UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________.
Commission File Number 000-26463
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MILITARY RESALE GROUP, INC.
-------------------------------------------------------------
(Name of small business issuer as specified in its charter)
New York 11-2665282
------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2180 Executive Circle
Colorado Springs, Colorado 80906
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(Address of principal executive offices)
(719) 391-4564
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2002, there were 9,672,127 shares of the issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
MILITARY RESALE GROUP, INC.
FORM 10-QSB/A
AMENDMENT NO. 1
INDEX
PART I. Financial Information
Item 1. Financial Statements Page no.
Balance Sheets - June 30, 2002 and December 31, 2001........... 3
Statements of Operations - Three months and six months
ended June 30, 2002 and 2001 .................................. 4
Statement of Stockholders' Deficit - From October 6, 1997
(inception) through June 30, 2002. ............................ 5
Statements of Cash Flows - Six months ended
June 30, 2002 and 2001... ..................................... 6
Notes to Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis or
Plan of Operation ............................................. 8
PART II. Other Information
Item 1. Legal Proceedings.............................................. 15
Item 2. Change in Securities and use of Proceeds....................... 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures .............................................................. 17
2
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC.
Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
------------ ------------
Current Assets
Cash ........................................ $ 6,079 $ --
Accounts receivable - trade ................. 522,997 441,058
Prepaids .................................... 3,714 6,708
Inventory ................................... 309,435 252,430
Deposits .................................... 23,218 20,406
---------- ----------
Total Currents Assets ...................... 865,443 720,602
---------- ----------
Fixed Assets:
Office equipment ........................... 2,741 9,121
Warehouse equipment ........................ 205,044 203,132
Vehicles ................................... 64,366 64,366
Leasehold improvements ..................... 2,440 2,440
Software ................................... 15,609 15,609
---------- ----------
290,200 294,668
Less accumulated depreciation (123,510) (102,257)
---------- ----------
Net Fixed Assets ........................... 166,690 192,411
---------- ----------
TOTAL ASSETS ................................. $1,032,133 $ 913,013
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade .................... $1,108,770 $1,047,207
Accrued expenses ............................ 47,221 --
Accrued interest payable .................... 32,370 25,657
Bank overdraft .............................. -- 1,349
Capitalized leases/Notes payable -
current portion............................. 339,755 260,522
---------- ----------
Total Current Liabilities ................... 1,528,116 1,334,735
---------- ----------
Long-term debt
Notes payable ............................... 91,121 91,121
---------- ----------
Total Long-term debt ....................... 91,121 91,121
---------- ----------
Total Liabilities ........................... 1,619,237 1,425,856
---------- ----------
Stockholders' Equity
Common stock, par value $.001, 60,000,000
shares authorized: 9,672,127 and 7,505,004
issued and outstanding at June 30, 2002 and
December 31, 2001, respectively ............ 967 750
Additional paid-in capital .................. 733,262 162,150
Retained deficit ............................ (1,321,333) (675,743)
---------- ----------
Total Stockholders' Equity ................. (587,104) (512,843)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $1,032,133 $ 913,013
========== ==========
See accountant's review report.
3
MILITARY RESALE GROUP, INC.
Statement of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
REVENUES:
Gross Sales ............................ $1,657,440 $1,048,393 $3,015,024 $2,073,376
Commission sales - net ................. 64,472 116,489 124,146 181,913
---------- ---------- ---------- ----------
Total Revenues ......................... 1,721,912 1,164,882 3,139,170 2,255,289
---------- ---------- ---------- ----------
COST OF GOODS SOLD: .................... 1,457,701 997,140 2,696,622 1,968,558
---------- ---------- ---------- ----------
GROSS PROFIT ........................... 264,211 167,742 442,548 286,731
---------- ---------- ---------- ----------
EXPENSES:
Salary and payroll taxes .............. 125,797 106,713 215,962 207,217
Professional fees ..................... 107,446 3,438 200,446 11,208
Occupancy ............................. 55,263 23,455 110,525 49,768
General and administrative ............ 74,439 35,654 162,084 81,825
Amortization/depreciation ............. 10,626 8,760 21,253 17,520
Lease and auto/truck expense .......... 21,910 25,555 46,318 51,183
---------- ---------- ---------- ----------
Total Operating Expenses ............. 395,481 203,575 756,588 418,721
---------- ---------- ---------- ----------
OTHER REVENUES & EXPENSES:
Interest expense ...................... (325,422) (986) (331,592) (2,251)
Interest income ....................... 42 -- 42 --
---------- ---------- ---------- ----------
Total Other Revenues & Expenses ...... (325,380) (986) (331,550) (2,251)
---------- ---------- ---------- ----------
NET LOSS ............................... $ (456,650) $ (36,819) $ (645,590) $ (134,241)
========== ========== ========== ==========
Per share information
Weighted average number
of common shares outstanding ......... 8,949,752 5,360,000 8,327,378 5,360,000
========== ========== ========== ==========
Net Loss per common share .............. $ (0.05) $ (0.01) $ (0.08) $ (0.02)
========== ========== ========== ==========
See accountant's review report.
4
MILITARY RESALE GROUP, INC.
Statements of Stockholders' Equity
(Unaudited)
Common Stock Additional Total
------------------------ Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
---------- ---------- ---------- ----------- -------------
Balance - October 6, 1997 .............. -- $ -- $ -- $ -- $ --
Issuance of common stock for cash ...... 800,000 80 120 -- 200
Net loss ............................... -- -- -- (6,756) (6,756)
--------- ---------- ---------- ----------- ----------
Balance - December 31, 1997 ............ 800,000 80 120 (6,756) (6,556)
--------- ---------- ---------- ----------- ----------
Issuance of common stock for cash ...... 40,000 4 14,996 -- 15,000
Issuance of common stock for services .. 3,000,000 300 (300) -- --
Net loss ............................... -- -- -- (43,372) (43,372)
--------- ---------- ---------- ----------- ----------
Balance - December 31, 1998 ............ 3,840,000 384 14,816 (50,128) (34,928)
--------- ---------- ---------- ----------- ----------
Issuance of common stock for cash ...... 1,520,000 152 134,848 -- 135,000
Nel loss ............................... -- -- -- (145,948) (145,948)
--------- ---------- ---------- ----------- ----------
Balance - December 31, 1999 ............ 5,360,000 536 149,664 (196,076) (45,876)
--------- ---------- ---------- ----------- ----------
Net loss ............................... -- -- -- (13,673) (13,673)
--------- ---------- ---------- ----------- ----------
Balance - December 31, 2000 ............ 5,360,000 536 149,664 (209,749) (59,549)
--------- ---------- ---------- ----------- ----------
Stock issued for services .............. 875,000 87 8,663 -- 8,750
Stock issued for subsidiary ............ 1,270,004 127 3,823 -- 3,950
Net loss ............................... -- -- -- (465,994) (465,994)
--------- ---------- ---------- ----------- ----------
Balance - December 31, 2001 ............ 7,505,004 750 162,150 (675,743) (512,843)
--------- ---------- ---------- ----------- ----------
Stock issued for services .............. 300,000 30 92,970 -- 93,000
Stock issued for services .............. 73,550 7 11,993 -- 12,000
Stock issued in lieu of debt and interest 1,793,573 180 466,149 -- 466,329
Net loss ............................... -- -- -- (645,590) (645,590)
--------- ---------- ---------- ----------- ----------
Balance - June 30, 2002 ................ 9,672,127 $ 967 $ 733,262 $(1,321,333) $ (587,104)
========= ========== ========== =========== ==========
See accountant's review report.
5
MILITARY RESALE GROUP, INC.
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
------------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net Loss .................................... $ (645,590) $ (134,241)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............. 21,252 17,520
Stock issued for services .................. 105,000 --
Stock issued in lieu of debt ............... 150,000 --
Stock issued for interest .................. 316,329 --
Loss on disposal of equipment .............. 6,380 --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable . (81,939) 26,042
Decrease (Increase) in prepaids ............ 2,994 (452)
Increase (Decrease) in deposits ............ (2,812) --
(Increase) Decrease in inventory ........... (57,005) (51,974)
Increase in accounts payable ............... 61,563 163,116
Increase (Decrease) in accrued expenses .... 53,934 7,200
---------- ----------
Net Cash Used in Operating Activities ....... (69,894) 27,211
---------- ----------
Cash Flows from Investing Activities
Capital expenditures ....................... (1,912) --
---------- ----------
Cash Flows Used in Investing Activities ..... (1,912) --
---------- ----------
Cash Flows from Financing Activities:
Bank overdraft ............................. (1,349) (21,094)
Proceeds from sale of stock ................ -- --
Proceeds (payments) from notes payable - net 79,234 (6,117)
---------- ----------
Cash Flows Provided by Financing Activities . 77,885 (27,211)
---------- ----------
Net Increase (Decrease) in cash and cash
equivalents ................................ 6,079 --
Cash and cash equivalents -
beginning of period ....................... -- --
---------- ----------
Cash and cash equivalents - end of period .. $ 6,079 $ --
========== ==========
Supplemental information:
Cash paid for interest .................... $ 6,170 $ --
========== ==========
Cash paid for income taxes ................ $ -- $ --
========== ==========
Non-cash investing and financing activities:
Issuance of stock in exchange for
cancellation of indebtedness of $150,000
and interest expense o $316,329
on convertible notes ..................... $ 466,329 $ --
========== ==========
See accountant's review report.
6
NOTE 1-GENERAL
On October 15, 2001, our Company, formerly known as Bactrol Technologies, Inc.,
and Military Resale Group, Inc., a Maryland corporation that was formed on
October 6, 1997 ("MRG-Maryland"), executed a Stock Purchase Agreement pursuant
to which, on November 15, 2001, 98.2% of MRG's stock was effectively exchanged
for a controlling interest in a publicly held "shell" corporation (the "Reverse
Acquisition") that concurrently changed its name to Military Resale Group, Inc.
This transaction is commonly referred to as a "reverse acquisition." For
financial accounting purposes, this transaction has been treated as the issuance
of stock for our net monetary assets, accompanied by a recapitalization of
MRG-Maryland with no goodwill or other intangible assets recorded. For financial
reporting purposes, MRG-Maryland was considered the acquirer, and therefore, the
historical operating results of Bactrol Technologies, Inc. are not presented.
NOTE 2 - BASIS OF PRESENTATION
In the opinion of our management, the accompanying unaudited condensed financial
statements include all normal adjustments considered necessary to present fairly
our financial position as of June 30, 2002, and results of operations and cash
flows for the three months ended June 30, 2002 and 2001. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-QSB, and do not contain certain information included in our audited
financial statements and notes for the fiscal year ended December 31, 2001.
NOTE 3 - INVENTORY
Inventory of as June 30, 2002 consisted of the following:
Finished Goods $309,435
--------
$309,435
========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
CERTAIN STATEMENTS IN THIS REPORT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE WORDS "BELIEVE",
"EXPECT", "ANTICIPATE", "INTEND" AND "PLAN" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT
WAS MADE.
Our business and results of operations are affected by a wide variety of
factors that could materially and adversely affect us and our actual results,
including, but not limited to: (1) the availability of additional funds to
enable us to successfully pursue our business plan; (2) the uncertainties
related to the effectiveness of our technologies and the addition of new
products and suppliers; (3) our ability to maintain, attract and integrate
management personnel; (4) our ability to complete the development of our
proposed product line in a timely manner; (5) our ability to effectively market
and sell our products and services to current and new customers; (6) our ability
to negotiate and maintain suitable strategic partnerships and corporate
relationships with suppliers and manufacturers; (7) the intensity of
competition; and (8) general economic conditions. As a result of these and other
factors, we may experience material fluctuations in future operating results on
a quarterly or annual basis, which could materially and adversely affect our
business, financial condition, operating results and stock price.
Any forward-looking statements herein speak only as of the date hereof. We
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following discussion should be read in conjunction
with the financial statements and related notes appearing elsewhere in this
Report.
OVERVIEW
Prior to November 15, 2001, we did not generate any signification revenue,
and accumulated no significant assets, as we explored various business
opportunities. On November 15, 2001, the date of the Reverse Acquisition, we
acquired 98.2% of the issued and outstanding capital stock of MRG-Maryland, in
exchange for a controlling interest in our publicly-held "shell" corporation.
For financial reporting purposes, MRG-Maryland was considered the acquirer in
such transaction. As a result, our historical financial statements for any
period prior to November 15, 2001 are those of MRG-Maryland.
8
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2001
REVENUES. Total revenue for the three months ended June 30, 2002 of
$1,721,912 reflected an increase of $557,030, or approximately 47.8%, compared
to total revenue of $1,164,882 for the three months ended June 30, 2001. 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
instances, we act as an agent for the manufacturer or supplier of the products
we sell, and earn a commission paid by the manufacturer or supplier, generally
in an amount equal to a percentage of the manufacturer's or supplier's gross
sales amount ("commission revenues"). In such cases, revenue is recognized as
the commission we receive on the gross sales amount.
Resale revenue for the three months ended June 30, 2002 of $1,657,440
reflected an increase of $609,049, or approximately 58.1%, compared to resale
revenue of $1,048,393 for the three months ended June 30, 2001. For the three
months ended June 30, 2002, approximately 75.6% of our gross profit was derived
from sales involving resale revenue compared to 30.6% for the three months ended
June 30, 2001. These increases were attributable primarily to the addition of
the new products we began supplying to commissaries during the fourth quarter of
fiscal 2001, including Slimfast, L'eggs, Bush Beans and Rayovac Batteries, and
during the first quarter of fiscal 2002, including a line of feminine hygiene
products and a line of infant feeding products supplied by Playtex Products,
Inc., which we sell on a resale basis, as well as the implementation of our
long-term strategy to increase our ratio of sales of products we sell on a
resale basis, rather than a commission basis, due to the payment discounts we
often receive from the manufacturers and suppliers of the goods we purchase for
resale.
Commission revenue for the three months ended June 30, 2002 of $64,472
reflected a decrease of $52,017, or approximately 44.7%, compared to commission
revenue of $116,489 for the three months ended June 30, 2001. For the three
months ended June 30, 2002, approximately 24.4% of our gross profit was derived
from sale involving commission revenue compared to approximately 69.4% for the
three months ended June 30, 2001. These decreases were attributable primarily to
the implementation of our long-term strategy to increase our ratio of sales of
products sold on a resale basis, rather than a commission basis. We cannot be
certain as to whether or not these trends will continue; however, in the long
term we are seeking to increase the ratio of our sales of products sold on a
resale basis, rather than a commission basis, because we believe we can increase
our profitability on such sales by taking advantage of payment discounts
frequently offered by the manufacturers and suppliers of such products. To do
so, we intend to continue to seek to add new products that we can offer to
commissaries on a resale
9
basis from our existing manufactures and suppliers and from others with whom we
do not currently have a working relationship.
In March 2002, we entered into an agreement with Playtex Products, Inc. to
distribute, on a resale basis, approximately 70 Stock Keeping Units (SKUs)
manufactured or supplied by Playtex, including a line of feminine hygiene
products and a line of infant feeding products. We have been advised by Playtex,
and verified with DeCA, that sales by Playtex in 2001 to the commissaries we
currently service amounted to approximately $350,000. However, there can be no
assurance that our sales of Playtex products will reach such amount, and the
amount of our actual sales of Playtex products may differ materially from the
amounts sold by Playtex in 2001 as a result of one or more of the factors
described above, among others.
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 increased capital to fund new
business development and increased sales and marketing efforts. We are currently
in discussions with a number of other manufacturers and suppliers in an effort
to reach an agreement under which we can distribute their products to the
military market. While there can be no assurance that we will do so, we believe
we will be successful in negotiating agreements with a number of such suppliers
and manufacturers.
To date, all of our sales revenue has been generated from customers located
in the United States.
COST OF GOODS SOLD. Cost of goods sold consists of our cost to acquire
products from manufacturers and suppliers for resale to commissaries. In
instances where we sell products on a commission basis, there is no cost of
goods sold because we act as an agent for the manufacturer or supplier and earn
only a commission on such sales. During the three months ended June 30, 2002,
cost of goods sold increased by $460,561, or approximately 46.2%, to $1,457,701
from $997,140 for the three months ended June 30, 2001. This increase was
attributable primarily to the addition of new products that we sell on a resale
basis. 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.
GROSS PROFIT. Gross profit for the three months ended June 30, 2002
increased by $96,469, or approximately 57.5%, compared to the three months ended
June 30, 2001, from $167,742 for the three months ended June 30, 2001 to
$264,211 for the three months ended June 30, 2002. This increase was
attributable primarily to the addition of new products that we purchase for
resale to the commissaries we service.
OPERATING EXPENSES. Total operating expenses aggregated $395,481 for the
three months ended June 30, 2002 as compared to $203,575 for the three months
ended June 30, 2001, representing an increase of $191,906, or approximately
95.3%. The increase in total operating expenses for the three month period ended
June 30, 2002 was attributable primarily to increased
10
professional fees of $104,008 resulting primarily from the costs of the
preparation of a registration statement under the Securities Act of 1933
relating to a proposed offering of equity securities; increased occupancy
expense of $31,808 resulting from our move to larger office and warehouse
facilities in September 2001; and increased general and administrative expenses
of $38,785 resulting primarily from increased premiums on health and workers'
compensation insurance.
INTEREST EXPENSE. Interest expense of $325,422 for the three months ended
June 30, 2002 reflected an increase of $324,436 as compared to interest expense
of $986 for the three months ended June 30, 2001. The increase in interest
expense was attributable primarily to interest expense of $316,329 resulting
from the debt-to-equity conversion of $150,000 aggregate principal amount of
convertible promissory notes in the second quarter of 2002, which amount
represented the difference between the fair market value of the conversion
shares at the time of conversion and the aggregate principal amount of such
notes.
NET LOSS. For the reasons discussed above, we incurred a net loss of
$456,650 for the three months ended June 30, 2002 as compared to a net loss of
$36,819 for the three months ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUE. Total revenue for the six months ended June 30, 2002 of $3,139,170
reflected an increase of $883,881, or approximately 39.2%, compared to total
revenue of $2,255,289 for the year ended June 30, 2001. Resale revenue for the
six months ended June 30, 2001 of $3,015,024 reflected an increase of $941,648,
or approximately 45.4%, compared to resale revenue of $2,073,376 for the six
months ended June 30, 2001. For the six months ended June 30, 2002,
approximately 71.9% of our gross profit was derived from sales involving resale
revenue compared to approximately 36.6% for the six months ended June 30, 2001.
These increases were attributable primarily to the addition of the new products
we began offering during the 2001 period, as discussed above, as well as the
implementation of our long term strategy to increase the ratio of sales on a
resale basis rather than a commission basis.
Commission revenues for the six months ended June 30, 2002 of $124,146
reflected a decrease of $57,767, or approximately 31.8%, compared to commission
revenues of $181,913 for the six months ended June 30, 2001. For the six months
ended June 30, 2002, approximately 28.1% of our gross profit was derived from
sales involving commission revenues as compared to approximately 63.4% for the
six months ended June 30, 2001.
COST OF GOODS SOLD. During the six months ended June 30, 2002, cost of
goods sold increased by approximately $728,064, or approximately 37.0%, to
$2,696,622 from $1,968,558 for the six months ended June 30, 2001. This increase
was attributable primarily to the addition of new products that we sell on a
resale basis.
GROSS PROFIT. Gross profit for the six months ended June 30, 2002 increased
by approximately $155,817, or approximately 54.3%, compared to the six months
ended June 30,
11
2001, from $286,731 for the six months ended June 30, 2001 to $442,548 for the
six months ended June 30, 2002. This increase was attributable primarily to
addition of new products that we purchase for resale to commissaries we service.
OPERATING EXPENSES. Total operating expenses aggregated approximately
$756,588 for the six months ended June 30, 2002 as compared to approximately
$418,721 for the six months ended June 30, 2001, representing an increase of
$337,867, or approximately 80.7%. The increase in total operating expenses was
attributable primarily to increased professional fees of approximately $189,238
resulting primarily from the costs of the preparation of the registration
statement under the Securities Act of 1933 relating to a proposed offering of
equity securities; increased occupancy expense of $60,757 resulting from our
move to larger office and warehouse facilities in September 2001; and increased
general and administrative expenses of $80,259 resulting primarily from
increased premiums on health workers' compensation insurance.
INTEREST EXPENSE. Interest expense of $331,592 for the six months ended
June 30, 2002 reflected an increase of $329,271 as compared to interest expense
of $2,251 for the six months ended June 30, 2001. The increase in interest
expense was attributable primarily to interest expense of $316,329 resulting
from the debt-to-equity conversion of $150,000 aggregate principal amount of
convertible promissory notes in the second quarter of 2002, which amount
represented the difference between the fair market value of the conversion
shares at the time of conversion and the aggregate principal amount of such
notes.
NET LOSS. Primarily as a result of the increased expenses and cost of goods
sold discussed above, we incurred a net loss of $645,590 for the six months
ended June 30, 2002 as compared to a net loss of $134,241 for the six months
ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had a cash balance of approximately $6,000. Our
principal source of liquidity has been borrowings. Since November 2001, we have
funded our operations primarily from borrowings of approximately $410,000. In
the fourth quarter of 2001 and the first quarter of 2002, we issued $260,000
aggregate principal amount of convertible promissory notes (the "9% Convertible
Notes") that mature on December 31, 2002 and bear interest at the rate of 8% per
annum prior to June 30, 2002 and 9% per annum thereafter. In April 2002,
$150,000 aggregate principal amount of 9% Convertible Notes (and $2,380 accrued
interest thereon) was converted by the holders into an aggregate of 1,993,573
shares of our common stock. The remaining 9% Convertible Notes are convertible
at any time and from time to time by the noteholders into a maximum of 1,153,900
shares of our common stock (subject to certain anti-dilution adjustments) if the
9% Convertible Notes are not in default, or a maximum of 2,307,800 shares of our
common stock (subject to certain anti-dilution adjustments) if an event of
default has occurred in respect of such notes. The terms of the 9% Convertible
Notes require us to register under the Securities Act of 1933 the shares our
common stock issuable upon conversion of the 9% Convertible Notes not later than
December 31, 2002.
12
In August 2002, we issued $100,000 aggregate principal amount of
convertible promissory notes (the "8% Convertible Notes") that mature on June
30, 2003 and bear interest at the rate of 8% per annum. The 8% Convertible Notes
are convertible at any time and from time to time by the noteholders into a
maximum of 400,000 shares of our common stock (subject to certain anti-dilution
adjustments). The terms of the 8% Convertible Notes require us to register under
the Securities Act of 1933 the shares of our common stock issuable upon
conversion of the 8% Convertible Notes not later than December 31, 2002.
Our current cash levels, together with the cash flows we generate from
operating activities, are not sufficient to enable us to execute our business
strategy. As a result, we intend to seek additional capital through the sale of
up to 5,000,000 shares of our common stock. In December 2001, we filed with the
Securities and Exchange Commission a registration statement relating to such
shares. Such registration statement has not yet been declared effective, and
there can be no assurance that the Securities and Exchange Commission will
declare such registration statement effective in the near future, if at all. In
the interim, we intend to fund our operations based on our cash position and the
near term cash flow generated from operations, as well as additional borrowings.
In the event we sell only a nominal number of shares (i.e. 500,000 shares) in
our proposed offering, we believe that the net proceeds of such sale, together
with anticipated revenues from sales of our products, will satisfy our capital
requirements for at least the next 12 months. However, we would require
additional capital to realize our strategic plan to expand distribution
capabilities and product offerings. These conditions raise substantial doubt
about our ability to continue as a going concern. Our actual financial results
may differ materially from the stated plan of operations.
Assuming that we receive a nominal amount of proceeds from our proposed
offering of common stock, we expect capital expenditures to be approximately
$200,000 during the next twelve months, primarily for the acquisition of an
inventory control system. It is expected that our principal uses of cash will be
to provide working capital, to finance capital expenditures, to repay
indebtedness and for other general corporate purposes, including sales and
marketing and new business development. The amount of spending for any
particular purpose is dependent upon the total cash available to us and the
success of our offering of common stock.
At June 30, 2002, we had liquid assets of $529,076, consisting of cash and
accounts receivable derived from operations, and other current assets of
$336,367, consisting primarily of inventory of products for sale and/or
distribution. Long term assets of $166,690 consisted primarily of warehouse
equipment used in operations.
Current liabilities of $1,528,116 at June 30, 2002 consisted of
approximately $1,108,770 of accounts payable and $339,755 for the current
portion of capitalized leases and notes payable, of which approximately $210,000
was payable to our officers or our other affiliates.
Our working capital deficit was $662,673 as of June 30, 2002 for the
reasons described above.
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During the six months ended June 30, 2002, we used cash of $69,894 in
operating activities primarily as a result of the net loss incurred during those
period.
During the six months ended June 30, 2002, we used net cash of $1,912 in
investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of short-term borrowings,
provided net cash of $77,885 during the six months ended June 30, 2002.
Subsequent to June 30, 2002, we borrowed an additional $100,000 from affiliates
pursuant to the issuance of 8% Convertible Notes.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 31, 2001 an action captioned WAREHOUSE, LTD V. MILITARY
RESALE GROUP, INC., Civil Action No. 01CV3230 was commenced against us and Ethan
Hokit, our President and one of our directors, in the District Court, El Paso
County, Colorado. In such action, the plaintiff, our former landlord, is seeking
damages for an alleged breach of the terms of several lease agreements for
office and warehouse space we occupied in Colorado Springs, Colorado. In its
complaint, the plaintiff seeks judgment in the aggregate amount of $122,632.29
for rent, restoration of the premises and other charges plus an undisclosed
amount for late charges, litigation costs, costs of re-leasing the premises,
reasonable attorneys' fees and interest. We filed an answer to the plaintiff's
complaint in which we asserted affirmative defenses and made counterclaims
against the plaintiff. Although this lawsuit is in its preliminary stages and
the full amount of the plaintiff's claim has not been asserted, we believe the
potential dollar amount of such claims will not have a material adverse effect
on our overall operations. We intend to defend such lawsuit and pursue our
counterclaims vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) 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 in
accordance with the terms thereof. 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 between the Company and
such persons. 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 July 2002, we issued options to purchase an aggregate of 300,000
shares of our common stock to consultants for services rendered. Such options
are one-year options that have an exercise price of $0.50 per share and expire
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
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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 2002, we issued 619,540 shares of our common stock to
consultants for services performed for the Company. 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 August 2002, we issued an aggregate of $100,000 principal amount of
convertible promissory notes to two affiliates of the Company. Such notes are
convertible into a maximum of 436,000 shares of our common stock at the option
of the noteholders at any time. 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.
(d) None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(a) Exhibits.
10.1 8% Convertible Promissory Note dated August 7, 2002 from the Company to
Atlantic Investment Trust in the principal amount of $50,000.
10.2 8% Convertible Promissory Note dated August 7, 2002 from the Company to
Eastern Investment Trust in the principal amount of $50,000.
(b) None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in Colorado Springs,
Colorado on September 11, 2002.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
---------------------------
Name: Ethan D. Hokit
Title: President (Principal Accounting
Officer and Principal Financial Officer)
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