10QSB 1 doc1.txt 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, 2003 [ ] 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 --------- MILITARY RESALE GROUP, INC. ----------------------------------------------------------------------- (Name of small business issuer as specified in its charter)
New York 11-2665282 ------------------------------------------------- ------------------------------------- (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
2180 Executive Circle Colorado Springs, Colorado 80906 ---------------------------------------------------------- (Address of principal executive offices) (719) 391-4564 ---------------------------------------------------- (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, 2003, there were 11,975,804 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
Page No. PART I. Financial Information Item 1. Financial Statements Balance Sheets - March 31, 2003 and December 31, 2002...................... 1 Statements of Operations - Three months ended March 31, 2003 and 2002...... 2 Statements of Cash Flows - Three months ended March 31, 2003 and 2002..... 3 Notes to Financial Statements.............................................. 5 Item 2. Management's Discussion and Analysis or Plan of Operation.................. 9 Item 3. Controls and Procedures.................................................... 15 PART II. Other Information Item 2. Changes in Securities and Use of Proceeds.................................. 15 Item 6. Exhibits and Reports on Form 8-K........................................... 16 Signatures ........................................................................... 17 Certifications ........................................................................... 18
i ITEM 1. FINANCIAL INFORMATION MILITARY RESALE GROUP, INC. CONDENSED BALANCE SHEETS
March 31, December 31, 2003 2002 ----------- ---------- Assets (Unaudited) (Audited) ----------- ----------- Current Assets Cash $ 2,146 $ 2,072 Accounts receivable - trade 497,805 428,037 Inventory 218,196 227,416 Prepaid consulting (Note 3) 167,639 116,417 Deposits 23,358 23,358 Prepaid interest (Note 4) 33,333 133,333 Other current assets 550 618 ----------- ----------- Total Current Assets 943,027 931,251 Fixed Assets Office equipment 12,371 10,607 Warehouse equipment 159,444 159,444 Software 16,324 16,324 ----------- ----------- 188,139 186,375 Less accumulated depreciation (91,221) (76,229) ----------- ----------- Net Fixed Assets 96,918 110,146 ----------- ----------- Total Assets 1,039,945 1,041,397 =========== =========== Liabilities and Stockholders' Equity (Impairment) Current Liabilities Accounts payable and accrued expenses 1,582,737 1,470,776 Bank overdraft -- 11,068 Other current liabilities 86,814 81,726 Current maturities of capital lease obligations 37,271 37,271 Current portion of deferred rental obligation 11,598 21,584 Accrued interest payable 67,735 47,816 Related party notes payable (Note 5) 240,000 230,000 Convertible notes payable (Note 6) 270,000 255,000 Promissory note payable (Note 8) 100,000 -- ----------- ----------- Total Current Liabilities 2,396,155 2,155,241 Deferred rental obligation 69,590 57,557 Obligations under capital leases, excluding current maturities 44,973 51,735 ----------- ----------- Total Liabilities 2,510,718 2,264,533 Commitments and Contingencies (Note 9) -- -- Stockholders' Equity (Impairment) Preferred stock, 10,000,000 shares authorized, 0 issued in 2003 and 2002 -- -- Common stock, par value $.0001, 50,000,000 shares authorized, 11,975,804 and 1,197 1,138 11,383,390 shares issued and outstanding in 2003 and 2002, respectively Additional paid-in capital 2,303,689 2,050,690 Accumulated deficit (3,775,659) (3,274,964) ----------- ----------- Total Stockholders' Equity (Impairment) (1,470,773) (1,223,136) ----------- ----------- Total Liabilities and Stockholders' Equity (Impairment) $ 1,039,945 $ 1,041,397 =========== =========== See notes to the financial statements
1 3 MILITARY RESALE GROUP, INC. CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
2003 2002 ------------- ------------ Revenues Resale revenue $ 1,612,597 $ 1,357,584 Commission revenue 146,366 59,674 ------------ ------------ Total Revenues 1,758,963 1,417,258 ------------ ------------ Cost of goods sold 1,512,326 1,238,921 ------------ ------------ Gross Profit 246,637 178,337 ------------ ------------ Operating Expenses Stock based compensation (Note 5 and 7) 206,369 115,065 Salary and payroll taxes 117,138 90,165 Professional fees 64,034 -- Occupancy 59,356 55,262 General and administrative 150,059 112,053 Amortization/depreciation 14,991 10,627 ------------ ------------ Total Operating Expenses 611,947 383,172 ------------ ------------ Net Loss From Operations (365,310) (204,835) ------------ ------------ Other (Expenses) Interest expense (135,385) (211,170) Loss on disposal of fixed assets -- -- ------------ ------------ Total Other (Expense) (135,385) (211,170) ------------ ------------ Net Loss $ (500,695) $ (416,005) ------------ ------------ Loss Per Share (Note 2) Net Loss Per Common Share - basic and diluted $ (0.04) $ (0.05) ============ ============ Weighted average number of common shares outstanding - basic and diluted - basic 11,684,156 7,705,004 ============ ============
See notes to the financial statements. 2 MILITARY RESALE GROUP, INC. CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
2003 2002 --------- ----------- Cash Flows From Operating Activities Net Loss $(500,695) $(416,005) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 14,911 10,626 Amortization of option based interest expense 100,000 -- Stock based compensation 153,924 115,065 Beneficial conversion feature 15,000 -- Loss on disposal of assets -- 6,380 Changes in Assets and Liabilities Decrease (increase) in accounts receivable (69,768) 56,825 Decrease (increase) in inventory 9,220 (63,404) Decrease in other assets 68 3,479 (Increase) in deposits -- (2,812) Increase in accounts payable and accrued expenses 144,873 228,336 Increase in deferred rent obligation 2,047 -- Increase in other liabilities 25,007 -- --------- --------- Net Cash Used In Operating Activities (105,413) (61,510) --------- --------- Cash Flows From Investing Activities Purchase of fixed assets (1,683) (1,912) --------- --------- Cash Flows Used In Investing Activities (1,683) (1,912) --------- --------- Cash Flows From Financing Activities Bank overdraft (11,068) (1,349) Payments on capital lease obligations (6,762) -- Proceeds from issuance of notes 125,000 119,352 --------- --------- Cash Flows Provided By Financing Activities 107,170 118,003 --------- --------- Net Increase in Cash and Cash Equivalents 74 54,581 Cash and Cash Equivalents at Beginning of Period 2,072 -- --------- --------- Cash and Cash Equivalents at End of Period $ 2,146 $ 54,581 ========= ========= SUPPLEMENTAL INFORMATION Interest Paid $ 466 $ 6,170 ========= ========= Income Taxes Paid $ -- $ -- ========= =========
See notes to the financial statements. 3 MILITARY RESALE GROUP, INC. CONDENSED STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities: 2003 2002 ---------- ---------- Issuance of stock and options in exchange for services to be rendered over six months $ 205,146 $ -- ----------- ----------- Issuance of common stock in payment of accrued compensation $ 32,912 $ -- ---------- -----------
See notes to the financial statements. 4 MILITARY RESALE GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF ORGANIZATION Military Resale Group, Inc. (the Company), organized under the laws of the State of New York, 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. and Military Resale Group, Inc. ("MRG"), which was formed on October 6, 1997 executed a Stock Purchase Agreement pursuant to which 98.2% of MRG's stock was effectively exchanged for a controlling interest in a publicly held "shell" corporation that concurrently changed its name to Military Resale Group, Inc. This transaction is commonly referred to as a "reverse acquisition". For financial accounting purposes, this transaction has been treated as the issuance of stock for the net monetary assets of the Company, accompanied by a recapitalization of MRG with no goodwill or other intangible assets recorded. For financial reporting purposes, MRG is considered the acquirer, and therefore, the historical operating results of Bactrol Technologies, Inc. are not presented. 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 is in a working capital deficit position that raises substantial doubt about its ability to continue as a going concern. 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 its ability to attain additional capital to develop its proposed products and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company's annual report on Form 10-KSB for the year ended December 31, 2002. NOTE 3 - PREPAID CONSULTING Prepaid consulting expenses are recorded in connection with common stock and options issued to consultants for future services and are amortized over the six-month agreement term. During the three months ended March 31, 2003, the Company incurred additional prepayments of $122,222 and stock-based compensation expense of $71,000. 5 MILITARY RESALE GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 4 - PREPAID INTEREST Prepaid interest expense is recorded in connection with the issuances of options for the extension of one of the Company's notes payable. The interest expense is being amortized over the extension period of six months, with $100,000 charged to interest expense in the current period. NOTE 5 - 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 a one-year executive compensation agreement with Edward Whelan. In consideration of the services to be rendered by Mr. Whelan and Mr. Meyer, the Company will issue in respect of each month the number of shares determined by dividing $12,000 by the product of 80% and the average closing low price for the Company's common stock during each quarter. As of March 31, 2003, no shares of the Company's common stock had been issued for services rendered during the term of the agreement. During the three months ended March 31, 2003, the Company issued an aggregate of 96,207 shares of the Company's common stock to Mr. Meyer as consideration under the January 2002 consulting agreement for services rendered in the 4th quarter of 2002, and an aggregate of 96,207 shares of the Company's common stock to Mr. Whelan as consideration under his 2002 executive compensation agreement for services rendered in the 4th quarter of 2002. The shares issued were valued at $0.19 per share, the fair market value on the date of issuance. 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 the earlier of demand or June 30, 2003. Subsequent to the quarter end, the Company issued 109,259 shares of the Company's common stock to each of Mr. Whelan and Mr. Meyer for the first quarter of 2003. The aggregate value of the shares issued which were expensed as accrued stock based compensation at March 31, 2003 totaled $52,445. NOTE 6 - CONVERTIBLE NOTES At March 31, 2003, the Company had an aggregate of $270,000 payable in convertible notes. $20,000 of the convertible notes bear interest at 8% per annum and are due on June 30, 2002. $70,000 of the convertible notes bear interest at 8% per annum prior to June 30, 2002 and 9% per annum thereafter and are due on June 30, 2003. $180,000 of the convertible notes bear interest at 8% per annum, including $75,000 due on June 30, 2003 and $105,000 due on July 30, 2003. The terms of the Company's convertible notes provide generally that, if the convertible notes are not in default, the holders may convert, at any time and from time to time, all or a portion of the outstanding balance under each convertible note into a number of shares (subject to certain anti-dilution adjustments) of the Company's common stock that will allow the note holder to receive common stock having a market value equal to 150% of the converted balance of the note. If an event of default has occurred in respect of such convertible notes, the holder may convert the outstanding balance into a number of shares (subject to certain anti-dilution adjustments) of the Company's common stock equal to twice the number of shares the holder would have otherwise received if the convertible notes were not in default. Among other events of default, the terms of the convertible notes require the Company to register under the Securities Act of 1933 the shares its common stock issuable upon conversion of the convertible notes not later than June 30, 2003. 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 6 MILITARY RESALE GROUP, INC. NOTES TO FINANCIAL STATEMENTS when the convertible notes were issued. During the periods ended March 31, 2003 and 2002, interest expense of $15,000 and $205,000, respectively (representing the aggregate proceeds to the Company from convertible notes issued during such periods), was recognized as the intrinsic value of the beneficial conversion feature of the convertible notes that were issued during such periods. NOTE 7 - SECURITIES ISSUED FOR SERVICES During the quarter ended March 31, 2003, the Company issued an aggregate 400,000 of the Company's common shares and 650,000 common stock options to various consultants for services provided or to be provided. Consulting expense of $153,924 was recognized in 2003 and a prepaid consulting expense of $122,222 was recorded in 2003. These amounts were based on the fair market value of the shares on the date of issuance. NOTE 8 - PROMISSORY NOTE PAYABLE On March 27, 2003, the Company issued a promissory note for $100,000 to Romano, Ltd. The note bears interest at 15% per annum and is due on March 26, 2004, subject to the following contingent payment terms upon the Company's 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
If the Company fails to secure any of the above-referenced additional funding, nor another significant event, such as a merger or acquisition of another company, the Company will be required to pay $8,000 per month commencing on July 1, 2003 until the full obligation is paid. NOTE 9 - COMMITMENTS AND CONTINGENCIES In March 2003, the Company entered into a consulting agreements for the provision of marketing and other advisory services. The agreement provides that, as compensation for such services, the Company will issue 250,000 shares of the Company's common stock and an option to purchase 650,000 shares of the Company's common stock at the lower of $.50 per share or the price per share granted to any other advisor or employee of the Company during the term of the agreement. The agreement is for six months. In February 2003 the Company entered into an agreement with an entity to act as the Company's financial advisor, investment banker and placement agent in connection with the placement of credit facilities and securities. The agreement calls for an equity retainer of 200,000 shares of restricted common stock and $5,000 per month through August 2003, as well as the following: 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. In February 2003, the Company entered into a lease modification agreement for its 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. 7 MILITARY RESALE GROUP, INC. NOTES TO FINANCIAL STATEMENTS The Company is a defendant in pending litigation regarding its former premises. The plaintiff is the former landlord, who is seeking damages for an alleged breach of the terms of several operating lease agreements for office and warehouse space located in Colorado Springs, Colorado. The Company intends to vigorously defend against such claim and also intends to pursue its counterclaims for damages caused by the landlord's constructive eviction from the premises. The pending litigation is in its preliminary stages, with a trial date anticipated in November 2003. The estimated contingent liability for this litigation is not expected to exceed $75,000, including the costs of defense. NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS Standard Implemented In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operation of a long-lived asset. SFAS No. 143 requires the recording of an asset and a liability equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The asset is required to be accreted each year based on a present value interest rate. The Company implemented this standard on January 1, 2003. The adoption of this standard did not have a material effect on the Company's financial statements. NOTE 11 - SEGMENT INFORMATION The Company operates primarily in a single operating segment, distributing and marketing resale grocery products to military commissaries. 8 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. 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. 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 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. Prior to November 15, 2001, we did not generate any signification revenue, and accumulated no significant assets, as we explored various business opportunities. On November 15, 2001, we acquired 98.2% of the issued and outstanding capital stock of Military Resale Group, Inc., a Maryland corporation ("MRG-Maryland"), in exchange for a controlling interest in our publicly-held "shell" corporation. 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. 9 RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 REVENUES. Total revenue for the three months ended March 31, 2003 of $1,758,963 reflected an increase of $341,705, or approximately 24.1%, compared to total revenue of $1,417,258 for the three months ended March 31, 2002. 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 March 31, 2003 of $1,612,597 reflected an increase of $255,013, or approximately 18.8%, compared to resale revenue of $1,357,584 for the three months ended March 31, 2002. This increase was attributable primarily to the addition of the new products we began supplying to commissaries during fiscal 2002, including a line of feminine hygiene products and a line of infant feeding products supplied by Playtex Products, Inc. that we sell on a resale basis. For the three months ended March 31, 2003, approximately 40.7% of our gross profit was derived from sales involving resale revenue compared to approximately 66.5% for the three months ended March 31, 2002. During the year ended December 31, 2002, we began implementing our long-term strategy to increase the ratio of our 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. However, due to our short-term cash shortage during the three months ended March 31, 2003, we were required to lower this ratio by increasing the amount of our of sales on a commission basis, which do not require a significant cash expenditure. In the three months ended March 31, 2003, Playtex Products, Inc., a supplier for whom we sell products on a resale basis, suspended the sale of its products to us pending our payment of an outstanding invoice in the approximate amount of $12,000 for products previously shipped to us. To date, we have not made such payment and all sales by Playtex remain suspended. We intend to make the outstanding payment in the second quarter of 2003, and believe that, upon such payment, Playtex will resume the sale of its products to us pursuant to the terms of our agreement. Commission revenues for the three months ended March 31, 2003 of $146,366 reflected an increase of $86,692, or approximately 145%, compared to commission revenues of $59,674 for the three months ended March 31, 2002. For the three months ended March 31, 2003, approximately 59.3% of our gross profit was derived from sales involving commission revenues 10 as compared to approximately 33.5% for the three months ended March 31, 2002. These increases were attributable primarily to the addition of the new products we began supplying to commissaries during the first quarter of fiscal 2003, including products distributed by Mid Valley Products, that we sell on a commission basis due to our short-term cash shortage 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. In October 2002, we added to our supplier network the Hillshire Farm and Kahn's product groups of Sara Lee Foods-USA and certain consumer products distributed by Chattem, Inc. Hillshire Farms and Kahn's are product lines of packaged meats and hams. Chattem is a manufacturer of branded consumer products, principally over-the-counter healthcare products, including Aspercreme, Gold Bond, Sportscreme, Pamprin, Dexatrim, Rejuvex and Flexall. We have been advised by Sara Lee Foods-USA, and verified with DeCA, that sales of Hillshire Farm and Kahn's products in 2001 to the commissaries we currently service amounted to approximately $950,000. We have been advised by Chattem, and verified with DeCA, that sales of Chattem's line of products in 2001 to the commissaries we currently service amounted to approximately $200,000. However, there can be no assurance that our annual sales of these products will reach such amounts, and the amount of our actual sales of Hillshire Farm and Kahn's Products and Chattem products may differ materially from the amounts sold by Sara Lee Foods-USA and Chattem, respectively, in 2001. 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, 2003, cost of goods sold increased by $273,405, or approximately 22.1%, to $1,512,326 from $1,238,921 for the three months ended March 31, 2002. This increase was attributable primarily 11 to the addition of new products that we sold 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 March 31, 2003 increased by approximately $91,304, or approximately 51.2%, compared to the three months ended March 31, 2002, from $178,337 for the three months ended March 31, 2002 to $246,637 for the three months ended March 31, 2003. This increase was attributable primarily to the increase in our sale of products on a commission basis that have no associated cost of good sold. OPERATING EXPENSES. Total operating expenses aggregated $611,947 for the three months ended March 31, 2003 as compared to $383,172 for the three months ended March 31, 2002, representing an increase of $228,475, or approximately 59.6%. The increase in total operating expenses was attributable primarily to increased professional fees of approximately $64,034 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 stock-based compensation expense of $91,034 resulting primarily from the issuance of shares of our common stock and options to purchase shares of our common stock to our consultants; and increased general and administrative expenses of $38,006 resulting primarily from increased truck rental expense and increased premiums on health workers' compensation insurance. INTEREST EXPENSE. Interest expense of $135,385 for the three months ended March 31, 2003 reflected an decrease of $75,785 as compared to interest expense of $211,170 for the three months ended March 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 $205,000 aggregate principal amount of convertible promissory notes issued in the three months ended March 31, 2002 as compared to $15,000 aggregate principal amount of convertible promissory notes issued in the three months ended March 31, 2003, offset by amortization of option-based interest expense of approximately $100,000 during the three months ended March 31, 2003. NET LOSS. Primarily as a result of the increased operating and interest expenses discussed above, we incurred a net loss of $500,695 for the three months ended March 31, 2003 as compared to a net loss of $416,005 for the three months ended March 31, 2002. Liquidity and Capital Resources At March 31, 2003, we had a cash balance of approximately $2,146. Our principal source of liquidity has been borrowings. Since November 2001, we have funded our operations primarily from borrowings of approximately $600,000. In the fourth quarter of 2001 and the first half of 2002, we issued $240,000 aggregate principal amount of convertible promissory notes (the "9% convertible notes") that mature, in nearly all instances, on June 30, 2003 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 12 interest thereon) was converted by the holders into an aggregate of 1,793,573 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 1,350,000 shares of our common stock (subject to certain anti-dilution adjustments) if the 9% convertible notes are not in default, or a maximum of 2,700,000 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 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 June 30, 2003. In July 2002, the holders of $20,000 aggregate principal amount of convertible notes maturing on June 30, 2002 denied our request to extend the maturity until July 30, 2003. The outstanding principal and interest on such convertible notes have not yet been paid and, thus, such convertible notes are currently in default. The terms of our 9% convertible notes and 8% convertible notes (discussed below) provide generally that, if the convertible notes are not in default, the holders may convert, at any time and from time to time, all or a portion of the outstanding balance under each convertible note into a number of shares (subject to certain anti-dilution adjustments) of 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 $0.50; 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 $0.75 per share. If such closing price is less than $0.75 per share, the conversion price shall be proportionately reduced, but in no event to a conversion price that is less than $0.10 per share, to permit the noteholder to receive the number of shares discussed above. 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 our common stock equal to twice the number of shares the holder would have otherwise received if the convertible notes were not in default. In the second half of 2002, we issued $165,000 aggregate principal amount of convertible promissory notes (the "8% convertible notes") that mature on either June 30, 2003 or July 30, 2003 and bear interest at the rate of 8% per annum. The 8% convertible notes are convertible at any time and from time to time by the noteholders into a maximum of 2,475,000 shares of our common stock (subject to certain antidilution adjustments) if the 8% convertible notes are not in default, or a maximum of 4,950,000 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 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 June 30, 2003. In the first quarter of 2003, we borrowed an aggregate of $10,000 from Edward T. Whelan, our Chief Executive Officer and Chairman of our Board of Directors. The loan is payable on demand and bears interest at the rate of 8% annum. The loan contains contingent payment terms which vary depending on the success of our efforts to raise additional funding. In January and March 2003, we issued $15,000 aggregate principal amount of convertible promissory notes that mature on June 30, 2003 and bear interest at 8% per annum. Such notes are 13 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 30, 2003. In March 2003, we borrowed $100,000 from a single lender. The loan matures on March 26, 2004 and bears interest at 15% per annum. 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 are able to generate sales proceeds of at least $500,000 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 net proceeds of at least $500,000 from our proposed offering, we expect capital expenditures to be approximately $200,000 during the next 12 months, primarily for the acquisition of an inventory control system. 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 offering of common stock. At March 31, 2003, we had liquid assets of $499,951, consisting of cash and accounts receivable derived from operations, and other current assets of $443,076, consisting primarily of inventory of products for sale and/or distribution and prepaid expenses. Long term assets of $188,139 consisted primarily of warehouse equipment used in operations. Current liabilities of $2,396,155 at March 31, 2003 consisted primarily of $1,582,737 of accounts payable and accrued expenses and $610,000 for notes payable, of which $240,000 was payable to our officers or our other affiliates. Our working capital deficit was $1,453,128 as of March 31, 2003 for the reasons described above. 14 During the three months ended March 31, 2003, we used cash of $105,413 in operating activities primarily as a result of the net loss we incurred during this period. During the three months ended March 31, 2003, we used net cash of $1,683 in investing activities, all of which was used for capital expenditures. Financing activities, consisting primarily of proceeds from the issuance of notes payable, provided net cash of $107,170 during the three months ended March 31, 2003. ITEM 3. CONTROLS AND PROCEDURES (a) Based upon an evaluation performed within 90 days of this Report, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have each concluded that our disclosure controls and procedures are effective to ensure that material information relating to our Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls are effective to provide reasonable assurances that our financial condition, results of operations and cash flows are fairly presented in all material respects. (b) The CEO and CFO each note that, since the date of his evaluation until the date of this Report, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) In January and March 2003, we issued $15,000 aggregate principal amount of convertible promissory notes that mature on June 30, 2003 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 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 30, 2003. Such notes were issued by us in reliance upon the exemption from registration provided by Section 15 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 (a) Exhibits. The following exhibits are filed herewith or are incorporated by reference to Exhibits previously filed. Exhibit No. Description ---------- ----------- 10.1 Consulting Agreement dated January 2, 2003 between our company and Edward Meyer, Jr. 10.2 Business Consulting Agreement dated as of March 10, 2003 between our company and Martin Nielson (incorporated herein by reference to Exhibit 4.1 to our Registration Statement on Form S-8 (Registration No. 333-81258)). 99.1 Certification of our Principal Executive Officer, Edward T. Whelan, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of our Principal Financial Officer, Ethan D. Hokit, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. On May 2, 2003, the Company filed a Current Report on Form 8-K providing certifications of its Chief Executive Officer and Chief Financial Officer with respect to its Annual Report on Form 10-KSB for the year ended December 31, 2002 as required by 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley act of 2002). 16 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 29, 2003. MILITARY RESALE GROUP, INC. By: /S/ ETHAN D. HOKIT ------------------------------ Name: Ethan D. Hokit Title: President (Principal Accounting Officer and Principal Financial Officer) 17 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER ------------------------------------------- Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Edward T. Whelan, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Military Resale Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 18 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /S/ EDWARD T. WHELAN ------------------------------ Name: Edward T. Whelan Title: Chief Executive Officer May 29, 2003 19 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Ethan D. Hokit, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Military Resale Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 20 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /S/ ETHAN D. HOKIT ------------------------------ Name: Ethan D. Hokit Title: Chief Financial Officer May 29, 2003 21 Exhibit No. Description ---------- ----------- 10.1 Consulting Agreement dated January 2, 2003 between our company and Edward Meyer, Jr. 10.2 Business Consulting Agreement dated as of March 10, 2003 between our company and Martin Nielson (incorporated herein by reference to Exhibit 4.1 to our Registration Statement on Form S-8 (Registration No. 333-81258)). 99.1 Certification of our Principal Executive Officer, Edward T. Whelan, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of our Principal Financial Officer, Ethan D. Hokit, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.