UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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Commission File Number 000-26463
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MILITARY RESALE GROUP, INC.
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(Name of small business issuer as specified in its charter)
New York 11-2665282
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2180 Executive Circle
Colorado Springs, Colorado 80906
----------------------------------------
(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 March 31, 2002, there were 7,805,004 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
INDEX
PART I. Financial Information
Item 1. Financial Statements Page no.
Balance Sheets -- March 31, 2002 and December 31, 2001.......................... 1
Statements of Operations - Three months ended March 31, 2002 and 2001............ 2
Statement of Stockholders' Deficit - From October 6, 1997 (inception)
through March 31, 2002......................................................... 3
Statements of Cash Flows - Three months ended March 31, 2002 and 2001............ 4
Notes to Financial Statements.................................................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation........................ 8
PART II. Other Information
Item 1. Legal Proceedings................................................................ 12
Item 2. Change in Securities and use of Proceeds......................................... 12
Item 3. Defaults Upon Senior Securities.................................................. 12
Item 4. Submission of Matters to a Vote of Security Holdings............................. 12
Item 5. Other Information................................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................................. 12
Signatures ............................................................................... 12
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC.
Balance Sheets
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
----------- -----------
Current Assets
Cash ...................................................... $ 54,581 $ --
Accounts receivable -- trade .............................. 384,233 441,058
Prepaids .................................................. 3,229 6,708
Inventory ................................................. 315,834 252,430
Deposits .................................................. 23,218 20,406
----------- -----------
Total Currents Assets .................................... 781,095 720,602
----------- -----------
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 ............................. (112,883) (102,257)
----------- -----------
Net Fixed Assets ......................................... 177,317 192,411
----------- -----------
TOTAL ASSETS ............................................... $ 958,412 $ 913,013
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade .................................. $ 1,039,543 $ 1,047,207
Accrued expenses .......................................... 31,000 --
Accrued interest payable .................................. 25,657 25,657
Bank overdraft ............................................ -- 1,349
Notes payable -- current portion .......................... 387,535 260,522
----------- -----------
Total Current Liabilities ................................ 1,483,735 1,334,735
----------- -----------
Long-term debt
Notes payable .............................................. 83,460 91,121
----------- -----------
Total Long-term debt ...................................... 83,460 91,121
----------- -----------
Total Liabilities .......................................... 1,567,195 1,425,856
----------- -----------
Stockholders' Equity
Common stock, par value $.001, 60,000,000 shares
authorized, 7,505,004 and 7,505,004 issued and outstanding
at March 31, 2002 and December 31, 2001, respectively .... 750 750
Additional paid-in capital ................................ 162,150 162,150
Retained deficit .......................................... (771,683) (675,743)
----------- -----------
Total Stockholders' Equity ............................... (608,783) (512,843)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 958,412 $ 913,013
=========== ===========
See accountant's review report.
1
MILITARY RESALE GROUP, INC.
Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2002 2001
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REVENUES: ........................................ $ 1,417,258 $ 1,090,407
COST OF GOODS SOLD: .............................. 1,238,921 971,418
----------- -----------
GROSS PROFIT ..................................... 178,337 118,989
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EXPENSES:
Selling and marketing ........................... -- --
General and administrative ...................... 268,107 215,146
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Total Operating Expenses ....................... 268,107 215,146
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OTHER REVENUES & EXPENSES:
Interest expense ................................ (6,170) (1,265)
Interest income ................................. -- 240
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Total Other Revenues & Expenses ................ (6,170) (1,025)
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NET LOSS ......................................... $ (95,940) $ (97,182)
=========== ===========
Per share information
Weighted average number
of common shares outstanding ................ 7,505,004 5,360,000
=========== ===========
Net Loss per common share ........................ $ (0.02) $ (0.01)
=========== ===========
See accountant's review report.
2
MILITARY RESALE GROUP, INC.
Statement 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
Net 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)
--------- --------- --------- --------- ---------
Net loss ............................ -- -- -- (95,940) (95,940)
--------- --------- --------- --------- ---------
Balance -- March 31, 2002 ........... 7,505,004 $ 750 $ 162,150 $(771,683) $(608,783)
========= ========= ========= ========= =========
See accountant's review report.
3
MILITARY RESALE GROUP, INC.
Statement of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
----------------------
2002 2001
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Cash Flows from Operating Activities:
Net Loss ......................................... $ (95,940) $ (97,422)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................... 10,626 9,009
Stock issued for services ....................... -- --
Loss on disposal of equipment .................. 6,380 --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable ..... 56,825 98,039
Decrease (Increase) in prepaids ................ 3,479 --
Increase (Decrease) in deposits ................ (2,812) --
(Increase) Decrease in inventory ............... (63,404) 6,615
(Decrease) in accounts payable ................. (7,664) (38,110)
Increase (Decrease) in accrued expenses ........ 31,000 1,578
--------- ---------
Net Cash Used in Operating Activities .............. (61,510) (20,291)
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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) 29,301
Proceeds from sale of stock ....................... -- --
Proceeds (payments) from notes payable - net ...... 119,352 (9,010)
--------- ---------
Cash Flows Provided by Financing Activities ........ 118,003 20,291
--------- ---------
Net Increase (Decrease) in cash and cash equivalents 54,581 --
Cash and cash equivalents -- beginning of period ... -- --
--------- ---------
Cash and cash equivalents -- end of period ......... $ 54,581 $ --
========= =========
Supplemental information:
Cash paid for interest ......................... $ 6,170 $ 1,265
========= =========
Cash paid for income taxes ..................... $ -- $ --
========= =========
See accountant's review report.
4
NOTE 1 -- GENERAL
NATURE OF BUSINESS
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 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 March 31, 2002, and results of operations and cash
flows for the three months ended March 31, 2002 and 2001. Interim results are
not necessarily indicative of results for a full year.
The condensed 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 March 31, 2002 consisted of the following:
Finished Goods $315,834
--------
$315,834
========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
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.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001
SALES. Sales for the three months ended March 31, 2002 of $1,417,258
reflected an increase of $326,851, or approximately 30%, compared to sales of
$1,090,407 for the three months ended March 31, 2001. This increase was
attributable primarily to the addition of the new products we began offering
during the 4th quarter of fiscal 2001, including Slimfast, L'eggs, Bush Beans
and Rayovac Batteries. Approximately 60% of our sales for the one year period
ended March 31, 2002 were derived from the sale of products we purchased from
manufacturers and suppliers for resale to commissaries. In such instances,
revenue was recognized as the gross sales amount of such products. Approximately
40% of our sales for the one year period ended March 31, 2002 were derived from
the sale of products on a consignment basis, in which case, we acted as an agent
for the manufacturer or supplier of the products we sold, and earned a
commission based on the amount of the sale. In these instances, revenue was
recognized as the net sales amount of such products after deducting the
manufacturer's or supplier's cost. We intend to continue to seek to add new
products that we can offer to commissaries or exchanges
6
from our existing manufactures and suppliers and from others with which we do
not currently a working relationship.
In January 2002, we entered into an agreement with Pfizer, Inc. to
distribute approximately 114 SKUs supplied by Pfizer, including Listerine,
Benadryl, Rolaids and Zantac. In March 2002, we entered into an agreement with
Playtex Products, Inc. to distribute approximately 70 SKUs manufactured or
supplied by Playtex, including a line of feminine hygiene products and a line of
infant feeding products. Based upon the amount of Pfizer sales made in 2001 to
the commissaries we currently service, we estimate that the inclusion of
Pfizer's products should add approximately $1 million to our annual sales. If
that is the case, on a pro forma basis, assuming we had carried Pfizer's
products throughout the year, Pfizer products would have accounted for
approximately 17% of our 2001 sales. With the addition of the products supplied
by Playtex and Pfizer, we anticipate that our 2002 sales will reach
approximately $7 million. However, there can be no assurance that our sales will
reach such projected amount, and the amount of our actual sales may differ
materially from such projections as a result of one or more of the factors
described above, among others. Our basis for such projections includes
historical sales data provided by the manufacturers of such additional products
and by the Defense Commissary Agency. In addition, we have assumed that our
sales for the 2nd , 3rd and 4th quarters of 2002 will continue to be 30% greater
than our sales for the same periods in 2001.
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 a distribution agreement for 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, and that by the end of fiscal year 2002, aggregate monthly sales
levels will reach at least $1 million on an annualized basis. However, there can
be no assurance that our sales will reach such projected amount, and the amount
of our actual sales may differ materially from such projections as a result of
one or more of the factors described above, among others.
To date, all of our sales revenue has been generated from customers
located in the United States.
COST OF GOODS SOLD. In instances where we purchase products from
manufacturers and suppliers for resale to commissaries, cost of goods sold
consists of our cost to acquire such products. In instances where we sell
products on a consignment 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, 2001, cost of goods sold
increased by approximately $267,000, or approximately 27.5%, to $1.23 million
from $970,000 for the three months ended March 31, 2001. This increase was
attributable primarily to an increase in the
7
ratio of sales of products we purchase from manufacturers and suppliers for
resale to commissaries versus sales of products on a consignment basis.
GROSS PROFIT. Gross profit for the three months ended March 31, 2002
increased by approximately $59,000, or approximately 50%, compared to the three
months ended March 31, 2001, from $119,000 for the three months ended March 31,
2001 to $178,000 for the year ended March 31, 2002. This increase was
attributable primarily to an increase in the sale of products supplied by
vendors from whom we purchase goods for resale.
OPERATING EXPENSES. Total operating expenses aggregated approximately
$268,000 for the three months ended March 31, 2002 as compared to approximately
$215,000 for the three months ended March 31, 2001, representing an increase of
approximately $53,000, or approximately 25%. The increase in total operating
expenses for the three month period ended March 31, 2002 was attributable
primarily to increased professional fees of approximately $16,500, or 7%,
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 approximately $55,000, or 21%,
resulting from our move to larger office and warehouse facilities in September
2001; increased salary and wages of approximately $90,000, or 34%, due primarily
to the addition of office and warehouse personnel and, to a lesser extent,
increased wages; and increased trucking expense of approximately $24,000, or
10%, due primarily to the addition of one truck and the renewal of two truck
leases at higher rates.
NET LOSS. Primarily as a result of the increased revenues discussed
above, we incurred a net loss of $95,940 for the three months ended March 31,
2002 as compared to a net loss of $97,182 for the three months ended March 31,
2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had a cash balance approximately $54,600. Our
principal source of liquidity has been borrowings. In 2001, we funded our
operations from borrowings of approximately $195,000. In the first quarter of
2002, we issued convertible promissory notes having an aggregate principal
amount of $225,000. Such notes become due on June 30, 2002 and bear interest at
the rate of 8% per annum. The notes are convertible into a maximum of 2,439,667
shares of our common stock at the option of the note holders. In April 2002, the
holders of $150,000 aggregate principal amount of such notes converted their
notes into an aggregate of 1,758,234 shares of our common stock. The failure to
have such registration statement declared effective by April 15, 2002 is an
event of default under the notes. The promissory notes are subject to certain
anti-dilution adjustments.
Our current level of cash flows from operating activities is 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
8
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. 1,000,000 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 March 31, 2002, we had liquid assets of $438,000, consisting of cash
and accounts receivable derived from operations, and other current assets of
$397,000, consisting primarily of inventory of products for sale and/or
distribution. Long term assets of $177,000 consisted primarily of warehouse
equipment used in operations.
Current liabilities of $1.2 million at March 31, 2002 consisted of
approximately $1 million of accounts payable and $387,500 for the current
portion of notes payable, of which approximately $120,000 was payable to our
officers or our other affiliates.
Our working capital deficit was $630,000 as of March 31, 2002 for the
reasons described above.
We used cash of $62,000 in operating activities during the three months
ended March 31, 2002, primarily as a result of the net loss incurred during the
period.
We used net cash of $2,000 in investing activities during the three
months ended March 31, 2002, all of which was used for capital expenditures.
Financing activities consisting primarily of short-term borrowings
provided net cash of $118,000 during the three months ended March 31, 2002.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) In the first quarter of 2002, we issued to ten investors $225,000
aggregate principal amount of 8% convertible promissory notes (each a"8%
Convertible Note"). Such notes are convertible into a maximum of 2,439,667
shares of our common stock at the option of the note holders at any time. In
April 2002, we issued 1,758,234 restricted shares of our common stock to holders
of 8% Convertible Notes in the aggregate amount of $152,380 in connection with
the conversion of the outstanding balances under such notes 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 4(2) of the
Securities Act of 1933, as amended.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) We are currently in default under the terms of 8% Convertible Notes
in the aggregate amount of $159,620 issued by us in the fourth quarter of 2001
and the first quarter of 2002. Under the terms of such 8% Convertible Notes, an
event of default includes our failure to have a registration statement for the
shares our common stock issuable upon conversion of the 8% Convertible Notes
declared effective by the Securities and Exchange Commission not later than
April 15, 2002. In April 2002, holders of 8% Convertible Notes in the aggregate
amount of $152,380 elected to convert the outstanding balances thereunder into
1,758,234 shares of our common stock pursuant to the terms of such 8%
Convertible Notes.
(b) None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDINGS
None.
ITEM 5. OTHER INFORMATION
None.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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 May 15, 2002.
MILITARY RESALE GROUP, INC.
By: /S/ ETHAN D. HOKIT
-------------------------------------
Name: Ethan D. Hokit
Title: President and Chief Operating Officer
(Principal Accounting Officer
and Principal Financial Officer)
11