 reflected a decrease of $78,278 as compared to interest expense
of $135,385 for the three months ended March 31, 2003. The decrease in interest
expense was attributable primarily to decreased 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 convertible promissory notes. We issued $50,000 aggregate
principal amount of convertible promissory notes in the three months ended March
31, 2003, but did not issue any convertible notes in the three months ended
March 31, 2004.
Net Loss. Primarily as a result of the increased operating expenses
discussed above, we incurred a net loss of $515,812 for the three months ended
March 31, 2004 as compared to a net loss of $500,695 for the three months ended
March 31, 2003.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED
DECEMBER 31, 2002
Revenues. Total revenue for the year ended December 31, 2003 of $6,049,445
reflected a decrease of $310,358, or approximately 4.9%, compared to total
revenue of $6,359,803 for the year ended December 31, 2002. The decrease in our
total revenues was primarily due to the following factors: (i) a short-term cash
shortage during the first and second quarters of 2003, which prevented us from
adding new products on a resale basis due the significant cash expenditure
required, (ii) a change in our supplier of fresh chicken products in the third
quarter of 2003 from Tyson Foods, Inc., whose products we sold on a resale
basis, to ConAgra Foods, Inc., whose products we sell on a commission basis, and
(iii) to a lesser extent, to lower sales to the commissary located at Ft.
Carson, Colorado caused by the overseas deployment of military personnel
stationed at Ft. Carson, which has historically been our largest customer.
Resale revenue for the year ended December 31, 2003 of $5,585,340
reflected a decrease of $430,066 , or approximately 7.1%, compared to resale
revenue of $6,015,406 for the year ended December 31, 2002. For the year ended
December 31, 2003, approximately 33.7% of our gross profit was derived from
sales involving resale revenue compared to approximately 61.2% for the year
ended December 31, 2002. These decreases were attributable primarily to the
short-term cash shortage, change in our supplier of fresh chicken products and
the military deployment as discussed above.
20
Commission revenues for the year ended December 31, 2003 of $464,105
reflected an increase of $119,708, or approximately 34.8%, compared to
commission revenues of $344,397 for the year ended December 31, 2002. For the
year ended December 31, 2003, approximately 66.3% of our gross profit was
derived from sales involving commission revenues as compared to approximately
38.8% for the year ended December 31, 2002. These increases were attributable
primarily to the change in our supplier of fresh chicken products discussed
above and the addition of the new products we began supplying to commissaries on
a commission basis due to our short-term cash shortage discussed above.
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 when 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, 2003, cost of goods
sold decreased by $122,072, or approximately 2.2%, to $5,349,774 from $5,471,846
for the year ended December 31, 2002. This decrease was attributable primarily
to decreased sales of products that we sold on a resale basis as discussed
above.
Gross Profit. Gross profit for the year ended December 31, 2003 decreased
by $188,286, or approximately 21.2%, compared to the year ended December 31,
2002, from $887,957 for the year ended December 31, 2002 to $699,671 for the
year ended December 31, 2003. This decrease was attributable primarily to a
decrease in sales on a resale basis, which offset the increase in sales on a
commission basis
Operating Expenses. Total operating expenses aggregated $3,033,154 for the
year ended December 31, 2003 as compared to $2,703,864 for the year ended
December 31, 2002, representing an increase of $329,290, or approximately 12.2%.
The increase in total operating expenses was attributable primarily to increased
stock-based compensation expense of $531,739 resulting primarily from the
issuance of shares of our common stock and options to purchase shares of our
common stock to our consultants and to holders of our convertible notes in
consideration of their willingness to extend the maturity dates of such notes.
In addition, salary and payroll taxes increased by $29,990 resulting primarily
from the addition of new employees.
Interest Expense. Interest expense of $298,266 for the year ended December
31, 2003 reflected a decrease of $178,793 as compared to interest expense of
$477,059 for the year ended December 31, 2002. The decrease in interest expense
was attributable primarily to decreased 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 $110,000 aggregate principal amount of convertible promissory notes
issued in the year ended December 31, 2003, as compared to $370,000 aggregate
principal amount of convertible promissory notes issued in the year ended
December 31, 2002.
Net Loss. Primarily as a result of decreased revenues and increased
operating expenses discussed above, we incurred a net loss of $2,631,749 for the
year ended December 31, 2003 as compared to a net loss of $2,319,221 for the
year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had a cash balance of approximately $113,889. Since
2001, we have funded our operations primarily from borrowings of approximately
$850,000 through the issuance of demand notes and convertible notes bearing
interest at either 8% or 9% per annum and having original maturity dates of
21
three to five months following the date of issuance of such convertible notes.
At March 31, 2004, none of such demand notes was outstanding and $605,000
aggregate principal amount of convertible notes were outstanding, of which
$520,000 aggregate principal amount mature on or about June 3, 2006 and $85,000
aggregate principal amount have matured but have not yet been paid. Such
convertible notes require us to register under the Securities Act of 1933 the
shares our common stock issuable upon conversion of such convertible notes. The
terms of our convertible notes provide generally that 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 our 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. To achieve this result, the conversion price of such notes
has been initially set at $0.25; provided, that the closing price per share of
our common stock as reported on the OTC Bulletin Board on the date of conversion
is at least $0.375 per share. If such closing price is less than $0.375 per
share, the conversion price shall be proportionately reduced, but in no event to
a conversion price that is less than $0.25 per share, to permit the noteholder
to receive the number of shares discussed above.
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
10,000,000 shares of our common stock in this offering. 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 and the sale of
unregistered shares of our common stock in private placements to accredited
investors. In the three months ended March 31, 2004, we sold and issued shares
of our common stock to accredited investors for aggregate gross proceeds of
$547,500. Such proceeds were used for the repayment of current liabilities and
for working capital purposes.
In the event we are able to generate sales proceeds of at least $750,000
(4,000,000 shares) in this 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. Our
independent auditors have indicated in its report on our 2003 financial
statements that our recurring losses from operations and our difficulties in
generating sufficient cash flow to meet our obligations and sustain our
operations raise substantial doubt about our ability to continue as a going
concern. Such qualification may hinder our ability to raise or obtain the
capital we require or have an adverse impact on the terms upon which we are able
to attract or obtain such capital. In addition, such qualification may adversely
impact our ability to attract and maintain new customer accounts.
Assuming that we receive net proceeds of at least $750,000 (4,000,000
shares) from this offering (of which there can be no assurance), we expect
capital expenditures to be approximately $100,000 during the next 12 months,
primarily for the acquisition of an inventory control system and a web-based
marketing software program. It is expected that our principal uses of cash
during that period 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 public offering of common stock.
22
At March 31, 2004, we had liquid assets of $1,094,291, consisting of cash
and accounts receivable derived from operations, and other current assets of
$710,039, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $214,640 consisted
primarily of warehouse equipment used in operations and the long-term portion of
prepaid interest.
Current liabilities of $2,828,396 at March 31, 2004 consisted primarily of
$2,559,905 of accounts payable and accrued expenses, including related party
amounts.
Our working capital deficit was $1,024,066 as of March 31, 2004 for the
reasons described above.
During the three months ended March 31, 2004, we used cash of $340,399 in
operating activities, primarily as a result of the net loss we incurred during
this period.
During the three months ended March 31, 2004, we used net cash of $7,332
in investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of proceeds from the sale and
issuance of shares of our common stock, provided net cash of $458,758 during the
three months ended March 31, 2004.
OFF BALANCE SHEET ARRANGEMENTS
At March 31, 2004, we had no off-balance sheet arrangements that had or
were reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our stockholders.
23
BUSINESS
OVERVIEW
We are a regional distributor of grocery and household items specializing
in distribution to the military market. We distribute a wide variety of items,
including fresh and frozen meat and poultry, seafood, frozen foods, canned and
dry goods, beverages, dairy products, paper goods and cleaning and other
supplies. Our operations are currently directed to servicing the commissary at
each of six military installations located in Colorado, Wyoming and South
Dakota, including the Air Force Academy located in Colorado Springs, Colorado.
We are approved by the Department of Defense to contract with military
commissaries and exchanges.
Military commissaries are large supermarket-type stores operated by the
United States Defense Commissary Agency ("DeCA") to provide grocery items for
sale to authorized patrons at the lowest practicable prices in facilities
designed and operated under standards similar to those in commercial food
stores. As of April 30, 2004, there were 275 commissaries worldwide, of which
171 were located in the continental United States and 104 were located overseas.
Commissaries are authorized by law to sell goods only to authorized patrons,
which include the approximately 1.4 million active duty U.S. military personnel,
their dependents and certain authorized reservists and retirees. As of April 30,
2004, the number of authorized commissary patrons totaled approximately 12.4
million individuals. Annual worldwide commissary sales totaled more than $5
billion in DeCA's 2003 fiscal year, which ended on September 30, 2003.
The categories and varieties of merchandise that may be sold in a
commissary are strictly regulated by DeCA, as is the cost at which items may be
purchased for resale. Under DeCA regulations, all items sold through the
commissary system must be sold at cost. The military commissary system is
generally self-funded and receives an annual appropriation from Congress
primarily to pay the salaries of those who work for the commissaries. Store
operations are funded by a 5% surcharge (not a tax) levied on the total amount
of the customers' purchases. The surcharge pays for new commissary construction
and renovation, new equipment and maintenance, paper bags, shopping carts and
other operating costs. In selling products at cost, commissaries are considered
an integral part of the military's pay and compensation package.
The military exchange system consists of nearly two dozen separate
business enterprises, including main exchange stores, convenience stores,
package stores, food operations, gas stations, movie theaters and others,
operated by the various military services for the benefit of military personnel
and other qualified patrons. As of April 30, 2004, there were 541 "main
exchanges" worldwide, and approximately 20,000 other exchange service-operated
facilities. Annual sales from the exchange systems' worldwide business
operations totaled approximately $10.9 billion in the exchange system's fiscal
year ended September 30, 2003. In October 2003, we began selling a limited
number of products to stores in the military exchange system that are located on
three of the military bases that we currently service.
STRATEGIC PLAN
Our strategy is to establish our company as a leading provider of goods to
the military market. To accomplish this, our management intends to execute the
following:
Expand Distribution Capabilities. We currently direct our focus to the
distribution of products to commissaries located in the Midwest Region of the
United States, which represents only one of the four DeCA regions. We do not
currently sell to commissaries located overseas or to military exchanges. An
important part of our strategic plan is to expand our distribution capabilities,
both in the domestic and overseas markets, by acquiring or contracting with
distributors, as opportunities permit.
24
Expand Product Offerings. Industry data indicate that the average number
of items stocked by the typical civilian supermarket is approximately 25,000 as
compared to approximately 13,000 for a commissary. We believe the discrepancy
results primarily from the reluctance of certain large manufacturers and many
medium and small manufacturers to undertake the administrative burden of
obtaining DeCA's approval of products to be sold to commissaries. Under Federal
procurement rules, a manufacturer may represent itself or retain a third-party
representative on an exclusive basis to negotiate, supply, invoice and otherwise
manage its products within the DeCA system. We believe there are many additional
manufacturers with products that would meet the DeCA procurement standards and
are desirous of selling to the military but that are unable or unwilling to
commit the personnel and other resources necessary to comply with the DeCA
procurement regulations and procedures required to enable them to sell their
products to military commissaries. We intend to continue marketing to
manufacturers, suppliers and brokers in an effort to establish new relationships
that will allow us to increase the amount and types of products we offer.
Growth Through Acquisitions. We intend to pursue an acquisition program to
increase the number of our offered products, strengthen our ability to sell to
the military exchange and commissary systems, and broaden our geographic reach
to sell and distribute products in domestic and overseas regions that we do not
currently service. We believe the industry in which we operate is highly
fragmented, consisting primarily of small local brokers and distributors that
limit their operations to a narrow range of offered products or distribute
products only to commissaries or exchanges in selected regions. In view of the
current state of the industry and the trend to centralize the management of the
commissary system and enhance its cost-effectiveness, we believe significant
opportunities are available to a business that can consolidate the capabilities
and resources of a number of existing brokers and distributors in the military
consumer goods market, including the cost savings that are inherent in a
vertically integrated business. We intend to implement our acquisition program
if we are able to increase our working capital through the sale of at least
7,500,000 shares of our common stock in this offering or can otherwise arrange
acquisition financing for a specific acquisition transaction. Once implemented,
the rate at which we seek to acquire additional complementary business and the
size of any such acquisitions will depend, to a significant degree, on our
working capital position or the aggregate amount of acquisition financing
available to us, including net proceeds from this offering.
Acquiring additional broker or distribution businesses will require
additional capital and may have a significant impact on our financial position.
We currently intend to finance future acquisitions by using our common stock for
all or a portion of the consideration to be paid or through acquisition specific
debt financing. In the event our common stock does not maintain sufficient
value, or potential acquisition candidates are unwilling to accept our common
stock as consideration for the sale of their businesses, we may be required to
utilize more of our cash resources, if available, in order to continue our
acquisition program. If we do not have sufficient cash resources, our growth
could be limited unless we are able to obtain capital through the issuance of
additional debt or the issuance of one or more series or classes of our equity
securities, which could have a dilutive effect on our then-outstanding capital
stock. We do not currently have a line of credit or other lending arrangement
with a lending financial institution, and there can be no assurance that we will
be able to obtain such an arrangement on terms we find acceptable or sufficient
for our needs, if at all, should we determine to do so. Acquisitions could
result in the accumulation of substantial goodwill and intangible assets, which
may result in substantial amortization charges that could reduce our reported
earnings.
25
Although we intend to perform a detailed investigation of each business
that we acquire, there may nevertheless be liabilities that we fail or are
unable to discover, including liabilities arising from non-compliance with
environmental laws by prior owners, and for which we, as a successor owner, may
be responsible. We will seek to minimize the impact of these liabilities by
obtaining indemnities and warranties from the seller that may be supported by
deferring payment of a portion of the purchase price. However, these indemnities
and warranties, if obtained, may not fully cover the liabilities due to their
limited scope, amount or duration, the financial limitations of the indemnitor
or warrantor, or other reasons. At this time there are no pending or planned
acquisitions.
Improve Management Information Systems. We are committed to improving our
management information systems to enable management to more efficiently track
sales and product shipments. To help make such improvements, we are seeking to
purchase and implement an inventory control system and a web-based sales
program. We believe that, upon completion of these projects, we will have
achieved significant progress in creating an improved infrastructure capable of
supporting expanded product offerings. In the event we sell at least 2,500,000
shares of our common stock in this offering, we will use a portion of the net
proceeds to purchase and implement an inventory control system.
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 described above. In the event we sell only a nominal amount of
shares offered hereby (2,500,000), we intend to use such proceeds to purchase
and implement an inventory control system and to continue to seek to expand our
product offerings to the extent we have sufficient working capital to finance
additional accounts receivable and purchase inventory. However, with only
limited net proceeds from this offering, it is unlikely that we will be able to
expand our distribution capabilities in any meaningful manner, and we may be
unable to implement our proposed acquisition program.
PURCHASING AND SUPPLY
At December 31, 2003, we distributed an aggregate of over 4,125 Stock
Keeping Units (SKUs) that we acquired from approximately 100 manufacturers or
suppliers. Products distributed include fresh and frozen meat and poultry,
seafood, frozen foods, canned and dry goods, beverages, dairy products, paper
goods and cleaning and other supplies. In 2003, we distributed an aggregate of
approximately 405 SKUs supplied by Tyson Foods, Inc. and S&K Sales, Inc., our
two largest suppliers, and approximately 37% of our aggregate revenues was
derived from the sale of products manufactured or supplied by such suppliers.
Our agreements with our principal suppliers generally provide that we will
act as their exclusive agent for the distribution of their products to specific
military commissaries. Pursuant to our agreement with Tyson Foods, Inc., we
purchase products for resale to commissaries. Under our agreement with S&K
Sales, Inc., a food broker, we sell and distribute products on a commission
basis to the six commissaries we service. Our agreement with Tyson Foods, Inc.
have a one-year term and automatically renew for successive one-year periods.
Our agreement with S&K Sales, Inc. has no defined term and is cancelable by
either party upon 30 days' written notice.
The majority of our revenues are derived from products that we purchase
outright from manufacturers and resell to commissaries. In this arrangement, the
manufacturer maintains an account with DeCA through the Electronic Data
Interchange ("EDI") system. Generally, the manufacturer also selects the broker
or brokers to merchandise the products and is actively involved in the sale of
its products to commissaries/exchanges and the interaction between the
commissaries/exchanges, the brokers and the distributors. Payment for products
are remitted by DeCA to the manufacturer within seven days after the end of each
roll-up period with respect to meats, 10 days with respect to dairy products and
23 days with respect to most other products.
26
For the year ended December 31, 2003 and the quarter ended March 31, 2004,
approximately 66.3% and 49.2%, respectively, of our gross profit was derived
from the sale of products acquired on a consignment basis. In a consignment
sale, the manufacturer is involved in all facets of the transaction. It appoints
and monitors brokers, maintains the account with DeCA, receives payment from
DeCA and pays us a fee based on a percentage of the purchase price paid by DeCA.
For the year ended December 31, 2003 and the quarter ended March 31, 2004,
approximately 33.7% and 50.8%, respectively, of our gross profit was derived
from the purchase and sale of products in which we acted as principal and
interacted directly with DeCA. In such instances, we purchase the products from
manufacturers and resell such products to commissaries at negotiated prices. The
manufacturer maintains an account with DeCA and receives payments directly from
DeCA. We receive from the manufacturer the purchase price paid by the commissary
plus a negotiated storage and delivery fee.
We believe all of our suppliers have sufficient resources to continue
supplying the products we distribute and do not foresee any shortage of product
availability from any of our suppliers.
MARKETING AND CUSTOMER SERVICE
Our senior management is involved in maintaining relationships with key
customers and securing new accounts. We also maintain good relationships with
brokers, which have been an effective source of new products. We believe that
our ability to consistently provide a high level of service makes us desirable
to brokers who want to ensure on-time delivery of the products they represent.
We rigorously monitor the quality of our service. Our personnel frequently visit
the commissaries that we serve and we are in constant communication with
commissaries in order to ensure on-time order fulfillment.
OPERATIONS AND DISTRIBUTION
Our operations can generally be categorized into two business processes:
(i) product replenishment and (ii) order fulfillment. Product replenishment
involves the management of logistics from the vendor location through the
delivery of products to our distribution center. Order fulfillment involves all
activities from order placement through delivery to the commissary location. We
determine the quantities in which such products will be ordered from
manufacturers. Order quantities for each product are systematically determined
by us. Given our experience in managing our product flow, losses due to
shrinkage, damage and product obsolescence represented less than 1/3 of 1% of
2003 net sales.
We work closely with the commissaries in order to optimize transportation
from vendor locations to the distribution center. By utilizing our own trucks
and our expertise in managing transportation, we can ensure on-time delivery of
products on a cost-effective basis. We believe that we realize significant cost
savings by the consolidation of products from more than one vendor or for use by
more than one commissary. We also utilize a number of third party carriers to
provide in-bound transportation services. None of these carriers is material to
our operations.
We currently warehouse approximately 4,125 SKUs for distribution to
commissaries. Products are inspected at our distribution center upon receipt and
stored in racks. Our distribution center includes approximately 28,746 square
feet of dry storage space, 3,000 square feet of frozen storage space, and 2,000
square feet of refrigerated storage space, as well as offices for operating,
sales and customer service personnel and a management information system.
27
We place a significant emphasis on providing a high service level in order
fulfillment. We believe that by providing a high level of service and
reliability, we reduce our costs by reducing the number of reorders and
redeliveries. Each commissary places product orders based on recent usage,
estimated sales and existing inventories. We have developed pre-established
routes and pre-arranged delivery times with each customer. Product orders are
placed with us six times a week either through our customer service
representative or through electronic transmission using the EDI system.
Approximately 90% of our orders are received electronically. Orders are
generally placed on a designated day in order to coordinate with our
pre-established delivery schedules. Processing and dispatch of each order is
generally completed within seven hours of receipt and our standards require each
order to be delivered to the customer within one hour of a pre-arranged delivery
time.
Products are picked and labeled at each distribution center. The products
are placed on pallets for loading of outbound trailers. Delivery routes are
scheduled to both fully utilize the trailers' load capacity and minimize the
number of miles driven. In 2003, we transported approximately 5,800 tons of
product and our trucks traveled in excess of 145,000 miles.
THE MILITARY MARKET
General. The United States military market is composed of three main
groups: the active members of the four branches of the United States military --
Army, Navy, Air Force and Marines; military retirees; and members of the
military reserve. Including disabled veterans, overseas civil service personnel
and dependents of all of these groups, and patrons of military commissaries and
exchanges number over 12 million.
According to DeCA trade publications, active duty personnel generally are
well-educated, well paid and sophisticated. They enjoy a high standard of living
with excellent benefits, and, therefore, constitute an excellent market for a
variety of goods and services. Military retirees consist of military personnel
who retire after 20 years or more of service with full commissary and exchange
privileges. Military retirees generally are younger than civilian retirees and
tend to engage in second careers after retirement. As a result, they generally
are affluent, and like active duty personnel, provide an excellent market for
goods and services offered by commissaries and exchanges. Within the last
several years, reservists were granted full commissary and exchange benefits
while on active duty. Reservists for the most part mirror a cross-section of the
general United States population. Generally, they do not shop at commissaries
and exchanges as often as members of the other military groups, but tend to buy
larger quantities at each trip.
The United States has streamlined its Armed Forces in the post-Cold War
era. Despite these reductions, the United States military resale market
continues to remain strong. In the fiscal year ended September 30, 2003, total
annual worldwide commissary and exchange sales were approximately $16 billion,
with more than $11 billion of these sales in the United States. Since 1945,
there has been a major military build-down following each of World War II, the
Korean War and the Vietnam war. The military market for consumer goods continued
to prosper through each one. The post-Cold War reduction in manpower has not
been as severe as previous reductions, and largely has been achieved by early
retirement, and the curtailment of inductees. Retirees have earned and retained
the privilege to shop in commissaries and exchanges, and Congress has elected to
extend the shopping privilege to those forced out prior to retirement.
The Commissary System. Military commissaries are the supermarkets of the
military. The stated mission of the commissary system is to provide grocery
items for sale to authorized patrons at the lowest possible prices in facilities
designed and operated like private-sector supermarkets. The assortment of brands
28
of merchandise, however, is limited to those that meet the reasonable demands of
commissary patrons, and commissaries currently are prohibited by law from
carrying certain merchandise, including beer and wine and automotive supplies.
Commissaries primarily stock and generally sell leading name brands and do not
offer private label or unknown brands. In the case of many remote military
bases, the commissary is the only source of groceries for military personnel.
Commissaries sell their products at prices equal to cost plus a one
percent fee to cover shrinkage plus a five percent surcharge. The only
promotional fee that commissaries can accept is a direct reduction in price.
Commissaries are prohibited from accepting other promotional items offered to
private-sector stores, such as slotting allowances, display allowances or volume
rebates. The commissary system receives an annual appropriation from Congress
that pays for the salaries of commissary personnel and for the purchase of
consumer goods for resale. Store operations otherwise are funded from the five
percent surcharge on purchases. Proceeds from the surcharge also pay for new
commissary construction, renovation, new equipment and maintenance, shopping
bags, shopping carts and various other items. Overseas commissaries also receive
Federal funds for transportation and utility costs. Through payment of the
surcharge, the patrons of the commissaries essentially have created a worldwide
military shoppers' cooperative.
The benefit provided by commissaries is an integral part of the military's
pay and compensation package. Recent re-enlistment surveys show that
commissaries rank second in importance only to the medical/dental benefit.
Commissaries are among the only benefits aimed exclusively at the military
family. As commissaries are prohibited by law from selling any product below
cost, certain items (those used as loss leaders by private-sector stores) may be
priced lower at private sector stores. Nevertheless, the annual savings amounts
to up to 30%. It has been estimated that the commissary system results in
approximately $2 billion of annual savings for its patrons. As a result, based
upon the annual Congressional appropriation of approximately $1 billion
available to DeCA, the commissary system provides one of the few government
benefits that delivers more than two dollars in direct benefit to the
beneficiary for every dollar spent by the taxpayer.
As of April 30, 2004, there were a total of 275 commissaries worldwide, of
which 171 were located in the continental United States. At such date, the
average gross square footage of these commissaries was approximately 22,300, and
the average weekly sales per square foot of selling space, a commonly used
measure of efficiency of retail operations, was approximately thirty percent
more than that of commercial supermarkets. In DeCA's fiscal year ended September
30, 2003, total annual worldwide commissary sales were more than $5 billion,
with more than $4 billion of these sales in the United States.
The table below shows the dollar volume of DeCA commissary sales over the
three fiscal years ended September 30, 2003, as reported by the American
Logistics Association.
FISCAL YEAR WORLDWIDE STORE SALES ($000S)
----------- -----------------------------
2003 $5,039,259
2002 $4,963,120
2001 $5,038,832
Total annual worldwide commissary sales through the first five months of
DeCA's 2004 fiscal year were $2.2 billion as compared to $1.7 billion for same
period in DeCA's 2003 fiscal year, reflecting an increase of $0.5 billion, or
approximately 29.4%.
29
In recent years, DeCA has implemented a store modernization program. We
believe DeCA's efforts to modernize facilities and merchandising and provide
easy access, shorter lines and more convenient hours at commissaries will all
contribute to increased sales volume in the commissary system.
The Exchange System. The military exchange system consists of nearly two
dozen separate "businesses," including main exchange stores (department stores),
convenience stores, package stores, food operations, gas stations, movie
theaters, and others. The exchange system is a vast, logistically complex
worldwide operation. Like the commissary system, the stated purpose of the
exchange system is to improve the quality of life of military personnel and
their families.
The exchange system is a "non-appropriated fund" government activity, and,
therefore, does not receive taxpayer subsidies. It is self-sustaining and
operates at a profit generated by patron purchases. After expenses, all exchange
earnings are returned to patrons in the form of new and improved exchanges and
dividends paid to the sponsoring service's morale, welfare and recreation
("MWR") funds. Appropriations by Congress only fund the cost of transporting
goods from the United States to overseas military exchanges. All other costs and
expenses, including building and operating costs, such as employees' salaries,
are paid from exchange revenues. Unlike the commissary system, which is managed
by one central governmental authority, each military service manages its own
exchange program. These include the Army and Air Force Exchange Service (a joint
military command), the Navy Exchange Service Command, the Marine Corps Exchange,
the Coast Guard Exchange System and the Department of Veterans Affairs.
Military exchanges consistently are ranked by military personnel among the
top benefits provided to the military community. As is the case with
commissaries, exchanges are prohibited from pricing products below cost;
therefore, certain items offered as "loss leaders" in private-sector stores may
be priced below prices offered by exchanges. Notwithstanding this constraint,
exchanges typically provide their customers with savings ranging from 20% to 25%
compared to civilian mass-merchandisers and department stores.
At April 2004, there were 541 "main exchanges" worldwide and approximately
20,000 exchange service-operated facilities. In the 12 months ended September
30, 2003, total annual worldwide exchange sales were approximately $10.9
billion, with more than $7 billion of these sales in the United States. In
October 2003, we began selling a limited number of products to stores in the
military exchange system that are located on three of the military bases that we
currently service.
The Defense Commissary Agency. DeCA, which is headquartered in Fort Lee,
Virginia, was formed in October 1991 in an effort to consolidate the commissary
system of each branch of the military into one efficient unit. Its stated
mission is to ensure the commissary system provides United States military
personnel and their families with needed groceries at the lowest possible price.
DeCA's mission is recognized by many as essential to the military preparedness
of the United States by assisting to maintain the morale, readiness and
effectiveness of active duty troops, and by encouraging reenlistment of highly
trained quality personnel.
DeCA is part of the Department of Defense ("DoD") under the Assistant
Secretary of Defense for Personnel and Readiness. It manages the total resources
of all DoD commissaries worldwide, including personnel, facilities, supplies,
equipment and funds. DeCA commands and centrally manages the commissary system
through four commissary regions. Three regions are located in the continental
United States and one in Europe. Daily operational support to the agency's
regions, zone managers, commissaries and associated facilities is provided by an
Operations Support Center located in Fort Lee, Virginia (the "OSC"), which is
responsible for acquisitions, financial management, information
technology/electronic commerce management, inventory management, food safety,
30
marketing and transportation. All suppliers of goods to the commissary system
are required to interface with the Marketing Business Unit (the "MBU") of the
OSC, which combines several disciplines, such as operations, acquisition
management and information management. The MBU is responsible for DeCA's
electronic data interchange system, the preparation and administration of the
resale ordering agreement used with suppliers, merchandising and marketing, and
maintenance of the catalog master file, the list of products authorized to be
carried by commissaries.
The great majority of the DeCA buying and merchandising decisions for the
four DeCA regions are handled at DeCA's headquarters in Fort Lee, Virginia. Each
region has its own Region Stock List ("RSL"). Within each RSL is a "Key Item
List," which is a list of items that each store within that region should carry.
Suppliers of brand name products must sell their products to the regional buyers
to have their products included on that region's RSL. Once a product is listed
on an RSL, it is the responsibility of the individual supplier to ensure that
the product gets on the shelf. Many suppliers employ brokers, like us who
function as sales representatives and provide a liaison with DeCA. Brokers also
serve to promote the suppliers' products and ensure that the products are
properly displayed and stocked on the shelf. Suppliers also contract with
distributors who warehouse and ship the suppliers' products to the commissaries.
Any supplier wishing to sell a product in the commissary system must
complete and submit a product application to DeCA. DeCA analyzes each proposed
product on the basis of price, quality, anticipated demand and other factors. If
the proposed product meets DeCA's requirements, it will be assigned a Local
Stock Number, a product identification number ("LSN"), and included on one or
more RSLs. If the product is unique to the tastes of a particular region or
regions, it will be placed on the RSL for those regions only. Depending on the
type of product, it may also be included on the Key Item List of one or more
regions.
COMPETITION
The military resale market is a highly competitive market that is served
by several large distributors, most notably SuperValu, Inc. and Nash Finch
Company, but is otherwise highly fragmented with hundreds of small,
privately-held firms operating in the various distribution layers. We face
competition from local, regional and national distributors on the basis of
price, quality and assortment, schedules and reliability of deliveries and the
range and quality of services provided.
Because there are relatively low barriers to entry in the military resale
market, we expect competition from a variety of established and emerging
companies. Many of our competitors have longer operating histories,
substantially greater financial, technical, marketing or other resources, or
greater name recognition than we have. Our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. In addition, consolidation in the industry, heightened competition
among our vendors, new entrants and trends toward vertical integration could
create additional competitive pressures that reduce our margins and adversely
affect our business. If we fail to successfully respond to these competitive
pressures or to implement our strategies effectively, it could have a material
adverse effect on our financial condition and prospects.
31
EMPLOYEES
At June 18, 2004, we employed 28 persons on a full-time basis, of which
four were management personnel, four were office staff and 20 were warehouse and
distribution personnel. None of our employees is a member of a trade union. All
of our employees are employed at our corporate offices and distribution center
located in Colorado Springs, Colorado.
DEVELOPMENT OF BUSINESS
MRG-Maryland, a Maryland corporation in which we acquired a 98.2% interest
on November 15, 2001 (the "Reverse Acquisition"), was formed in October 1997 by
Richard Tanenbaum, one of our directors. Prior to November 15, 2001, we were
inactive and had nominal assets and liabilities. As MRG-Maryland was considered
the acquirer in such acquisition for financial reporting purposes, our
historical financial statements for any period prior to November 15, 2001, as
well as the description of our business operations for such periods, are those
of MRG-Maryland.
DESCRIPTION OF PROPERTY
Our corporate headquarters is located at our distribution center in
Colorado Springs, Colorado. The lease for our distribution center and corporate
headquarters includes approximately 32,748 square feet, of which approximately
1,000 square feet is used for our corporate headquarters. The lease expires in
the year 2006. The annual rent for our distribution center is approximately
$180,000 per annum, with annual rental increases of approximately $8,000 per
year during the term of the lease.
LEGAL PROCEEDINGS
None.
32
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to each of
our officers or directors as of June 18, 2004
NAME AGE POSITION
---- --- --------
Edward T. Whelan 53 Chairman of the Board and Chief Executive Officer
Ethan D. Hokit 65 President, Chief Operating Officer, Treasurer and
Director
Richard H. Tanenbaum 56 Director and Secretary
Lee Brukman 55 Director
EDWARD T. WHELAN was a co-founder of MRG-Maryland in October 1997 and
served as its Chairman and Chief Executive Officer until the consummation of the
Reverse Acquisition in November 2001, at which time he became our Chairman of
the Board and Chief Executive Officer. From April 1998 until October 2003, Mr.
Whelan also served as the President and a principal stockholder of Xcel
Associates, Inc., a company engaged in providing financial consulting to small
and medium-sized companies and to high net worth individuals. From 1989 to
December 2001, Mr. Whelan also served as President and a principal shareholder
of Shannon Investments, Inc., a consulting firm to small and medium-sized
companies. From 1968 to 1971, Mr. Whelan attended St. Peters College in Jersey
City, New Jersey, where he majored in Economics.
ETHAN D. HOKIT was a co-founder of MRG-Maryland in October 1997 and served
as its President and Chief Operating Officer, and was a director, until the
consummation of the Reverse Acquisition in November 2001, at which time he
became our President, Chief Operating Officer and Treasurer and one of our
directors. From 1983 until February 1998, Mr. Hokit was the President of Front
Range Distributors, Inc., a regional distributor of groceries and household
goods to the military market serving the five military bases in and around
Colorado Springs, Colorado. Mr. Hokit graduated from the University of Oklahoma
with a Bachelor of Science degree in Chemistry in 1960 and a Master's Degree in
Clinical Chemistry in 1962.
RICHARD H. TANENBAUM was the general counsel and a director of
MRG-Maryland since its inception in October 1997 until the consummation of the
Reverse Acquisition in November 2001, at which time he became our general
counsel and one of our directors. Since 1984, Mr. Tanenbaum has practiced law in
Bethesda, Maryland, with an emphasis on contract negotiations, the purchase and
sale of businesses, loan and real estate acquisitions, and related tax matters.
Mr. Tanenbaum received his Juris Doctorate degree at Columbia Law School of the
Catholic University of America in 1974. He received a Bachelor of Science degree
from Bradley University in 1967.
LEE BRUKMAN became a director of the Company in June 2004. Since 2003, Mr.
Brukman has been President, Chief Executive Officer and Chairman of the Board of
Data Recovery Continuum, Inc. From 2001 to 2002, Mr. Brukman served as
President, Chief Executive Officer and Chairman of the Board of South Bend
Renaissance Corporation. Prior to 2001, he served in management positions with
various other companies. For the last 33 years, Mr. Brukman has been an investor
in real estate and in public and private companies at all stages of development.
He has also served as an adjunct professor at Pepperdine University and National
University. Mr. Brukman earned a Bachelor of Arts degree from New York
University, a Master of Public Administration degree from San Diego
State University, and a Master of Science in Systems Management from the
University of Southern California.
33
TERMS OF OFFICERS AND DIRECTORS
Our Board of Directors currently consists of three directors. Pursuant to
our By-laws, each of our directors serves until the next annual meeting of
stockholders or until his or her successor is duly elected or appointed.
Our executive officers are appointed by the Board of Directors and serve
at the pleasure of the Board. There are no family relationships among any of our
executive officers or directors.
EXECUTIVE COMPENSATION
The table below sets forth the compensation earned for services rendered
in all capacities for the fiscal years ended December 31, 2001, 2002 and 2003 by
our executive officers in their capacities as officers and directors of
MRG-Maryland.
---------------------------- -------- ------------------------------------ ----------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------ ----------------------------------------------------
Awards Payouts
--------------------------- ------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award(s) SARs Payouts sation
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------------------- -------- ----------- --------- -------------- -------------- ------------ ---------- -------------
Edward T. Whelan, Chairman 2001 - - $63,800(1) - - - -
and Chief Executive Officer 2002 - - $109,857 (2) - - - -
2003 - - $141,791(3) - - - -
---------------------------- -------- ----------- --------- -------------- -------------- ------------ ---------- -------------
Ethan D. Hokit, 2001 $60,000 - - - - - -
President and Chief 2002 $60,000 - $9,000(4) - - - -
Operating Officer 2003 $60,000 - - - - - -
---------------------------- -------- ----------- --------- -------------- -------------- ------------ ---------- -------------
---------------
(1) Represents the value of 220,000 shares of common stock valued at $63,800
($0.29 per share) issued to Mr. Whelan in December 2001 as additional
compensation for services rendered in 2001.
(2) Represents the value of 145,000 shares of common stock valued at $29,000
($0.20 per share) issued to Mr. Whelan in February 2002 for consulting
services performed for us during 2001 and the value of an aggregate of
301,113 shares of common stock valued at $80,857 (an average of $0.27 per
share) issued to Mr. Whelan in 2002 for consulting services performed for
us from January 2002 through June 2002 and as compensation for services
rendered as Chief Executive Officer from July 2002 through October 2002.
(3) Represents the value of 934,790 shares of our common stock valued at
$141,791 issued to Mr. Whelan as compensation for services rendered as
Chief Executive Officer during the fourth quarter of 2002 and during 2003.
Shares were issued at the end of each quarterly period and were valued at
fair market value as follows: 96,207 shares ($0.16 per share), 109,259
shares ($0.24 per share), 127,273 shares ($0.27), 190,466 shares ($0.13
per share) and 411,585 ($0.10 per share).
(4) Represents the value of 90,000 shares of common stock issued to Mr. Hokit
as additional compensation for services rendered in 2001.
34
In January 2004, our board of directors approved a one year executive
compensation arrangement with Edward T. Whelan, pursuant to which we will issue
Mr. Whelan shares of our common stock in consideration for his services as Chief
Executive Officer. Under the terms of the arrangement, we will issue in respect
of each month during 2004 a number of shares determined by dividing $12,000 by
the product of 80% and the average low price for our common stock during such
month and options to purchase an equivalent number of shares of our common stock
at an exercise price of $0.25 per share.
DIRECTORS' COMPENSATION
Our directors are reimbursed for expenses incurred in attending meetings
of the Board of Directors. Directors generally are not paid any separate fees
for serving as directors. However, in December 2001, we issued 200,000 shares of
common stock to Richard H. Tanenbaum for services rendered as one of our
directors.
EXECUTIVE EMPLOYMENT AGREEMENTS
We do not have an employment agreement with any of our executive officers.
EQUITY INCENTIVE PLAN
In December 2001, we adopted the Military Resale Group, Inc. 2001 Equity
Incentive Plan (the "Incentive Plan") for the purpose of attracting, retaining
and maximizing the performance of executive officers and key employees and
consultants. We have reserved 1,500,000 shares of our common stock for issuance
under the Incentive Plan. The Incentive Plan has a term of ten years and
provides for the grant of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory
stock options, stock appreciation rights, restricted stock awards, performance
share awards and compensatory share awards. The exercise price for non-statutory
stock options may be equal to or more or less than 100 percent of the fair
market value of shares of common stock on the date of grant. The exercise price
for incentive stock options may not be less than 100 percent of the fair market
value of shares of our common stock on the date of grant (110 percent of fair
market value in the case of incentive stock options granted to employees who
hold more than ten percent of the voting power of our issued and outstanding
shares of common stock).
Options granted under the Incentive Plan may not have a term of more than
a ten-year period (five years in the case of incentive stock options granted to
employees who hold more than ten percent of the voting power of our common
stock) and generally vest over a three-year period. Options generally terminate
three months after the optionee's termination of employment by us for any reason
other than death, disability or retirement, and are not transferable by the
optionee other than by will or the laws of descent and distribution.
35
The Incentive Plan also provides for grants of stock appreciation rights
("SARs"), which entitle a participant to receive a cash payment, equal to the
difference between the fair market value of a share of our common stock on the
exercise date and the exercise price of SAR. The exercise price of any SAR
granted under the Incentive Plan will be determined by our board of directors in
its discretion at the time of the grant. SARs granted under the Incentive Plan
may not be exercisable for more than a ten year period. SARs generally terminate
one month after the grantee's termination of employment by us for any reason
other than death, disability or retirement. Although our board of directors has
the authority to grant SARs, it does not have any present plans to do so.
Restricted stock awards, which are grants of shares of our common stock
that are subject to a restricted period during which such shares may not be
sold, assigned, transferred, made subject to a gift, or otherwise disposed of,
or mortgaged, pledged or otherwise encumbered, may also be made under the
Incentive Plan.
Performance share awards, which are grants of shares of our common stock
upon the achievement of specific performance objectives, may also be made under
the Incentive Plan. At this time, our board of directors has not granted, and
does not have any plans to grant, performance shares of common stock.
Compensatory share awards, which are grants of shares of our common stock
as consideration for services rendered by our employees or consultants, may also
be made under the Incentive Plan.
As of June 18, 2004, there were outstanding under the Incentive Plan
options to purchase an aggregate of 800,000 shares of our common stock, which
options are three-year options having an exercise price of $0.50 per share.
Exclusive of the Incentive Plan, as of June 18, 2004, there were outstanding
options and warrants to purchase approximately 8,982,560 shares of our common
stock, which options include five-year options to purchase 1,305,000 shares of
our common stock at an exercise price of $0.25 per share issued in June 2003 to
holders of our convertible bridge notes and demand notes in consideration of
their willingness to extend the term of their loans to us until June 3, 2006,
five-year options to purchase 1,350,000 shares of our common stock at an
exercise price of $0.50 per share issued to three consultants in the first half
of 2003, five-year warrants to purchase an aggregate of 1,000,000 shares of our
common stock, consisting of warrants to purchase 250,000 shares at each of
$0.25, $0.50, $0.75 and $1.00 per share, issued in June 2003 to a holder of one
of our demand notes, three-year warrants to purchase an aggregate of 1,000,000
shares of our common stock, consisting of warrants to purchase 250,000 shares at
each of $0.25, $0.50, $0.75 and $1.00 per share, issued to one of our
consultants in May 2003, five-year options to purchase 600,000 shares of our
common stock at an exercise price of $0.25 per share issued to one of our
consultants in October 2003 for services, and five-year options to purchase
250,000 shares of our common stock at an exercise price of $0.25 per share
issued to one of our consultants in December 2003, five-year warrants to
purchase an aggregate of 2,000,000 shares of our common stock at an exercise
price of $0.25 per share issued to investors in our private placement in the
first quarter of 2004, three-year warrants to purchase an aggregate of 250,000
shares of our common stock at an exercise price of $0.25 per share issued to one
of our lenders in the first quarter of 2004, five-year warrants to purchase an
aggregate of 247,560 shares of our common stock at an exercise price of $0.25
per share issued to Edward Whelan, our Chief Executive Officer, in the first
quarter of 2004, five-year warrants to purchase an aggregate of 320,000 shares
of our common stock at an exercise price of $0.125 per share issued to one of
our consultants in the first quarter of 2004, five-year warrants to purchase an
aggregate of 200,000 shares of our common stock at an exercise price of $0.25
per share issued to one of our consultants in the second quarter of 2004, and
five-year warrants to purchase an aggregate of 960,000 shares of our common
stock at an exercise price of $0.25 per share issued in connection with our
purchase of Ohio Street Partners, LLC in the second quarter of 2004. During
2003, options to purchase 1,000,000 shares of our common stock were exercised
resulting for an aggregate proceeds to us of $75,000.
36
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 18, 2004 certain information
regarding the beneficial ownership of our common stock by (a) each person who is
known to us to be the beneficial owner of more than five percent (5%) of our
common stock, (b) each director and executive officer and (c) all directors and
executive officers as a group. Except as otherwise indicated, the persons or
entities listed below have sole voting and investment power with respect to all
shares of common stock beneficially owned by them, except to the extent such
power may be shared with a spouse.
SHARES OF COMMON STOCK BENEFICIAL OWNERSHIP
OWNED PRIOR TO OFFERING(1) AFTER OFFERING(%)(1)
--------------------------------- -----------------------------------------
2,500,000 5,000,000 10,000,000
NAME AND ADDRESS AMOUNT % SHARES SHARES SHARES
------------------------------------ -------------- --------------- ------ ------ ------
Edward T. Whelan.................... 4,584,911(2) 14.06% 13.06% 12.19% 10.76%
135 First Street
Keyport, NJ 07735
Lee Brukman ....................... 2,880,000(3) 9.32% 8.63% 8.02% 7.04%
c/o Data Recovery Continuum, Inc.
P.O. Box 105
La Jolla, CA 92038
Data Recovery Continuum, Inc. ..... 2,880,000 9.32% 8.63% 8.02% 7.04%
P.O. Box 105
La Jolla, CA 92038
Richard H. Tanenbaum................ 1,798,763(4) 5.59% 5.19% 4.84% 4.27%
7315 Wisconsin Avenue
Suite 775N
Bethesda, MD 20814
Ethan D. Hokit...................... 655,000(5) 2.18% 2.01% 1.87% 1.64%
3305 Blodgett Drive
Colorado Springs, CO 80919
Directors and executive officers as
a group (four persons)............. 9,918,674 28.94% 26.97% 25.26% 22.40%
------------------
(1) For purposes of this table, information as to the beneficial ownership of
shares of our common stock is determined in accordance with the rules of
the Securities and Exchange Commission and includes general voting power
and/or investment power with respect to securities. Except as otherwise
indicated, all shares of our common stock are beneficially owned, and sole
investment and voting power is held, by the person named. For purposes of
this table, a person or group of persons is deemed to have "beneficial
ownership" of any shares of our common stock which such person has the
right to acquire within 60 days after the date of this Prospectus. For
purposes of computing the percentage of outstanding shares of our common
stock held by each person or group of persons named above, any shares
which such person or persons has the right to acquire within 60 days after
the date of this Prospectus is deemed to be outstanding but is not deemed
to be outstanding for the purpose of computing the percentage ownership of
any other person. The inclusion herein of such shares listed beneficially
owned does not constitute an admission of beneficial ownership.
37
(2) Includes 907,253 shares owned directly by Mr. Whelan, 270,000 shares
issuable upon the exercise of options held by Mr. Whelan, 160,000 shares
issuable upon the conversion of convertible bridge note indebtedness,
1,007,658 shares beneficially owned by Grace Holdings, Inc., of which Mr.
Whelan is President, 1,000,000 shares issuable upon the exercise of
warrants held by Oncor Partners Inc., of which Mr. Whelan is a principal
shareholder, and 1,240,000 shares issuable upon the exercise of warrants
held by Shannon Investments Inc. which is controlled by Mr. Whelan. Mr.
Whelan disclaims beneficial ownership of 500,000 shares of common stock
beneficially owned by Oncor Partners Inc. and all shares of common stock
beneficially owned by Grace Holdings, Inc. and Shannon Investments Inc.
(3) Includes 1,920,000 shares owned of record by Data Recovery Continuum,
Inc., of which Mr. Brukman is a principal shareholder, and 960,000 shares
issuable upon the exercise of warrants held by Data Recovery Continuum,
Inc.
(4) Includes 685,000 shares owned directly by Mr. Tanenbaum, 863,763 shares
beneficially owned by Atlantic Investment Trust, of which Mr. Tanenbaum
serves as trustee, and 250,000 shares beneficially owned by Eastern
Investment Trust, of which Mr. Tanenbaum serves as trustee. Mr. Tanenbaum
disclaims beneficial ownership of shares of common stock beneficially
owned by such entities.
(5) Includes 130,000 shares owned directly by Mr. Hokit, 100,000 shares
issuable upon the conversion of convertible bridge note indebtedness,
25,000 shares issuable upon the exercise of options held by Mr. Hokit, and
400,000 shares of our common stock owned of record by Mr. Hokit's spouse.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, we borrowed $60,000 from Shannon Investments, Inc., which
is controlled by Edward Whelan, our Chairman of the Board and Chief Executive
Officer. In connection with such loan, we executed a promissory note in favor of
Shannon Investments, Inc. that bears interest at the rate of 10% per annum and
was originally payable on demand. In June 2003, Shannon Investments agreed to
extend the term of the loan until June 3, 2006 and, in consideration thereof, we
issued to Shannon Investments options to purchase 1,000,000 shares of our common
stock. Such options are five-year options to purchase 250,000 shares at each of
$0.25, $0.50, $0.75 and $1.00 per share. As of June 18, 2004, the full principal
amount of the note was still outstanding.
From October 1997 through June 30, 2002, Xcel Associates, Inc., a company
of which Mr. Whelan previously served as the President and a principal
shareholder, maintained office space in our corporate offices without charge.
On August 14, 2001, we borrowed $100,000 from Oncor Partners, Inc., a
company of which Edward Whelan, our Chairman of the Board and Chief Executive
Officer, is President and a shareholder. The loan bears no interest and had an
original term of one year, which, in August 2002, was extended for an additional
six months to February 14, 2003. In consideration of Oncor's willingness to
extend the term of the loan, in November 2002, we granted Oncor a five-year
option to purchase 500,000 shares of our common stock at an exercise price of
$0.50. In June 2003, Oncor agreed to further extend the term of the loan until
June 3, 2006 and, in consideration thereof, we issued to Oncor a five-year
option to purchase 100,000 shares of our common stock at an exercise price of
$0.25 per share. We also amended such note to allow such lender to convert the
outstanding principal amount into shares of our common stock at a conversion
price of $0.25.
In December 2001, we borrowed $25,000 from each of Ethan D. Hokit, our
President and one of our directors, and Atlantic Investment Trust ("Atlantic"),
a trust of which Richard Tanenbaum, one of our directors, is the trustee. In
connection with each such loan, we executed a demand promissory note that bears
38
interest at the rate of 8% per annum. In June 2003, such lenders agreed to
extend the terms of their loans until June 2006 and, in consideration thereof,
we issued to such lenders an option to purchase 25,000 shares of our common
stock at an exercise price of $0.25 per share. We also amended such notes to
allow the lender to convert the principal amount into shares of our common stock
at a conversion price of $0.25.
In January 2002, we entered into a one-year business consulting agreement
with Edward Whelan and Edward Meyer, Jr. for the provision of marketing and
managerial consulting services. Effective July 1, 2002, the consulting agreement
of Mr. Whelan was terminated and Mr. Whelan became one of our employees, for
which he was compensated on the same basis as he was to be paid under his
consulting agreement. In consideration of the services to be rendered by Messrs.
Whelan and Meyer, we issued 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 our common stock during such month. An aggregate of 301,113 shares of
our common stock was issued to each of Messrs. Whelan or Meyer (or their
respective designees) for services rendered during the term of the agreement.
In August 2002, we issued to Atlantic Investment Trust and to Eastern
Investment Trust, both trusts of which Richard Tanenbaum, one of our directors,
is the trustee, $100,000 aggregate principal amount of convertible promissory
notes that originally matured on June 30, 2003 and bear interest at the rate of
8% per annum. In June 2003, such lenders agreed to extend the term of their
loans until June 3, 2006 and, in consideration thereof, we issued such lenders
an option to purchase 25,000 shares of our common stock at an exercise price of
$0.25 per share. Such notes are convertible at any time and from time to time by
the noteholders into a maximum of 400,000 shares of our common stock (subject to
certain anti-dilution adjustments). The terms of such notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of the notes not later than June 3, 2006.
In the fourth quarter of 2002 and the first quarter of 2003, we borrowed
an aggregate of $30,000 from Edward T. Whelan, our Chief Executive Officer and
the Chairman of our Board of Directors. In connection with such borrowings, we
executed demand promissory notes that bear interest at the rate of 10% per annum
with respect to $20,000 aggregate principal amount and 8% per annum with respect
to $10,000 aggregate principal amount. In June 2003, such lender agreed to
extend the terms of his loans until June 2006 and, in consideration thereof, we
issued to such lender an option to purchase 25,000 shares of our common stock at
an exercise of $0.25 per share.
In January 2003, our board of directors approved a one year executive
compensation agreement with Edward T. Whelan, pursuant to which we will issue
Mr. Whelan shares of our common stock in consideration for his services as Chief
Executive Officer. Under the terms of the agreement, we will issue in respect of
each month during 2003 a number of shares determined by dividing $12,000 by the
product of 80% and the average low price for our common stock during such month.
An aggregate of 920,794 shares of our common stock was issued to Mr. Whelan (or
his designee) pursuant to the executive compensation agreement.
In May 2003, we issued to Atlantic Investment Trust and to Eastern
Investment Trust, the trustee of each of which is Richard Tanenbaum, one of our
directors, $20,000 aggregate principal amount of convertible promissory notes
that originally matured on September 30, 2003 and bear interest at the rate of
8% per annum. In June 2003, such lenders agreed to extend the terms of their
loans until June 2006 and, in consideration thereof, we issued to such lenders
an option to purchase an aggregate of 7,500 shares of our common stock at an
exercise price of $0.25 per share. Such notes are convertible at any time and
from time to time by the noteholders into a maximum of 120,000 shares of our
common stock (subject to certain anti-dilution adjustments). The terms of such
notes require us to register under the Securities Act of 1933 the shares of our
common stock issuable upon conversion of the notes not later than June 3, 2006.
39
In January 2004, our board of directors approved a one year executive
compensation arrangement with Edward T. Whelan, pursuant to which we will issue
Mr. Whelan shares of our common stock in consideration for his services as Chief
Executive Officer. Under the terms of the arrangement, we will issue in respect
of each month during 2004 a number of shares determined by dividing $12,000 by
the product of 80% and the average low price for our common stock during such
month and options to purchase an equivalent number of shares of our common stock
at an exercise price of $0.25 per share. As of June 18, 2004, an aggregate of
247,560 shares of our common stock and options to purchase an aggregate of
247,560 shares of our common stock were issued to Mr. Whelan under his executive
compensation arrangement.
In the second quarter of 2004, we purchased Ohio Street Partners, LLC from
Data Recovery Continuum, Inc., a company of which Lee Brukman, one of our
directors, is a principal shareholder. As consideration for the purchase, we
issued to the selling entity 1,920,000 shares of our common stock and the
five-year warrants to purchase an aggregate of 960,000 shares of our common
stock at $0.25 per share. In connection with such transaction, we granted
registration rights to the selling entity.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock, par
value $.0001 per share. As of June 18, 2004, 29,928,071 shares of common stock
were issued and outstanding and no shares of preferred stock were issued and
outstanding. In addition, at such date, 9,782,560 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants and
2,805,980 shares of common stock were reserved for issuance upon the conversion
of outstanding convertible notes. Our Board of Directors has approved an
increase in our number of authorized shares of common stock from 50,000,000
shares to 100,000,000 shares. We are currently seeking shareholder approval for
such action.
COMMON STOCK
Voting, Dividend and Other Rights. Each outstanding share of common stock
will entitle the holder to one vote on all matters presented to the shareholders
for a vote. Holders of shares of common stock will have no preemptive,
subscription or conversion rights. All shares of common stock to be outstanding
following this offering will be duly authorized, fully paid and non-assessable.
Our Board of Directors will determine if and when distributions may be paid out
of legally available funds to the holders. We have not declared any cash
dividends during the past fiscal year with respect to the common stock. Our
declaration of any cash dividends in the future will depend on our Board of
Directors' determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. In addition, we were a party to a credit facility
that prohibits the payment of dividends without the lender's prior consent.
Rights Upon Liquidation. Upon liquidation, subject to the right of any
holders of the preferred stock to receive preferential distributions, each
outstanding share of common stock may participate pro rata in the assets
remaining after payment of, or adequate provision for, all our known debts and
liabilities.
Majority Voting. The holders of a majority of the outstanding shares of
common stock constitute a quorum at any meeting of the shareholders. A plurality
of the votes cast at a meeting of shareholders elects our directors. The common
stock does not have cumulative voting rights. Therefore, the holders of a
majority of the outstanding shares of common stock can elect all of our
directors. In general, a majority of the votes cast at a meeting of shareholders
must authorize shareholders action other than the election of directors.
However, the Business Corporation Law of the State of New York provides that
certain extraordinary matters, such as a merger or consolidation in which we are
a constituent corporation, a sale or other disposition of all or substantially
all of our assets, and our dissolution, require the vote of the holders of
two-thirds of all outstanding voting shares. Most amendments to our certificate
of incorporation require the vote of the holders of a majority of all
outstanding voting shares.
40
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Executive
Registrar & Transfer, 3615 South Huron, Street, Suite 104, Englewood, Colorado
80110.
PLAN OF DISTRIBUTION
We are offering up to 10,000,000 shares of our common stock on a "best
efforts, no minimum" basis at a price of $0.25 per share. Under a "best efforts,
no minimum" offering, there is no requirement that we sell a specified number of
shares before the proceeds of the offering become available to us. We may sell
only a nominal amount of shares and receive minimal proceeds from this offering.
We will not escrow any of the proceeds received from our sale of shares before
the offering and we are not required to sell a specified number of shares before
the offering is terminated. Therefore, upon acceptance of a subscription, the
proceeds from that subscription will be immediately available for our use and
the investor has no assurance that we will sell all or any part of the remaining
shares offered hereby. The offering will commence on the date shown on the front
cover of this Prospectus and will terminate on November 30, 2004, unless, in our
discretion, we terminate the offering before that date. We also reserve the
right to extend the offering beyond November 30, 2004 for an additional 120 days
if we have not sold all of the shares prior to that date.
Our officers, directors, employees and affiliates may purchase shares in
the offering on the same terms and conditions as other purchasers. Subscription
for the shares may only be made by completing a written subscription agreement
and by submitting the completed agreement, together with a check payable to
"Military Resale Group, Inc.," to us at our principal executive offices to the
attention of our Chief Executive Officer. If the subscription is accepted, the
check will be deposited by us and, upon notification from our bank that the
funds are available, we will cause a stock certificate for the shares purchased
to be issued and delivered to the investor. If we reject any subscription, the
investor's check will be returned without interest or deduction.
To comply with the securities laws of certain jurisdictions, the shares of
common stock offered by this Prospectus may have to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with. We currently plan to register all of the 10,000,000 shares
offered hereby for offer and sale in each of the States of Colorado and New York
and a limited number of shares in the States of Connecticut, Florida and New
Jersey.
We have not engaged the services of an underwriter or selling agent or
broker in connection with this offering. We will offer the shares directly and
through our officers and directors, Messrs. Whelan, Hokit and Tanenbaum, acting
on our behalf. We will not pay any commission or other consideration or
compensation to any officer or director in connection with the sale of the
shares. The persons offering the shares on our behalf will rely on the safe
harbor from broker-dealer registration set forth in Rule 3a4-1 under the
Securities Exchange Act of 1934 on the basis that such persons:
o are not subject to statutory disqualification;
o have not and will not be compensated in connection with their
participation in this offering;
o are not associated with a broker or dealer;
o after this offering, will continue to perform substantial services
on our behalf, other than in connection with the offering of our
securities;
41
o were not a broker or dealer or associated with a broker or dealer
during past 12 months; and
o do not participate in the sale of securities for any issuer more
than once every 12 months.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Our common stock trades on the OTC Bulletin Board under the ticker symbol
"MYRG." Securities in the OTC market are generally more difficult to trade than
those on the Nasdaq National Market, the Nasdaq SmallCap Market or the major
stock exchanges. In addition, accurate price quotations are more difficult to
obtain. Additionally, our common stock is subject to special regulations
governing the sale of a penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions,
which are not applicable to our securities:
o The equity security is listed on Nasdaq or a national
securities exchange;
o The issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o The issuer of the equity security has been in continuous
operation for more than three years, and has net tangible
assets of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock would be
subject to Rule 15g-9 of the Securities Exchange Act of 1934, which relates to
non-Nasdaq and non-exchange listed securities. Under this rule, broker-dealers
who recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
LEGAL MATTERS
The legality of the issuance of the shares offered will be passed upon for
us by the law firm of Pryor Cashman Sherman & Flynn LLP, New York, New York.
42
EXPERTS
The financial statements as of December 31, 2002 and for the year ended
December 31, 2002 included in this Prospectus have been audited by Rosenberg
Rich Baker Berman & Company, Bridgewater, New Jersey, independent accountants,
as stated in its report appearing herein and elsewhere in this Prospectus, and
have been so included in reliance upon the report of this firm given upon their
authority as experts in auditing and accounting. The financial statements as of
December 31, 2003 and for the year ended December 31, 2003 included in this
Prospectus have been audited by A.J. Robbins, P.C., Denver, Colorado,
independent accountants, as stated in its report appearing herein and elsewhere
in this Prospectus, and have been so included in reliance upon the report of
this firm given upon their authority as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITES
Our restated certificate of incorporation and by-laws contains provisions
entitling our officers and directors to indemnification by the company to the
fullest extent permitted by New York business corporation law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under this
provision of our corporate charter and bylaws, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, this
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 (including exhibits and schedules) under the Securities
Act, with respect to the shares to be sold in this offering. This prospectus
does not contain all the information set forth in the registration statement.
For further information with respect to our company and the common stock offered
in this Prospectus, reference is made to the registration statement, including
the exhibits filed thereto, and the financial statements and notes filed as a
part thereof. With respect to each such document filed with the SEC as an
exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved.
We file quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
public reference facilities of the SEC in Washington, D.C. You may call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at
http//www.sec.gov.
43
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors..................................... F-2 - F-3
Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003 (audited)...................... F-4
Statements of Operations for the three months ended March
31, 2004 and 2003 (unaudited) and for the years ended
December 31, 2003 and 2002 (audited) ............................ F-5
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 2002 (audited) and 2003 (audited) and for the three
months ended March 31, 2004 (unaudited).......................... F-6
Statements of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited) and for the years ended December 31, 2003
and 2002 (audited) .............................................. F-7
Notes to Financial Statements...................................... F-9
F-1
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
216 SIXTEENTH STREET
SUITE 600
DENVER, COLORADO 80202
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Military Resale Group, Inc. as
of December 31, 2003, and the related statements of operations, changes in
stockholders' equity (deficit), and cash flows for the year 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 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 the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Military Resale Group, Inc. as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
working capital deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ AJ. ROBBINS, P.C.
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
DENVER, COLORADO
APRIL 7, 2004
F-2
Report of Independent Auditors
To the Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Military Resale Group, Inc. as
of December 31, 2002, and the related statements of operations, changes in
stockholders' equity (impairment), and cash flows for the year 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 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 the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Military Resale Group, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
working capital deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ ROSENBERG RICH BAKER BERMAN & CO.
-------------------------------------
BRIDGEWATER, NEW JERSEY
APRIL 21, 2003
F-3
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
--------------
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
------------------- -------------------
CURRENT ASSETS: (UNAUDITED)
Cash $ 113,889 $ 2,862
Accounts receivable - trade 980,402 765,851
Inventory 386,827 334,950
Prepaid consulting 205,679 484,506
Deposits 38,618 33,218
Prepaid interest 69,574 92,681
Prepaid expenses 9,341 ---
------------------- -------------------
Total Current Assets 1,804,330 1,714,068
------------------- -------------------
PREPAID INTEREST, NET OF CURRENT PORTION 132,038 132,038
EQUIPMENT
Office equipment 22,379 15,047
Warehouse equipment 159,444 159,444
Software 16,324 16,324
------------------- -------------------
198,147 190,815
Less accumulated depreciation (115,545) (106,103)
------------------- -------------------
Net equipment 82,602 84,712
------------------- -------------------
Total Assets $ 2,018,970 $ 1,930,818
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,510,556 $ 2,507,544
Accounts payable, related party 49,349 72,632
Current maturities of capital lease obligations 32,489 51,981
Deferred rent 2,729 2,729
Current portion of accrued interest payable 117,248 99,561
Current portion of notes payable 31,025 90,235
Current portion of convertible notes payable 85,000 85,000
------------------- --------------------
Total Current Liabilities 2,828,396 2,909,682
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT MATURITIES 36,351 36,351
DEFERRED RENT, NET OF CURRENT PORTION 21,832 21,832
RELATED PARTIES CONVERTIBLE NOTES PAYABLE 370,000 370,000
NOTES PAYABLE, NET OF CURRENT PORTION 98,975 98,975
CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 150,000 150,000
------------------- --------------------
Total Liabilities 3,505,554 3,586,840
------------------- --------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.0001, 10,000,000 shares
authorized, -0- issued and outstanding --- ---
Common stock, par value $.0001, 50,000,000 shares authorized,
26,895,571 and 21,448,011 issued and outstanding 2,690 2,144
Additional paid-in capital 4,933,251 4,248,547
Accumulated (deficit) (6,422,525) (5,906,713)
------------------- --------------------
Total Stockholders' Equity (Deficit) (1,486,584) (1,656,022)
------------------- --------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,018,970 $ 1,930,818
=================== ====================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
MILITARY RESALE GROUP, INC.
STATEMENTS OF OPERATIONS
------------------------
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------- ----------------------------------------
2004 2003 2003 2002
------------------ ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Resale revenue $ 1,961,544 $ 1,612,597 $ 5,585,340 $ 6,015,406
Commission revenue 173,432 146,366 464,105 344,397
------------------ ------------------ ------------------ ------------------
Total Revenues 2,134,976 1,758,963 6,049,445 6,359,803
COST OF GOODS SOLD 1,782,561 1,512,326 5,349,774 5,471,846
------------------ ------------------ ------------------ ------------------
GROSS PROFIT 352,415 246,637 699,671 887,957
OPERATING EXPENSES:
Stock based compensation 410,827 206,369 1,304,250 772,511
Salary and payroll taxes 162,789 117,138 532,262 502,272
Professional fees 29,092 64,034 348,843 502,077
Occupancy 59,356 59,356 248,373 302,237
General and administrative 139,614 150,139 569,552 583,978
Depreciation 9,442 14,911 29,874 40,789
------------------ ------------------ ------------------ ------------------
Total Expenses 811,120 611,947 3,033,154 2,703,864
------------------ ------------------ ------------------ ------------------
Net (Loss) From Operations (458,705) (365,310) (2,333,483) (1,815,907)
OTHER (EXPENSES):
Interest expense (57,107) (135,385) (298,266) (477,059)
Loss on disposal of fixed assets --- --- --- (26,255)
------------------ ------------------ ------------------ ------------------
Total Other (Expenses) (57,107) (135,385) (298,266) (503,314)
------------------ ------------------ ------------------ ------------------
NET (LOSS) $ (515,812) $ (500,695) $ (2,631,749) $ (2,319,221)
================== ================== ================== ==================
NET (LOSS) PER COMMON SHARE BASIC AND
DILUTED $ (0.02) $ (0.04) $ (0.18) $ (0.25)
================== ================== ================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 23,497,984 11,684,156 14,619,599 9,156,648
================== ================== ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
MILITARY RESALE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2001 (RESTATED) 7,505,004 $ 750 $ 442,150 $ (955,743) $ (512,843)
Issuance of common stock for debt 896,787 90 149,910 --- 150,000
Issuance of common stock for beneficial
conversion feature 896,787 90 (90) --- ---
Beneficial conversion feature --- --- 370,000 --- 370,000
Stock options granted for services --- --- 214,000 --- 214,000
Issuance of common stock for services 2,084,812 208 674,720 --- 674,928
Stock options granted for debt extension --- --- 200,000 --- 200,000
Net (loss) for the year --- --- --- (2,319,221) (2,319,221)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2002 11,383,390 1,138 2,050,690 (3,274,964) (1,223,136)
Issuance of common stock for
litigation settlement 384,000 38 49,962 --- 50,000
Issuance of common stock for exercise
of options 1,000,000 100 74,900 --- 75,000
Beneficial conversion feature --- --- 27,173 --- 27,173
Stock options granted for services --- --- 406,400 --- 406,400
Issuance of common stock for services 8,230,621 823 1,298,027 --- 1,298,850
Stock options granted for debt extension --- --- 271,440 --- 271,440
Sale of common stock 450,000 45 69,955 --- 70,000
Net (loss) for the year --- --- --- (2,631,749) (2,631,749)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2003 21,448,011 2,144 4,248,547 (5,906,713) (1,656,022)
Issuance of common stock for services 597,560 60 95,940 --- 96,000
Stock options granted for services --- --- 36,000 --- 36,000
Warrants granted for note repayment --- --- 10,000 --- 10,000
Issuance of common stock for note
repayment 400,000 40 39,960 --- 40,000
Sale of common stock, net of offering
costs of $44,250 4,450,000 446 502,804 --- 503,250
Net (loss) --- --- --- (515,812) (515,812)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, MARCH 31, 2004 (UNAUDITED) 26,895,571 $ 2,690 $ 4,933,251 $ (6,422,525) $ (1,486,584)
================= ================= ============== ============== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------- -------------------------------------
2004 2003 2003 2002
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (TO) OPERATING (UNAUDITED) (UNAUDITED)
ACTIVITIES:
Net (loss) $ (515,812) $ (500,695) $ (2,631,749) $ (2,319,221)
Adjustments to reconcile net
(loss) to net cash
used in operating activities:
Depreciation 9,442 14,911 29,874 40,789
Amortization of option based
interest expense 23,107 100,000 180,054 66,667
Stock issued for services 374,827 153,924 1,074,926 772,511
Options issued for services 36,000 --- 229,324 ---
Beneficial conversion feature --- 15,000 27,173 370,000
Loss on disposal of assets --- --- --- 26,255
Stock issued for settlement --- --- 50,000 ---
Issuance of note for settlement --- --- 100,000 ---
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (214,551) (69,768) (337,814) 13,021
(Increase) decrease in inventory (51,877) 9,220 (107,534) 25,014
(Increase) decrease in other
assets --- 68 618 6,090
(Increase) in deposits (5,400) --- (9,860) (2,952)
(Increase) in prepaid expenses (9,341) --- --- ---
Increase in accounts payable and
accrued expenses 3,012 133,805 1,014,317 455,447
Increase (decrease) in related
party accounts payable (23,283) --- 72,632 ---
Increase in accrued interest
payable 33,477 --- --- ---
Increase (decrease) in deferred
rent obligation --- 2,047 (54,580) 79,141
Increase in other liabilities --- 25,007 14,313 81,726
------------------- ------------------- ---------------- ----------------
Net Cash (Used In) Operating
Activities (340,399) (116,481) (348,306) (385,512)
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (T0) INVESTING
ACTIVITIES:
Purchase of fixed assets (7,332) (1,683) (4,440) (2,580)
------------------- ------------------- ---------------- ----------------
Net Cash (Used in) Investing
Activities (7,332) (1,683) (4,440) (2,580)
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES:
Proceeds from stock options
exercised --- --- 75,000 ---
Payments on capital lease
obligations (19,492) (6,762) (674) (14,836)
Proceeds from issuance of notes --- 125,000 190,000 270,000
Proceeds from issuance of related
party notes --- --- 30,000 135,000
Payments on notes payable (25,000) --- (10,790) ---
Proceeds from issuance of common
stock 547,500 --- 70,000 ---
Payments of offering costs (44,250) --- --- ---
------------------- ------------------- ---------------- ----------------
Net Cash Provided by
Financing Activities 458,758 118,238 353,536 390,164
------------------- ------------------- ---------------- ----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 111,027 74 790 2,072
CASH AND CASH EQUIVALENTS,
beginning of period 2,862 2,072 2,072 ---
------------------- ------------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period$ 113,889 $ 2,146 $ 2,862 $ 2,072
=================== =================== ================ ================
Supplementary information:
Cash paid for:
Interest $ --- $ 466 $ 15,833 $ 20,327
=================== =================== ================ ===============
Income taxes $ --- $ --- $ --- $ ---
=================== =================== ================ ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------------------ --------------------------------
2004 2003 2003 2002
-------------- ----------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Non-cash investing and financing activities:
Issuance of stock in exchange for cancellation of
indebtedness $ --- $ --- $ --- $ 150,000
============== ================= ============= ==============
Issuance of stock and common stock options in
exchange for services to be rendered over six
months to one year $ 132,000 $ 205,146 $ 1,705,250 $ 181,000
============== ================= ============= ==============
Issuance of common stock options for loan
extensions $ --- $ --- $ 271,440 $ 200,000
============== ================= ============= ==============
Issuance of common stock in litigation settlement $ --- $ --- $ 50,000 $ ---
============== ================= ============= ==============
Issuance of common stock and warrants as payment
of notes payable $ 50,000 $ --- $ --- $ ---
============== ================= ============= ==============
Issuance of common stock in payment of accrued
compensation $ --- $ 32,912 $ --- $ ---
============== ================= ============= ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Military Resale Group, Inc. (the Company) was organized under the laws of the
State of New York and is a regional distributor of grocery and household items
specializing in distribution to commissaries of the U. S. Military. Currently,
the Company services six military installations located in Colorado, Wyoming and
South Dakota.
On October 15, 2001, the Company, formerly Bactrol Technologies, Inc. entered
into a stock purchase agreement with Military Resale Group, Inc., a Maryland
corporation that was formed on October 6, 1997 ("MRG"), pursuant to which 98.2%
of MRG's stock was effectively exchanged for a controlling interest in our
publicly held "shell" corporation. Concurrently with the closing of that
transaction, the Company changed its name from Bactrol Technologies, Inc. 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 was considered the acquirer, and
therefore, the historical operating results of Bactrol Technologies, Inc. are
not presented.
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 has suffered recurring losses from operations, and its working
capital deficit raises substantial doubt about its ability to continue as a
going concern.
The Company is currently registering 10,000,000 shares of its common stock for
sale at $.25 per share on a best efforts basis.
The Company's management is currently pursuing equity and/or debt financing in
an effort to continue operations. The future success of the Company is likely
dependent on their ability to attain additional capital to develop business, and
ultimately upon their ability to attain future profitable operations. There can
be no assurance that the Company will be successful in obtaining such financing,
or that the Company will attain positive cash flow from operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-9
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for the
three months ended March 31, 2004 and 2003 are presented on a basis consistent
with the audited financial statements and reflect all adjustments, consisting
only of normal recurring accruals, necessary for fair presentation of the
results of such period. The results of operations for the three moths ended
March 31, 2004 are not necessarily indicative of the results to be expected for
the year ending December 31, 2004.
CASH AND CASH EQUIVALENTS
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, its doubtful accounts related to these trade accounts have been
insignificant. Therefore, no allowance for doubtful accounts has been provided
for.
INVENTORY
Inventory consists primarily of grocery items, and is stated at the lower of
cost 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.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. For the three months
ended March 31, 2004 and 2003, the Company incurred $2,377 and $-0- of
advertising costs, respectively. For the years ended December 31, 2003 and 2002,
the Company incurred $-0- and $949 of advertising costs, respectively.
EQUIPMENT
The Company follows the practice of capitalizing equipment costing in excess of
$250. The cost of ordinary maintenance and repairs is charged to operations
while renewals and replacements are capitalized. Depreciation expense was $9,442
and $14,911 for the three months ended March 31, 2004 and 2003 and $29,874 and
$40,789 for the years ended December 31, 2003 and 2002, respectively.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Office equipment and software 3 to 5 years
Warehouse equipment 5 to 7 years
F-10
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
represents the tax payable for the current period and the change during the
period in deferred tax assets and liabilities. Deferred tax assets and
liabilities have been netted to reflect the tax impact of temporary differences.
Deferred tax assets arise primarily from the net operating loss carryforward and
expenses accrued for book basis but not for tax basis. The Company is on the
accrual basis for tax purposes, which has resulted in a net operating loss
carryforward at March 31, 2004 and December 31, 2003. A full valuation allowance
has been recorded at March 31, 2004 and December 31, 2003 since management of
the Company can not determine that it is more likely than not that the tax asset
will be realized. (See Note 9)
NET (LOSS) PER COMMON SHARE
The Company computes earnings (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). This statement simplifies the standards for computing earnings per
share (EPS) previously found in Accounting Principles Board Opinion No. 15,
Earnings Per Share, and makes them more comparable to international EPS
standards. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. In addition, the Statement requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. (See Note 12).
REVENUE RECOGNITION
The Company's revenues are derived from either resale revenue or commission
revenue.
Resale Revenue: The Company purchases products from manufacturers and suppliers
for resale to the commissaries it services. Revenue from these customers is
recognized when title to products passes to the customer for the amount of the
sales less an appropriate provision for returns and allowances. The revenue
amount recorded 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 the Company is responsible for
fulfillment of the order and for the customer's acceptance of the goods or
services sold, (b) bears inventory risk (taking 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.
F-11
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Commission Revenue: The Company records commission revenue in cases where it
acts as an agent for the manufacturer or supplier of the products it sells, and
earns a commission based upon a percentage of the suppliers' sales amount. This
revenue is recognized at the time goods are shipped by the Company to the
ultimate customer, which is when title passes.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard requires the Company to adopt the
"fair value" method with respect to stock-based compensation of consultants and
other non-employees. The Company did not change its method of accounting with
respect to employee stock options; the Company continues to account for these
under the "intrinsic value" method, and to furnish the proforma disclosures
required by SFAS 123.
VALUATION OF THE COMPANY'S COMMON STOCK
Unless otherwise disclosed, all stock based transactions entered into by the
Company have been valued at the market value of the Company's common stock on
the date the transaction was entered into or have been valued using the Modified
Black-Scholes European Pricing Model to estimate the fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments approximates their fair value,
because of the short-term nature of these financial instruments.
The fair value of the Company's capital lease obligations approximate their
carrying value and are based on the current rates offered for debt of the same
remaining maturities with similar collateral requirements, or that the
difference is represented by the additional costs to convert the debt to market
rates making the two presently equivalent.
CONCENTRATIONS OF RISK
The Company maintains all cash and cash equivalents in financial institutions,
which at times may exceed federally insured limits. The Company has not
experienced a loss in such accounts.
The Company's revenues from military commissary sales provide approximately
ninety two percent of their total revenues. Management believes that
concentration of customers with respect to risk is minimal due to the sales
being primarily through government contracts.
RECLASSIFICATION
Certain amounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation in the current year
financial statements.
F-12
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB 51 ("FIN 46"). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
(Variable Interest Entities or "VIEs") and to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The disclosure requirements
of FIN 46 became effective for financial statements issued after January 31,
2003. The adoption of this interpretation did not have an impact on the
Company's financial statements.
In April 2003, FASB issued SFAS No. 149, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS 149") which is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. This statement amends and clarifies financial accounting
and reporting for derivative instruments including certain instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The Company has adopted SFAS
149 and its adoption did not have a material effect on its financial statements.
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, ("SFAS 150")
which is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Company has adopted SFAS 150
and its adoption did not have a material effect on its financial statements.
USE OF 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 period. Actual results could differ from those estimated
amounts.
F-13
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 2 - PREPAID CONSULTING
Prepaid consulting expenses are recorded in connection with common stock and
options issued to purchase common stock granted to consultants for future
services and are amortized over the agreement term. The Company incurred
prepayments of $20,000 and stock based compensation expense of $298,827 during
the three months ended March 31, 2004 and incurred prepayments of $484,506 and
stock based compensation expense of $1,304,250 during the year ended December
31, 2003.
NOTE 3 - PREPAID INTEREST
Prepaid interest is recorded in connection with the issuances of options for the
extension of various notes payable. The prepaid interest is being amortized over
the extension period, with $23,107 charged to interest expense during the three
months ended March 31, 2004 and $180,054 charged to interest expense during the
year ended December 31, 2003.
NOTE 4 - RELATED PARTY TRANSACTIONS
In January 2003, the Company entered into a one-year business consulting
agreement with Edward Meyer, Jr. for marketing and managerial consulting
services, and an executive compensation agreement with Edward Whelan, Chief
Executive Officer. In consideration of the services to be rendered by Mr. Whelan
and Mr. Meyer, the Company will issue each month the number of shares determined
by dividing $12,000 by the product of 80% and the average closing low price for
the Company's common stock during each quarter.
During the year ended December 31, 2003, the Company issued 1,305,622 shares of
common stock as consideration under a January 2002 and 2003 consulting and
compensation agreements for the fourth quarter of 2002 and the four quarters of
2003 (370,831 shares to Mr. Meyer and 934,791 shares to Mr. Whelan, or their
respective designees). The transactions were valued between $0.10 and $0.27 per
share, the fair market value of our common stock on the dates of issuance.
On July 11, 2003, the Company issued 100,000 shares of our common stock to an
employee, Robert Hefner, for compensation for past employment services. These
shares were valued at $0.26 per share or $26,000, the fair value at date of
issuance.
On November 1, 2003 the Company issued 300,000 shares of common stock to Mr.
Meyer in connection with the signing of a consulting agreement. The term of the
agreement is for one year. These shares were valued at $30,000, the fair value
at date of issuance. This amount will be amortized over the term of the
agreement.
F-14
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 4 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the year ended December 31, 2003, the Company received advances from
related parties; $11,500 from individuals related to shareholders/management.
These advances are non-interest bearing and are due on demand. These amounts are
recorded as due to related parties along with $61,132 of amounts due to a
related party for expenses paid by related party on behalf of the Company.
On March 31, 2004 pursuant to a consulting agreement with the Company's chief
executive officer, the Company issued 247,560 shares of common stock and granted
options to purchase 247,560 shares of common stock at $.25 per share for a
period of five years for services rendered valued at $72,000. The value of the
stock and the value of the options was $36,000 each based on $12,000 each per
month. The number of shares and options issued was determined by dividing
$36,000 by 80% of the average low price of the common stock in each quarter.
On March 11, 2003, Edward Whelan loaned the Company $10,000. The corresponding
note bears interest at a rate of 8% per annum and is due on June 3, 2006.
On June 30, 2003, in connection with the conversion of $190,000 of demand notes
to convertible notes from Edward Whelan, Chief Executive Officer, and companies
which he controls and/or is shareholder, 1,130,000 stock options were issued.
The options expire in five years. The fair value of the options are estimated at
$235,040 based on the Modified Black-Scholes European Pricing Model. The average
risk free interest rate used was 2.9%, volatility was estimated at 94.06%, and
the expected life was five years. The demand notes have been modified to allow
the holder to convert their notes into shares of common stock at $0.25 per
share. These convertible notes do not have a beneficial conversion feature.
On June 30, 2003, in connection with the conversion of $25,000 of demand notes
to convertible notes from each of Ethan Hokit, President and Atlantic Investment
Trust, of which Richard Tanenbaum, one of the Company's directors, is the
trustee, 25,000 stock options were issued to each of such noteholders. The
options expire in five years. The fair value of the options are estimated at
$10,400 based on the Modified Black-Scholes European Pricing Model. The average
risk free interest rate used was 2.9%, volatility was estimated at 94.06%, and
the expected life was five years. The demand notes have been modified to allow
the holder to convert their notes into shares of common stock at $0.25 per
share. Such notes do not have a beneficial conversion feature.
On August 7, 2002, the Company borrowed $50,000 from Atlantic Investment Trust
and $50,000 from Eastern Investment Trust. Richard Tanenbaum, one of the
Company's Directors, is a trustee of these entities. The notes are convertible
and bear interest at 8% per annum and were due on July 30, 2003. These notes
have been extended to June 3, 2006 (See Note 5).
During 2002, Edward Whelan advanced the Company $20,000. The advances bear
interest at a rate of 10% per annum and are due on demand.
F-15
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES
During the year ended December 31, 2002, notes payable of $150,000, which
included a beneficial conversion feature, were converted into 1,793,574 shares
of the Company's common stock pursuant to the notes.
At March 31, 2004 and December 31, 2003, the Company had an aggregate of
$605,000 payable in convertible notes of which $370,000 are with related parties
(see Note 4). On June 30, 2003, notes in the amount of $215,000 that were
originally due on or before June 30, 2003 and $50,000 of notes that were
originally due September 30, 2003 were extended until June 3, 2006 and bear
interest at 8%. An additional $240,000 of demand notes were converted to
convertible notes on June 30, 2003 and are due June 3, 2006. Of these notes,
$100,000 are non-interest bearing, $60,000 bear interest at 10% and $80,000 bear
interest at 8%.
In connection with the extension of the due dates and conversion of the demand
notes to convertible notes, stock options of 1,305,000 were issued. The options
expire in five years. The fair value of the options were estimated at $271,440
based on the Modified Black-Scholes European Pricing Model. The average risk
free interest rate used was 2.9%, volatility was estimated at 94.06% and the
expected life was five years. The Company recorded prepaid interest of $271,440
and are amortizing it over the extension period. Interest expense of $23,107 and
$46,721 was recorded during the three months ended March 31, 2004 and during the
year ended December 31, 2003, respectively for amortization of the prepaid
interest.
During the year ended December 31, 2003, the Company issued $20,000 in
convertible notes bearing interest at 8% per annum due January 30, 2004 and
$15,000 in convertible notes bearing interest at 8% per annum due June 3, 2006.
The Company's convertible notes provide generally that, if the convertible notes
are not in default, the holders may convert, at any 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 common stock that will allow the note
holder to receive common stock having a market value equal to 150% of the
converted balance of the note. For notes issued prior to May 30, 2003, 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 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 of
common stock issuable upon conversion of the convertible notes. On June 30, 2003
the demand notes were modified to allow the holder to convert their notes into
common stock at $0.25 per share. These convertible notes do not have a
beneficial conversion feature.
F-16
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES (CONTINUED)
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, 2003 and 2002 interest
expense of $27,173 and $370,000, respectively, was recognized as the intrinsic
value of the beneficial conversion feature of the convertible notes that were
issued during such periods.
NOTE 6 -NOTES PAYABLE
On March 27, 2003, the Company issued a promissory note for $100,000 to Romano,
Ltd. As of December 31, 2003, the remaining balance on this note was $89,210.
The note bears interest at 15% per annum and was due on March 26, 2004, subject
to the following contingent payment terms upon the Company raising or securing
additional funding from any third-party source:
Additional Funding Terms Modification
------------------ ------------------
$ 250,000 Payment of 10% of outstanding principal and accrued interest
$ 500,000 Payment of 15% of outstanding principal and accrued interest
$1,000,000 or more Payment of 100% of outstanding principal and accrued interest
When the Company failed to secure any of the above-referenced additional
funding, or another significant event such as a merger or acquisition of another
company, the Company was required to pay $8,000 per month commencing on July 1,
2003 until the full obligation was paid.
During the three months ended March 31, 2004 the Company reached an agreement
with Romano, Ltd. Since March 31, 2003 $50,000 cash was paid towards the
original $100,000 note, of which $25,000 was paid during the three months ended
March 31, 2004. The Company signed a $30,000 note with Romano, Ltd., for the
accrued interest on the original $100,000 loan with interest at 15% per annum,
payable beginning on April 1, 2004 with equal consecutive installments payable
on the fifteenth of every month in the amount of $5,000 until paid in full or
March 26, 2005. In addition, the Company issued 400,000 shares of common stock
and granted warrants to purchase 250,000 shares of common stock at $.25 per
share for three years as full satisfaction of the remaining $50,000 balance of
the loan.
F-17
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 6 -NOTES PAYABLE (CONTINUED)
Maturities on long term debt, including related parties, are as follows for the
three months ended March 31, 2004 and for the year ended December 31, 2003:
MARCH 31, DECEMBER 31,
2004 2003
----------------- -----------------
2004 $ 116,025 $ 175,235
2005 14,767 14,767
2006 536,313 536,313
2007 18,022 18,022
2008 19,909 19,909
Thereafter 29,964 29,964
----------------- -----------------
$ 735,000 $ 794,210
================= =================
NOTE 7 - CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in various
years through 2006. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the asset at the inception of the lease. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation expense.
Properties under capital leases at March 31, 2004 and December 31, 2003 are as
follows:
MARCH 31, DECEMBER 31,
2004 2003
------------------- -------------------
Equipment $ 103,403 $ 103,403
Less: accumulated amortization 48,683 43,513
------------------- -------------------
Net $ 54,720 $ 59,890
=================== ===================
F-18
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 7 - CAPITAL LEASES (CONTINUED)
The following is a schedule of minimum lease payments under capital leases as of
March 31, 2004 and December 31, 2003.
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
2004 $ 42,347 $ 61,839
2005 22,818 22,818
2006 20,916 20,916
---------- ------------
Total net minimum capital lease payments 86,081 105,573
Less: amounts representing interest 17,241 17,241
---------- ------------
Present value of net minimum capital
lease payments 68,840 88,332
Less: current maturities of capital
lease obligations 32,489 51,981
---------- ------------
Obligations under capital leases, net of
current maturities $ 36,351 $ 36,351
========== ============
NOTE 8 - OPERATING LEASE COMMITMENTS
In August 2001, the Company entered into a lease agreement that expires in
August 2006 for office and warehouse space in Colorado Springs, Colorado.
Minimum future lease payments under current lease agreements at March 31, 2004
and December 31, 2003 are as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- -------------
2004 $ 150,095 $ 199,217
2005 207,404 207,404
2006 141,908 141,908
--------- -------------
Total minimum payments required $ 499,407 $ 548,529
========= ============
The lease has an annual escalation factor. The above rental commitments reflect
the periods during which the actual obligations arise (per the lease agreement).
Rental expense has been charged to operations on a straight-line basis. The
associated liability is presented in the balance sheet as a deferred rental
obligation.
F-19
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 8 - OPERATING LEASE COMMITMENTS (CONTINUED)
Rent expense for the three months ended March 31, 2004 and 2003 was $59,356 each
year, respectively and for the years ended December 31, 2003 and 2002 was
$248,373 and $302,237, respectively.
NOTE 9 - INCOME TAXES
The components of deferred tax assets and (liabilities) and the related tax
affects of temporary differences that give rise to deferred tax assets and
(liabilities) are as follows:
MARCH 31, DECEMBER 31,
2004 2003
-------------- -------------
Net operating loss carryforward $ 1,942,723 $ 1,827,506
Less valuation allowance (1,942,723) (1,827,506)
-------------- --------------
$ --- $ ---
============== =============
The components of deferred income tax expense (benefit) are as follows:
MARCH 31, DECEMBER 31,
2004 2003
-------------- -------------
Net operating loss carryforward $ 115,216 $ 563,506
Less valuation allowance (115,216) (563,506)
-------------- --------------
$ --- $ ---
============== =============
Following is a reconciliation of the amount of income tax expense (benefit) that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense (benefit):
MARCH 31,
2004 2003
-------------- -------------
Tax expense at federal statutory rates $ (175,376) $ (170,236)
Stock based compensation 60,160 34,000
Net operating loss carryforward 115,216 136,236
-------------- -------------
$ --- $ ---
============== =============
F-20
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 9 - INCOME TAXES (CONTINUED)
DECEMBER 31,
2003 2002
-------------- -------------
Tax expense at federal statutory rates $ (894,795) (788,535)
Increase in inventory valuation allowance 6,077 ---
Other 11,723 ---
Stock based compensation 123,889 ---
Net operating loss carryforward 753,106 788,535
-------------- -------------
$ --- $ ---
============== =============
As of March 31, 2004 and December 31, 2003, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $5,714,000 and
$5,375,000, respectively, 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 our effective tax rate
to differ from the statutory income tax rate.
The net operating loss carryforward, if not utilized, will expire between 2017
and 2023. At March 31, 2004 and December 31, 2003, the valuation allowance
increased by $115,216 and $563,506, respectively.
NOTE 10 - EQUITY INCENTIVE PLAN
In December 2001, the Company adopted the Military Resale Group, Inc. 2001
Equity Incentive Plan (the "Incentive Plan") for the purpose of attracting,
retaining and maximizing the performance of executive officers and key employees
and consultants. The Company has reserved 1,500,000 shares of common stock for
issuance under the Incentive Plan. The Incentive Plan has a term of ten years
and provides for the grant of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory
stock options, stock appreciation rights, restricted stock awards, performance
share awards and compensatory share awards. The exercise price for non-statutory
stock options may be equal to or more or less than 100 percent of the fair
market value of shares of common stock on the date of grant. The exercise price
for incentive stock options may not be less than 100 percent of the fair market
value of shares of our common stock on the date of grant (110 percent of fair
market value in the case of incentive stock options granted to employees who
hold more than ten percent of the voting power of issued and outstanding shares
of common stock).
Options granted under the Incentive Plan may not have a term of more than
ten-years (five years in the case of incentive stock options granted to
employees who hold more than ten percent of the voting power of common stock)
and generally vest over a three-year period.
F-21
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 10 - EQUITY INCENTIVE PLAN (CONTINUED)
The fair value of each option granted is estimated on the grant date using the
Modified Black-Scholes European-Pricing Model. The following assumptions were
made in estimating fair value:
Dividend yield 0%
Risk-free interest rate 2.5%-3.6%
Expected life 1-5 years
Expected Volatility 233%-253%
Common stock options granted under the plan during the three months ended March
31, 2004 and during the year ended December 31, 2003 and 2002 were 0, 0 and
800,000, respectively.
OUTSTANDING OPTIONS
OPTION ------------- -------------
SHARES PRICE PER
AVAILABLE SHARES SHARE
-------------- ------------- -------------
BALANCE, DECEMBER 31, 2001 1,500,000 --- $ ---
Granted (800,000) 800,000 0.50
Expired --- --- ---
-------------- ------------- -------------
BALANCE, DECEMBER 31, 2002 700,000 800,000 $ 0.50
-------------- ------------- -------------
Granted --- --- ---
Exercised --- --- ---
Expired --- --- ---
-------------- ------------- -------------
BALANCE, DECEMBER 31, 2003 700,000 800,000 $ 0.50
Granted --- --- ---
Exercised --- --- ---
Expired --- --- ---
-------------- ------------- -------------
BALANCE, MARCH 31, 2004 700,000 800,000 $ 0.50
============== ============= =============
NOTE 11 - COMMON STOCK
During the year ended December 31, 2002 the Company issued 2,084,812 shares of
common stock to various consultants for services performed and to be performed.
The shares were valued at $674,298 based on the closing market price on the date
of signing the agreements. This amount was recorded as prepaid consulting and
was amortized over the term of the agreements.
F-22
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 11 - COMMON STOCK (CONTINUED)
During December 2003 the Company issued 384,000 shares of common stock for
settlement of litigation in the amount of $50,000. (See Note 13).
During the year ended December 31, 2003, the Company issued aggregate shares of
common stock of 8,230,621 to various consultants for services provided or to be
provided. Stock based compensation expense of $1,127,174 was recognized in 2003
and a prepaid consulting expense of $ 307,430 was recorded in 2003 for stock
issued for services. These amounts were based on the fair market value of the
shares on the date of issuance.
5,505,000 and 500,000 stock options were granted to various parties during the
years ended December 31, 2003 and 2002, respectively, for services rendered and
to be rendered. (See Notes 4 and 5). The options expire in five years. The
options issued during year ended December 31, 2003 and 2002 were valued at
$677,840, and $200,000, respectively, the fair value using the Black-Scholes
European Pricing Model. The average risk free interest rate used was 2.9%,
volatility was estimated at 94.06% and 253%, respectively, and the expected life
was five years.
Compensation cost charged to operations for options issued was $ 276,045 and
$220,000 during the years ended December 31, 2003 and 2002, respectively.
Prepaid consulting costs and prepaid interest expense for options issued are
$177,076 and $224,719, respectively at December 31, 2003.
During the three months ended March 31, 2004, the Company issued an aggregate
200,000 of the Company's common shares to a consultant for services provided and
expensed $40,000 (the value of the services) as stock based compensation.
During the three months ended March 31, 2004 the Company issued 100,000 shares
of the Company's common stock valued at $9,000, the fair market value of the
common stock, to a consultant for services to be provided. The value of the
stock is recorded as prepaid consulting and will be amortized over the term of
the agreement.
On January 29, 2004 the Company issued 50,000 shares of common stock valued at
$11,000 as a retainer fee for services to be performed in connection with
raising of capital (See Note 13). This amount is recorded as prepaid consulting
and is being amortized over the term of the agreement.
During the three months ended March 31, 2004 pursuant to a consulting agreement
with an unrelated party, the Company granted warrants to purchase 320,000 shares
of the Company's common stock at $.125 for a period of five years. These
warrants were valued at $52,870, the fair value using the Black-Scholes European
Pricing Model. The average risk free interest rate used was 3.39%, volatility
was estimated at 96% and the expected life was five years. The warrants were
granted as compensation to the Company's investment banker for raising $500,000
by selling 4,000,000 shares of common stock. This investment banker was also
paid $40,000 as commission for the sale of stock.
F-23
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 11 - COMMON STOCK (CONTINUED)
During the three months ended March 31, 2004 the Company sold 4,000,000 shares
of common stock to several individuals at $.125 per share for total
consideration of $460,000, net of offering costs paid of $40,000. These
individuals were also given warrants to purchase 2,000,000 shares of common
stock (50% of shares issued) at $.25 per share for a period of five years. The
terms of the stock subscription agreements provide that in the event the average
closing bid price of the common stock for the ten days preceding the effective
date of the Registration Statement (to be filed) is $.17 or below, then the
purchase price for the shares shall be reset to a purchase price equal to the
average price minus $.05, provided that the purchase price is not less than
$.065 per share. Upon the occurrence of the price adjustment, the Company will
issue to each subscriber the additional shares they are entitled to based upon
the adjusted price. In addition, if the Registration Statement (to be filed) is
not declared effective on or before June 30, 2004, then commencing on the first
day of each month thereafter until December 1, 2004 or the declared effective
date of the Registration Statement, the Company will issue each subscriber, as
liquidated damages, additional shares of common stock equal to 10% of the number
of shares purchased by each subscriber.
During the three months ended March 31, 2004 the Company sold 450,000 shares of
common stock to several individuals for $.10 to $.125 per share for total
consideration of $43,250, net of offering costs of $4,250. In accordance with
the terms of the stock subscription agreements, if the Company's Registration
Statement (to be filed) is not declared effective on or before June 30, 2004,
then commencing on the first day of each month thereafter until December 1, 2004
or the declared effective date of the Registration Statement, the Company will
issue each subscriber, as liquidated damages and not as a penalty, additional
shares of common stock equal to 10% of the number of shares purchased by each
subscriber.
F-24
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 12 - EARNINGS PER SHARE
For the Three Months Ended March 31, 2004
-----------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (515,812) 23,497,984 $ (0.02)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (515,812) 23,497,984 $ (0.02)
================= ================= ============
For the Three Months Ended March 31, 2003
-----------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (500,695) 11,684,156 $ (0.04)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (500,695) 11,684,156 $ (0.04)
================= ================= ============
F-25
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 12 - EARNINGS PER SHARE (CONTINUED)
For the Year Ended December 31, 2003
------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (2,631,749) 14,619,599 $ (0.18)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (2,631,749) 14,619,599 $ (0.18)
================= ================= ============
For the Year Ended December 31, 2002
------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (2,319,221) 9,156,648 $ (.25)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (2,319,221) 9,156,648 $ (.25)
================= ================= ============
NOTE 13 - CONTINGENCIES
On January 29, 2004 the Company entered into a business consulting agreement
with an unrelated party for financial advisory and investment banking services
and issued the consultant 50,000 shares of its common stock valued at $11,000.
The consultant will advise the Company as to issues of capital formation, assist
the Company on the market awareness of its stock by setting up road shows and
will assist the Company in raising $300,000 through the issuance of common stock
at $.125 and warrants to purchase 1,200,000 warrants exercisable at $.25 per
share for five years. Upon successful closing of the above raising of capital,
the Company will pay the consultant a cash fee commission of 10% of the capital
raised plus a cash non-accountable expense allowance of 2.5% of the capital
raised. In addition, upon raising the capital, the consultant will be entitled
to 300,000 warrants with similar terms as those issued in the capital raise. No
capital has been raised under this agreement to date.
F-26
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 13 - CONTINGENCIES (CONTINUED)
The Company was the plaintiff in a litigation with one of its vendors. During
the three months ended March 31, 2004 the Company entered into a judgment in
which they were ordered to pay the vendor $5,356 with the amount due accruing
interest at 8% per annum. As of March 31, 2004 the Company had not paid any
amount to this vendor. Subsequent to March 31, 2004, the Company received a Writ
of Garnishment and is expecting to have the original judgment amount of $5,356
plus interest and other charges of $181 garnished from one of their bank
accounts.
The Company was the defendant in a litigation regarding their former premises.
The plaintiff was the former landlord, who was seeking damages for an alleged
breach of the terms of several operating lease agreements for office and
warehouse space located in Colorado Springs, Colorado. On November 25, 2003 a
settlement was reached and issued with the district court of El Paso County,
Colorado. Under the terms of the settlement, the Company delivered 384,000
shares of common stock to the plaintiff for settlement of $50,000 owed and
agreed to issue a note payable to the plaintiff in the amount of $100,000
bearing interest at 10% per annum beginning November 6, 2003. Under the terms of
the note, the Company is required to begin payments of $2,000 per month on July
1, 2004 and on the first day of each and every month thereafter until all
principal and accrued interest are paid in full. If on the date of full payment
of the note or the date of maturity of the note, whichever occurs first, the
market price of the stock as of close of the market on that day is $50,000 or
greater the plaintiff must accept the stock as full satisfaction of the $50,000
liability. If the market price of the stock is less than $50,000, the plaintiff
may either retain the stock as full satisfaction of the $50,000 or surrender the
stock to the Company in exchange for simultaneous payment to the plaintiff in
cash of $50,000.
The Company was the defendant in two other litigations with two different
vendors. In accordance with the judgments issued on September 10, 2003 and
October 31, 2003, the Company is required to pay a total of $76,675
(non-interest bearing) and $39,901 (bearing interest at 8% per annum) to each
vendor respectively. As of March 31, 2004 the Company owed $69,675 and $40,433,
respectively, to each vendor.
In February 2003, a capital lease obligation, secured by equipment with a net
book value of $25,363, was accelerated due to non-payment. This obligation is
reflected in the current portion of obligations under capital leases in the
accompanying financial statements. The Company defaulted under the accelerated
terms of this agreement and the debt has been sent to a collections agency. The
Company is paying $1,000 per month on this lease until a new settlement can be
reached.
In February 2003, the Company entered into a Lease Modification Agreement for a
capital lease for equipment with a net book value of $57,183. The term of the
lease was extended through April 2007, with no required payment for the months
between November 2002 and February 2003. Minimum lease payments have increased
to $2,100 through October 2003 and $1,980 for the remaining 40 months.
F-27
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 14 - SUBSEQUENT EVENTS
On April 1, 2004 the Company entered into a one-year business consulting
agreement with an unrelated party for management and financial consulting
services. Under the terms of the agreement the consultant will receive $5,000
per month for the term of the agreement and receive 250,000 shares of common
stock valued at $47,500, the fair market value of the common stock on the date
the agreement was entered.
On May 10, 2004 the Company issued 100,000 shares of common stock to a
consultant for services to be rendered over a period of 180 days. These shares
are valued at $17,000, the fair market value of the common stock on the date the
agreement was entered.
On May 11, 2004 the Company issued 200,000 shares of common stock and granted
200,000 options to purchase common stock at $.25 per share to a stockholder for
services rendered. The stock is valued at $34,000, the fair market value of the
common stock on the day the agreement was entered.
On June 1, 2004 the Company entered into a consulting agreement for business
development, advisory and business networking services. Under the terms of the
agreement the consultant will receive 500,000 shares of common stock, valued at
$70,000, the fair market value of the common stock on the date the agreement was
entered, and $8,000 payable by July 15, 2004.
On June 10, 2004 the Company purchased all of the outstanding shares of Ohio
Street Partners, Inc. a private Delaware Corporation in exchange for 1,920,000
shares of the Company's common stock and warrants to purchase 960,000 shares of
the Company's common stock at $.25 per share. Ohio Street Partners, Inc. sole
asset is a single-family residential condominium rental property located in San
Diego, California valued at $310,000 and is subject to a loan secured by a first
deed of trust of approximately $70,000. The Company also received a loan of
$75,000 from the seller evidenced by a note payable and deed of trust recorded
against the property. The note payable accrues interest at 8% per annum and is
due on demand or September 10, 2004, or upon the sale of condominium, whichever
occurs first. In accordance with the terms of the agreement the seller is
entitled to one seat on the Company's board of directors. The Company intends to
sell the property as soon as possible.
On June 16, 2004 the Company issued 62,500 shares of common stock as liquidated
damages in accordance with the terms of a subscription agreement dated July 9,
2003. The stockholder was entitled to liquidated damages of 10% per month
beginning February 1, 2004 and continuing until June 1, 2004 of the original
number of shares purchased if the Company's registration statement did not
become effective as of January 31, 2004.
F-28
------------------------------------- -----------------------------------------
UNTIL __________ , ALL
DEALERS THAT EFFECT TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY
BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS 10,000,000 SHARES
UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. NO DEALER, SALES
REPRESENTATIVE OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE MILITARY RESALE GROUP, INC.
CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF COMMON STOCK
AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. ---------------
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE PROSPECTUS
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY ---------------
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
__________, 2004
------------------------------------- -----------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Sections 721 through 725 of the Business Corporation
Law of the State of New York (the "NYBCL"), which provides for indemnification
of directors and officers of New York corporations under certain circumstances.
Section 722 of the NYBCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, in connection with actions or proceedings, whether civil or
criminal (other than an action by or in the right of the corporation, a
"derivation action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute does not apply in respect of a threatened action, or a
pending action that is settled or otherwise disposed of, and requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. Section 721 of the
NYBCL provides that Article 7 of the BCL is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, disinterested director vote, shareholder vote, agreement or
otherwise.
Article 7 of our Restated Certificate of Incorporation requires us to
indemnify our officers and directors to the fullest extent permitted under the
NYBCL. Furthermore, Article XII of our Amended and Restated By-laws provides
that we may, to the full extent permitted and in the manner required by the laws
of the State of New York, indemnify any officer or director (and the heirs and
legal representatives of any such person) made, or threatened to be made, a
party in an action or proceeding (including, without limitation, one by us or in
our right to procure a judgment in our favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which of our directors or officers served in
any capacity at our request, by reason of the fact that such director or
officer, or such director's or officer's testator or intestate, was a director
or officer of ours or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity.
Section 402(b) of the NYBCL provides that a corporation's certificate of
incorporation may include a provision that eliminates or limits the personal
liability of the corporation's directors to the corporation or its shareholders
for damages for any breach of a director's duty, provided that such provision
does not eliminate or limit (1) the liability of any director if a judgment or
other final adjudication adverse to the director establishes that the director's
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that the director personally gained a financial
profit or other advantage to which the director was not legally entitled or that
the director's acts violated Section 719 of the NYBCL, or (2) the liability of
any director for any act or omission prior to the adoption of a provision
authorized by Section 402(b) of the NYBCL. Article 7 of our Restated Certificate
of Incorporation provides that none of our directors shall be liable to us or
our shareholders for any breach of duty in such capacity except for liability in
the event a judgment or other final adjudication adverse to a director
establishes that his or her acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that the director
personally gained, in fact, a financial profit or other advantage to which he or
she was not legally entitled or that such director's acts violated Section 719,
or its successor, of the NYBCL.
II-1
Any amendment to or repeal of our Restated Certificate of Incorporation or
by-laws shall not adversely affect any right or protection of any of our
directors or officers for or with respect to any acts or omissions of such
director or officer occurring prior to such amendment or repeal.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons pursuant
to the foregoing, we have been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred by us
in connection with the issuance and distribution of the Common Stock registered
hereby, all of which expenses, except for the Securities and Exchange Commission
registration fee, are estimates:
DESCRIPTION AMOUNT
------
Securities and Exchange Commission registration fee $ 320
fee
Accounting fees and expenses................... 35,000*
Legal fees and expenses........................ 195,000*
Miscellaneous fees and expenses................ 19,680*
----------
Total................................ $ 250,000*
==========
-------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information for all securities we sold
during the past three years without registration under the Securities Act:
2001
On August 1, 2001, Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), issued options to purchase 1,000,000 shares of its common
stock to Ronald Steenbergen, a consultant. In connection with our purchase of
98.2% of the outstanding capital stock of MRG-Maryland in a reverse acquisition
(the "Reverse Acquisition"), we assumed the obligations under the option. Such
options were exercisable for one year at an exercise price of $0.50 per share
and expired in August 2002 without having been exercised. Such options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
II-2
In November 2001, we issued an aggregate of 5,410,000 shares of our common
stock to the eleven stockholders of MRG- Maryland in connection with the Reverse
Acquisition. Such shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons represented to us that they were `accredited investors' as defined
in Regulation D under the Securities Act of 1933, as amended.
In December 2001, we issued an aggregate of 875,000 shares of our common
stock to an aggregate of 13 of our employees and directors as bonus compensation
for services rendered in 2001. As no additional consideration was paid to the
Company by the recipients of such shares, such issuances were not "offers" or
"sales" as defined in the Securities Act of 1933, as amended, nor subject to the
registration requirements of the Securities Act of 1933, as amended.
In December 2001, we issued $35,000 aggregate principal amount of
convertible notes to two purchasers. At the time of issuance, such notes were
convertible at any time and from time to time by the noteholders into a maximum
of 525,000 shares of our common stock (subject to certain anti-dilution
adjustments) if such convertible notes are not in default, or a maximum of
1,050,000 shares of our 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 us to register under the
Securities Act of 1933 the shares our common stock issuable upon conversion of
such convertible notes not later than June 3, 2006. Such notes were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
2002
In the first six months of 2002, we issued $240,000 aggregate principal
amount of convertible notes to nine purchasers. At the time of issuance, such
notes were convertible at any time and from time to time by the noteholders into
a maximum of 3,600,000 shares of our common stock (subject to certain
anti-dilution adjustments) if such convertible notes are not in default, or a
maximum of 7,200,000 shares of our common stock (subject to certain
anti-dilution adjustments) if an event of default has occurred in respect of
such convertible notes. Such notes were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In April 2002, we issued an aggregate of 1,993,573 restricted shares of
our common stock to two holders of our convertible promissory notes in
connection with the conversion of $150,000 aggregate principal amount of such
notes plus $2,380 of accrued interest thereon into shares of our common stock.
Such shares were issued by us in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
In May 2002, we issued 36,775 shares of our common stock to each of Edward
Meyer and Edward Whelan, our Chairman of the Board and Chief Executive Officer,
pursuant to the terms of a consulting agreement. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
II-3
In July 2002, we issued options to purchase an aggregate of 300,000 shares
of our common stock to consultants for services rendered. Such options were
one-year options that have an exercise price of $0.50 per share and expired on
July 1, 2003. Such options were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In July 2002, we issued 75,000 shares of our common stock to a consultant
for services rendered. Such shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such person was an `accredited investor' as defined in Regulation D under the
Securities Act of 1933, as amended.
In August 2002, we issued an aggregate of 619,540 shares of our common
stock to five consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the second half of 2002, we issued $165,000 aggregate principal amount
of convertible promissory notes with original maturity dates of June 30, 2003
that, as amended, mature on June 3, 2006 and bear interest at 8% per annum that
mature on June 30, 2003 and bear interest at the rate of 8% per annum. At the
time of issuance, such notes were convertible at any time and from time to time
by the noteholders into a maximum of 990,000 shares of our common stock (subject
to certain anti-dilution adjustments). The terms of the such notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of the notes not later than June 3, 2006. Such notes
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, on the basis that such issuance
did not involve a public offering, no underwriter fees or commissions were paid
in connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In September 2002, we issued 95,861 shares of our common stock to each of
Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer (or their designees), pursuant to the terms of a consulting agreement.
Such shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In October 2002, we issued an aggregate of 250,000 shares of our common
stock to a consultant for services rendered. In connection with such issuance,
we granted "piggy-back" registration rights to the consultant. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended. The
consulting agreement provides that we will issue additional shares of our common
stock upon the consultant's achievement of certain performance goals.
II-4
In November 2002, we issued an aggregate of 300,000 shares of our common
stock to a consultant for services rendered. In connection with such issuance,
we granted "piggy-back" registration rights to the consultant. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In November 2002, we granted one of our lenders a five-year option to
purchase 500,000 shares of our common stock at an exercise price of $0.50 per
share in consideration of the lender's willingness to extend the term of its
loan to the Company for an additional six months. Such options were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
2003
In January 2003, we issued 96,207 shares of our common stock to each of
Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer (or their designees), pursuant to the terms of a consulting agreement
and an executive compensation agreement. Such shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In January and March 2003, we issued $15,000 aggregate principal amount of
convertible promissory notes with original maturity dates of June 30, 2003 that,
as amended, mature on June 3, 2006 and bear interest at 8% per annum. At the
time of issuance, such notes were convertible at any time and from time to time
by the noteholders into a maximum of 225,000 shares of our common stock (subject
to certain anti-dilution adjustments) if the convertible notes are not in
default, or a maximum of 450,000 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 such notes require us to register under the Securities
Act of 1933 the shares of our common stock issuable upon conversion of such
notes not later than June 3, 2006. Such notes were issued by us in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid by us in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In January and March 2003, we issued an aggregate of 282,500 shares of our
common stock to three consultants for services rendered. Such shares were issued
by us in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid by
us in connection with such issuance and such persons were "accredited investors"
as defined in Regulation D under the Securities Act of 1933, as amended.
In May and June 2003, we issued $60,000 aggregate principal amount of
convertible promissory notes with original maturity dates of September 30, 2003
that, as amended, mature on June 3, 2006 and bear interest at 8% per annum. Such
notes are convertible at any time and from time to time by the noteholders into
a maximum of 360,000 shares of our common stock (subject to certain
anti-dilution adjustments). The terms of such notes require us to register under
the Securities Act of 1933 the shares of our common stock issuable upon
conversion of such notes not later than June 3, 2006, except for $10,000
aggregate principal amount of such notes which require us to register such
shares not later than September 30, 2003. In connection with the sale of such
notes, we issued 400,000 shares to the noteholders. Such notes and shares were
issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
II-5
In May 2003, we issued 109,259 shares of our common stock to one of our
consultants for services rendered during the first quarter of 2003. Such shares
were issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such person was an
`accredited investor' as defined in Regulation D under the Securities Act of
1933, as amended.
In May 2003, we issued 109,259 shares of our common stock to our Chief
Executive Officer as compensation for services rendered during the first quarter
of 2003. Such shares were issued by us in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such person was an `accredited investor' as defined in Regulation D under
the Securities Act of 1933, as amended.
In June 2003, we issued to a consultant 595,000 shares of our common stock
and three-year warrants to purchase an aggregate of 1,000,000 shares of our
common stock consisting of warrants to purchase 250,000 shares at each of $0.25,
$0.50, $0.75 and $1.00 per share. In connection with such issuance, we granted
"piggy-back" registration rights to the consultant. Such shares and options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In June 2003, we isssued 100,000 shares of our common stock to an employee
as bonus compensation for services rendered. Such shares were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such person had access to the same kind of information as that
which would be included in a registration statement.
In June 2003, we issued an aggregate of 500,000 shares of our common stock
to two consultants for services rendered. Such shares were issued by us in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid by us in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In June 2003, we issued options to purchase 1,305,000 shares of our common
stock to holders of our 8% and 9% convertible notes and demand notes in
consideration of their willingness to extend the maturity dates of such notes
until June 3, 2006. Such options were issued by us in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid by us in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In July 2003, we issued 127,272 shares of our common stock to one of our
consultants for services rendered during the second quarter of 2003. Such shares
were issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such person was an
`accredited investor' as defined in Regulation D under the Securities Act of
1933, as amended.
In July 2003, we issued 127,273 shares of our common stock to our Chief
Executive Officer as compensation for services rendered during the second
quarter of 2003. Such shares were issued by us in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such person was an `accredited investor' as defined in Regulation D under
the Securities Act of 1933, as amended.
II-6
In July 2003, we issued an aggregate of 900,000 shares of our common stock
to consultants for services rendered. Such shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were "accredited investors" as defined in Regulation D
under the Securities Act of 1933, as amended.
In August 2003, we issued an aggregate of 250,000 shares of our common
stock to two investors in a private sale for aggregate net proceeds to us of
$50,000. Such shares were issued by us in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such persons were `accredited investors' as defined in Regulation D under
the Securities Act of 1933, as amended.
In October 2003, we issued an aggregate of 200,000 shares of our common
stock to two consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In November 2003, we issued 650,000 shares of our common stock to two
consultants for services rendered. Such shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were `accredited investors' as defined in Regulation D
under the Securities Act of 1933, as amended.
In December 2003, we issued 384,000 shares of our common stock to our
former landlord in settlement of certain claims. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In December 2003, we issued an aggregate of 1,538,093 shares of our common
stock to four consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In December 2003, we issued 602,051 shares of our common stock to our
Chief Executive Officer for services rendered during the third and fourth
quarters of 2003 pursuant to the terms of his employment arrangement. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such person was an `accredited
investor' as defined in Regulation D under the Securities Act of 1933, as
amended.
II-7
In December 2003, we issued 200,000 shares of our common stock to
investors in a private placement for aggregate proceeds to us of $20,000. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such persons were `accredited
investors' as defined in Regulation D under the Securities Act of 1933, as
amended.
In December 2003, we issued options to purchase an aggregate of 250,000
shares of our common stock to consultants for services to be rendered. Such
options are five year options which have an exercise price of $0.25 per share.
Such options were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In October and December 2003, we issued an aggregate of 1,000,000 shares
of our common stock to a consultant in connection with the exercise of options
which resulted in proceeds to us of $75,000. Such shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such person was an `accredited investor' as defined in
Regulation D under the Securities Act of 1933, as amended.
2004
In the three months ended March 31, 2004, we issued to investors in a
private placement investment units consisting of an aggregate of 4,000,000
shares of our common stock and five-year warrants to purchase an aggregate of
2,000,000 shares of our common stock at $0.25 per share for gross proceeds to us
of $500,000, less sales commissions of $40,000. In connection with such
issuances, we granted registration rights to such investors. Such shares and
warrants were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended, on the basis that
such issuance did not involve a public offering and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In the three months ended March 31, 2004, we issued 450,000 shares of our
common stock to investors in a private placement for gross proceeds to us of
$47,500, less sales commissions of $4,250. In connection with such issuances, we
granted registration rights to such investors. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued 400,000 shares of our
common stock and three-year warrants to purchase an aggregate of 250,000 shares
of our common stock at $0.25 per share to one of our lenders in full
satisfaction of $50,000 of our indebtedness to such lender. Such shares and
warrants were issued in reliance upon the exemption from registration provided
by Section 3(a)(9) of the Securities Act of 1933, as amended.
II-8
In the three months ended March 31, 2004, we issued 247,560 shares of our
common stock and five-year options to purchase 247,560 shares of our common
stock at $0.25 per share to our Chief Executive Officer for services rendered
during the three months ended March 31, 2004 pursuant to the terms of his
employment arrangement. The services were valued at $72,000. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued an aggregate of
300,000 shares of our common stock to two consultants for services rendered or
to be rendered to the Company, which services were valued at $49,000 in the
aggregate. Such shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued five-year warrants to
purchase an aggregate of 320,000 shares of our common stock at $0.125 per share
to a consultant for services rendered to the Company. Such warrants were valued
at $52,870 and were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In the three months ended March 31, 2004, we issued 50,000 shares of our
common stock to a consultant for business consulting services to be rendered.
Such shares were valued at $11,000 and were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were `accredited investors' as defined in Regulation D
under the Securities Act of 1933, as amended.
In the three months ended June 30, 2004, we issued an aggregate of
1,050,000 shares of our common stock to four consultants for services rendered
or to be rendered to the Company, which services were valued at $168,500 in the
aggregate. One such consultant was also granted options to purchase 200,000
shares of our common stock at $0.25 per share. Such shares and options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended June 30, 2004, we issued 1,920,000 shares of our
common stock and five-year warrants to purchase an aggregate of 960,000 shares
of our common stock at $0.25 per share as consideration for our purchase of Ohio
Street Partners, LLC. In connection with such transaction, we granted
registration rights to the selling party. Such shares and warrants were issued
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering and such person was `accredited investor' as defined
in Regulation D under the Securities Act of 1933, as amended.
II-9
In the three months ended June 30, 2004, we issued 62,500 shares of our
common stock to an investor as liquidated damages for our failure to file a
registration statement covering such investor's shares on or before January 31,
2004, as required pursuant to such investor's subscription agreement. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such person was an `accredited
investor' as defined in Regulation D under the Securities Act of 1933, as
amended.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated By-laws of the Company.
5* Opinion of Pryor Cashman Sherman & Flynn LLP.
10.1* Amended and Restated Promissory Note dated as of June 30, 2002 from the
Company to Atlantic Investment Trust in the principal amount of $25,000
(incorporated by herein by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002 (file
no. 000-26463)).
10.2* Amended and Restated Promissory Note dated as of June 30, 2002 from the
Company to Ethan Hokit, our president and one of our directors, in the
principal amount of $25,000 (incorporated by herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2002 (file no. 000-26463)).
10.3* 2001 Equity Incentive Plan of the Company adopted in December 2001
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81258).
10.4* Amended and Restated Promissory Note dated as of May 5, 2003 from the
Company to Oncor Partners, Inc. in the principal amount of $100,000.
10.5* Lease Agreement, dated as of August 2001, between MRS Connection and
the Company related to 2180 Executive Circle, Colorado Springs,
Colorado 80906.
10.6* Promissory Note dated as of October 30, 1997 from the Company to
Shannon Investments, Inc.
10.7* Form of Subscription Agreement.
10.8* Domestic Service Agreement dated May 1, 2002 between the Company and
Tyson Foods, Inc. (Certain portions of this Exhibit have been omitted
pursuant to our request for confidential treatment).
II-10
10.9* Letter of Agreement effective November 1, 2001 between the Company and
S&K Sales, Inc. (Certain portions of this Exhibit have been omitted
pursuant to our request for confidential treatment).
10.10* Form of 9% Convertible Note (incorporated herein by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002 (File no. 000-264463)).
10.11* Description of Edward Whelan Executive Compensation Arrangement
(incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2003 (File
no. 000-264463).
10.12* $10,000 Demand Note dated November 17, 2002 from our company to Edward
T. Whelan (incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.13* $5,000 Demand Note dated December 11, 2002 from our company to Edward
T. Whelan (incorporated herein by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.14* $5,000 Demand Note dated December 2, 2002 from our company to Edward T.
Whelan (incorporated herein by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.15* $10,000 Demand Note dated March 11, 2003 from our company to Edward T.
Whelan (incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.16* Form of Warrant issued to certain investors during the three months
ended March 31, 2004 (incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2004 (File no. 000-264463).
10.16* Description of Registration Rights granted to certain investors during
the three months ended March 31, 2004 (incorporated herein by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for
the period ended March 31, 2004 (File no. 000-264463).
23.1 Consent of A.J. Robbins, P.C.
23.2 Consent of Rosenberg Rich Baker Berman & Company.
23.3* Consent of Pryor Cashman Sherman & Flynn LLP (included in their opinion
filed as Exhibit 5).
24* Powers of Attorney (included in the Signature Page of the
Registration Statement).
----------------
* Previously filed with the Commission.
II-11
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds, to believe that it met all
the requirements of filing on Form SB-2 and authorized this Amendment No. 6 to
Registration Statement to be signed on its behalf by the undersigned, in
Colorado Springs, Colorado on July 9, 2004.
MILITARY RESALE GROUP, INC.
By: /s/Ethan D. Hokit
-------------------------------------
Ethan D. Hokit
President and Chief Operating Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/Edward T. Whelan Chairman of the Board, Chief July 9, 2004
-------------------------- Executive Officer
Edward T. Whelan (Principal Executive Officer)
/s/Ethan D. Hokit President, Chief Operating July 9, 2004
-------------------------- Officer, Director (Principal
Ethan D. Hokit Accounting Officer and
Principal Financial Officer)
/s/Richard H. Tanenbaum Director July 9, 2004
--------------------------
Richard H. Tanenbaum
/s/Lee Brukmam Director July 9, 2004
--------------------------
Lee Brukmam
II-13