MILITARY RESALE GROUP INC - SB-2/A - 20040712 - CERTAIN_TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, we borrowed $60,000 from Shannon Investments, Inc., which
is controlled by Edward Whelan, our Chairman of the Board and Chief Executive
Officer. In connection with such loan, we executed a promissory note in favor of
Shannon Investments, Inc. that bears interest at the rate of 10% per annum and
was originally payable on demand. In June 2003, Shannon Investments agreed to
extend the term of the loan until June 3, 2006 and, in consideration thereof, we
issued to Shannon Investments options to purchase 1,000,000 shares of our common
stock. Such options are five-year options to purchase 250,000 shares at each of
$0.25, $0.50, $0.75 and $1.00 per share. As of June 18, 2004, the full principal
amount of the note was still outstanding.
From October 1997 through June 30, 2002, Xcel Associates, Inc., a company
of which Mr. Whelan previously served as the President and a principal
shareholder, maintained office space in our corporate offices without charge.
On August 14, 2001, we borrowed $100,000 from Oncor Partners, Inc., a
company of which Edward Whelan, our Chairman of the Board and Chief Executive
Officer, is President and a shareholder. The loan bears no interest and had an
original term of one year, which, in August 2002, was extended for an additional
six months to February 14, 2003. In consideration of Oncor's willingness to
extend the term of the loan, in November 2002, we granted Oncor a five-year
option to purchase 500,000 shares of our common stock at an exercise price of
$0.50. In June 2003, Oncor agreed to further extend the term of the loan until
June 3, 2006 and, in consideration thereof, we issued to Oncor a five-year
option to purchase 100,000 shares of our common stock at an exercise price of
$0.25 per share. We also amended such note to allow such lender to convert the
outstanding principal amount into shares of our common stock at a conversion
price of $0.25.
In December 2001, we borrowed $25,000 from each of Ethan D. Hokit, our
President and one of our directors, and Atlantic Investment Trust ("Atlantic"),
a trust of which Richard Tanenbaum, one of our directors, is the trustee. In
connection with each such loan, we executed a demand promissory note that bears
38
interest at the rate of 8% per annum. In June 2003, such lenders agreed to
extend the terms of their loans until June 2006 and, in consideration thereof,
we issued to such lenders an option to purchase 25,000 shares of our common
stock at an exercise price of $0.25 per share. We also amended such notes to
allow the lender to convert the principal amount into shares of our common stock
at a conversion price of $0.25.
In January 2002, we entered into a one-year business consulting agreement
with Edward Whelan and Edward Meyer, Jr. for the provision of marketing and
managerial consulting services. Effective July 1, 2002, the consulting agreement
of Mr. Whelan was terminated and Mr. Whelan became one of our employees, for
which he was compensated on the same basis as he was to be paid under his
consulting agreement. In consideration of the services to be rendered by Messrs.
Whelan and Meyer, we issued in respect of each month the number of shares
determined by dividing $12,000 by the product of 80% and the average closing bid
price for our common stock during such month. An aggregate of 301,113 shares of
our common stock was issued to each of Messrs. Whelan or Meyer (or their
respective designees) for services rendered during the term of the agreement.
In August 2002, we issued to Atlantic Investment Trust and to Eastern
Investment Trust, both trusts of which Richard Tanenbaum, one of our directors,
is the trustee, $100,000 aggregate principal amount of convertible promissory
notes that originally matured on June 30, 2003 and bear interest at the rate of
8% per annum. In June 2003, such lenders agreed to extend the term of their
loans until June 3, 2006 and, in consideration thereof, we issued such lenders
an option to purchase 25,000 shares of our common stock at an exercise price of
$0.25 per share. Such notes are convertible at any time and from time to time by
the noteholders into a maximum of 400,000 shares of our common stock (subject to
certain anti-dilution adjustments). The terms of such notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of the notes not later than June 3, 2006.
In the fourth quarter of 2002 and the first quarter of 2003, we borrowed
an aggregate of $30,000 from Edward T. Whelan, our Chief Executive Officer and
the Chairman of our Board of Directors. In connection with such borrowings, we
executed demand promissory notes that bear interest at the rate of 10% per annum
with respect to $20,000 aggregate principal amount and 8% per annum with respect
to $10,000 aggregate principal amount. In June 2003, such lender agreed to
extend the terms of his loans until June 2006 and, in consideration thereof, we
issued to such lender an option to purchase 25,000 shares of our common stock at
an exercise of $0.25 per share.
In January 2003, our board of directors approved a one year executive
compensation agreement with Edward T. Whelan, pursuant to which we will issue
Mr. Whelan shares of our common stock in consideration for his services as Chief
Executive Officer. Under the terms of the agreement, we will issue in respect of
each month during 2003 a number of shares determined by dividing $12,000 by the
product of 80% and the average low price for our common stock during such month.
An aggregate of 920,794 shares of our common stock was issued to Mr. Whelan (or
his designee) pursuant to the executive compensation agreement.
In May 2003, we issued to Atlantic Investment Trust and to Eastern
Investment Trust, the trustee of each of which is Richard Tanenbaum, one of our
directors, $20,000 aggregate principal amount of convertible promissory notes
that originally matured on September 30, 2003 and bear interest at the rate of
8% per annum. In June 2003, such lenders agreed to extend the terms of their
loans until June 2006 and, in consideration thereof, we issued to such lenders
an option to purchase an aggregate of 7,500 shares of our common stock at an
exercise price of $0.25 per share. Such notes are convertible at any time and
from time to time by the noteholders into a maximum of 120,000 shares of our
common stock (subject to certain anti-dilution adjustments). The terms of such
notes require us to register under the Securities Act of 1933 the shares of our
common stock issuable upon conversion of the notes not later than June 3, 2006.
39
In January 2004, our board of directors approved a one year executive
compensation arrangement with Edward T. Whelan, pursuant to which we will issue
Mr. Whelan shares of our common stock in consideration for his services as Chief
Executive Officer. Under the terms of the arrangement, we will issue in respect
of each month during 2004 a number of shares determined by dividing $12,000 by
the product of 80% and the average low price for our common stock during such
month and options to purchase an equivalent number of shares of our common stock
at an exercise price of $0.25 per share. As of June 18, 2004, an aggregate of
247,560 shares of our common stock and options to purchase an aggregate of
247,560 shares of our common stock were issued to Mr. Whelan under his executive
compensation arrangement.
In the second quarter of 2004, we purchased Ohio Street Partners, LLC from
Data Recovery Continuum, Inc., a company of which Lee Brukman, one of our
directors, is a principal shareholder. As consideration for the purchase, we
issued to the selling entity 1,920,000 shares of our common stock and the
five-year warrants to purchase an aggregate of 960,000 shares of our common
stock at $0.25 per share. In connection with such transaction, we granted
registration rights to the selling entity.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.0001 per share, and 10,000,000 shares of preferred stock, par
value $.0001 per share. As of June 18, 2004, 29,928,071 shares of common stock
were issued and outstanding and no shares of preferred stock were issued and
outstanding. In addition, at such date, 9,782,560 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants and
2,805,980 shares of common stock were reserved for issuance upon the conversion
of outstanding convertible notes. Our Board of Directors has approved an
increase in our number of authorized shares of common stock from 50,000,000
shares to 100,000,000 shares. We are currently seeking shareholder approval for
such action.
COMMON STOCK
Voting, Dividend and Other Rights. Each outstanding share of common stock
will entitle the holder to one vote on all matters presented to the shareholders
for a vote. Holders of shares of common stock will have no preemptive,
subscription or conversion rights. All shares of common stock to be outstanding
following this offering will be duly authorized, fully paid and non-assessable.
Our Board of Directors will determine if and when distributions may be paid out
of legally available funds to the holders. We have not declared any cash
dividends during the past fiscal year with respect to the common stock. Our
declaration of any cash dividends in the future will depend on our Board of
Directors' determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. In addition, we were a party to a credit facility
that prohibits the payment of dividends without the lender's prior consent.
Rights Upon Liquidation. Upon liquidation, subject to the right of any
holders of the preferred stock to receive preferential distributions, each
outstanding share of common stock may participate pro rata in the assets
remaining after payment of, or adequate provision for, all our known debts and
liabilities.
Majority Voting. The holders of a majority of the outstanding shares of
common stock constitute a quorum at any meeting of the shareholders. A plurality
of the votes cast at a meeting of shareholders elects our directors. The common
stock does not have cumulative voting rights. Therefore, the holders of a
majority of the outstanding shares of common stock can elect all of our
directors. In general, a majority of the votes cast at a meeting of shareholders
must authorize shareholders action other than the election of directors.
However, the Business Corporation Law of the State of New York provides that
certain extraordinary matters, such as a merger or consolidation in which we are
a constituent corporation, a sale or other disposition of all or substantially
all of our assets, and our dissolution, require the vote of the holders of
two-thirds of all outstanding voting shares. Most amendments to our certificate
of incorporation require the vote of the holders of a majority of all
outstanding voting shares.
40
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Executive
Registrar & Transfer, 3615 South Huron, Street, Suite 104, Englewood, Colorado
80110.
PLAN OF DISTRIBUTION
We are offering up to 10,000,000 shares of our common stock on a "best
efforts, no minimum" basis at a price of $0.25 per share. Under a "best efforts,
no minimum" offering, there is no requirement that we sell a specified number of
shares before the proceeds of the offering become available to us. We may sell
only a nominal amount of shares and receive minimal proceeds from this offering.
We will not escrow any of the proceeds received from our sale of shares before
the offering and we are not required to sell a specified number of shares before
the offering is terminated. Therefore, upon acceptance of a subscription, the
proceeds from that subscription will be immediately available for our use and
the investor has no assurance that we will sell all or any part of the remaining
shares offered hereby. The offering will commence on the date shown on the front
cover of this Prospectus and will terminate on November 30, 2004, unless, in our
discretion, we terminate the offering before that date. We also reserve the
right to extend the offering beyond November 30, 2004 for an additional 120 days
if we have not sold all of the shares prior to that date.
Our officers, directors, employees and affiliates may purchase shares in
the offering on the same terms and conditions as other purchasers. Subscription
for the shares may only be made by completing a written subscription agreement
and by submitting the completed agreement, together with a check payable to
"Military Resale Group, Inc.," to us at our principal executive offices to the
attention of our Chief Executive Officer. If the subscription is accepted, the
check will be deposited by us and, upon notification from our bank that the
funds are available, we will cause a stock certificate for the shares purchased
to be issued and delivered to the investor. If we reject any subscription, the
investor's check will be returned without interest or deduction.
To comply with the securities laws of certain jurisdictions, the shares of
common stock offered by this Prospectus may have to be offered or sold only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the shares of common stock may not be offered or sold unless they
have been registered or qualified for sale or an exemption is available and
complied with. We currently plan to register all of the 10,000,000 shares
offered hereby for offer and sale in each of the States of Colorado and New York
and a limited number of shares in the States of Connecticut, Florida and New
Jersey.
We have not engaged the services of an underwriter or selling agent or
broker in connection with this offering. We will offer the shares directly and
through our officers and directors, Messrs. Whelan, Hokit and Tanenbaum, acting
on our behalf. We will not pay any commission or other consideration or
compensation to any officer or director in connection with the sale of the
shares. The persons offering the shares on our behalf will rely on the safe
harbor from broker-dealer registration set forth in Rule 3a4-1 under the
Securities Exchange Act of 1934 on the basis that such persons:
o are not subject to statutory disqualification;
o have not and will not be compensated in connection with their
participation in this offering;
o are not associated with a broker or dealer;
o after this offering, will continue to perform substantial services
on our behalf, other than in connection with the offering of our
securities;
41
o were not a broker or dealer or associated with a broker or dealer
during past 12 months; and
o do not participate in the sale of securities for any issuer more
than once every 12 months.
Our common stock is considered a penny stock. Penny stocks are subject to
special regulations, which may make them more difficult to trade on the open
market.
Our common stock trades on the OTC Bulletin Board under the ticker symbol
"MYRG." Securities in the OTC market are generally more difficult to trade than
those on the Nasdaq National Market, the Nasdaq SmallCap Market or the major
stock exchanges. In addition, accurate price quotations are more difficult to
obtain. Additionally, our common stock is subject to special regulations
governing the sale of a penny stock.
A "penny stock," is defined by regulations of the Securities and Exchange
Commission as an equity security with a market price of less than $5.00 per
share. However, an equity security with a market price under $5.00 will not be
considered a penny stock if it fits within any of the following exceptions,
which are not applicable to our securities:
o The equity security is listed on Nasdaq or a national
securities exchange;
o The issuer of the equity security has been in continuous
operation for less than three years, and either has (a) net
tangible assets of at least $5,000,000, or (b) average annual
revenue of at least $6,000,000; or
o The issuer of the equity security has been in continuous
operation for more than three years, and has net tangible
assets of at least $2,000,000.
If you buy or sell a penny stock, these regulations require that you
receive, prior to the transaction, a disclosure explaining the penny stock
market and associated risks. Furthermore, trading in our common stock would be
subject to Rule 15g-9 of the Securities Exchange Act of 1934, which relates to
non-Nasdaq and non-exchange listed securities. Under this rule, broker-dealers
who recommend our securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale.
Penny stock regulations will tend to reduce market liquidity of our common
stock, because they limit the broker-dealers' ability to trade, and a
purchaser's ability to sell the stock in the secondary market. The low price of
our common stock will have a negative effect on the amount and percentage of
transaction costs paid by individual shareholders. The low price of our common
stock may also limit our ability to raise additional capital by issuing
additional shares. There are several reasons for these effects. First, the
internal policies of many institutional investors prohibit the purchase of
low-priced stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's commissions on
low-priced stocks usually represent a higher percentage of the stock price than
commissions on higher priced stocks. As a result, our shareholders will pay
transaction costs that are a higher percentage of their total share value than
if our share price were substantially higher.
LEGAL MATTERS
The legality of the issuance of the shares offered will be passed upon for
us by the law firm of Pryor Cashman Sherman & Flynn LLP, New York, New York.
42
EXPERTS
The financial statements as of December 31, 2002 and for the year ended
December 31, 2002 included in this Prospectus have been audited by Rosenberg
Rich Baker Berman & Company, Bridgewater, New Jersey, independent accountants,
as stated in its report appearing herein and elsewhere in this Prospectus, and
have been so included in reliance upon the report of this firm given upon their
authority as experts in auditing and accounting. The financial statements as of
December 31, 2003 and for the year ended December 31, 2003 included in this
Prospectus have been audited by A.J. Robbins, P.C., Denver, Colorado,
independent accountants, as stated in its report appearing herein and elsewhere
in this Prospectus, and have been so included in reliance upon the report of
this firm given upon their authority as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITES
Our restated certificate of incorporation and by-laws contains provisions
entitling our officers and directors to indemnification by the company to the
fullest extent permitted by New York business corporation law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under this
provision of our corporate charter and bylaws, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, this
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 (including exhibits and schedules) under the Securities
Act, with respect to the shares to be sold in this offering. This prospectus
does not contain all the information set forth in the registration statement.
For further information with respect to our company and the common stock offered
in this Prospectus, reference is made to the registration statement, including
the exhibits filed thereto, and the financial statements and notes filed as a
part thereof. With respect to each such document filed with the SEC as an
exhibit to the registration statement, reference is made to the exhibit for a
more complete description of the matter involved.
We file quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
public reference facilities of the SEC in Washington, D.C. You may call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at
http//www.sec.gov.
43
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors..................................... F-2 - F-3
Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003 (audited)...................... F-4
Statements of Operations for the three months ended March
31, 2004 and 2003 (unaudited) and for the years ended
December 31, 2003 and 2002 (audited) ............................ F-5
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 2002 (audited) and 2003 (audited) and for the three
months ended March 31, 2004 (unaudited).......................... F-6
Statements of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited) and for the years ended December 31, 2003
and 2002 (audited) .............................................. F-7
Notes to Financial Statements...................................... F-9
F-1
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
216 SIXTEENTH STREET
SUITE 600
DENVER, COLORADO 80202
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Military Resale Group, Inc. as
of December 31, 2003, and the related statements of operations, changes in
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Military Resale Group, Inc. as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
working capital deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ AJ. ROBBINS, P.C.
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
DENVER, COLORADO
APRIL 7, 2004
F-2
Report of Independent Auditors
To the Board of Directors
Military Resale Group, Inc.
Colorado Springs, Colorado
We have audited the accompanying balance sheet of Military Resale Group, Inc. as
of December 31, 2002, and the related statements of operations, changes in
stockholders' equity (impairment), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Military Resale Group, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
working capital deficit raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ ROSENBERG RICH BAKER BERMAN & CO.
-------------------------------------
BRIDGEWATER, NEW JERSEY
APRIL 21, 2003
F-3
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
------------------- -------------------
CURRENT ASSETS: (UNAUDITED)
Cash $ 113,889 $ 2,862
Accounts receivable - trade 980,402 765,851
Inventory 386,827 334,950
Prepaid consulting 205,679 484,506
Deposits 38,618 33,218
Prepaid interest 69,574 92,681
Prepaid expenses 9,341 ---
------------------- -------------------
Total Current Assets 1,804,330 1,714,068
------------------- -------------------
PREPAID INTEREST, NET OF CURRENT PORTION 132,038 132,038
EQUIPMENT
Office equipment 22,379 15,047
Warehouse equipment 159,444 159,444
Software 16,324 16,324
------------------- -------------------
198,147 190,815
Less accumulated depreciation (115,545) (106,103)
------------------- -------------------
Net equipment 82,602 84,712
------------------- -------------------
Total Assets $ 2,018,970 $ 1,930,818
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,510,556 $ 2,507,544
Accounts payable, related party 49,349 72,632
Current maturities of capital lease obligations 32,489 51,981
Deferred rent 2,729 2,729
Current portion of accrued interest payable 117,248 99,561
Current portion of notes payable 31,025 90,235
Current portion of convertible notes payable 85,000 85,000
------------------- --------------------
Total Current Liabilities 2,828,396 2,909,682
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT MATURITIES 36,351 36,351
DEFERRED RENT, NET OF CURRENT PORTION 21,832 21,832
RELATED PARTIES CONVERTIBLE NOTES PAYABLE 370,000 370,000
NOTES PAYABLE, NET OF CURRENT PORTION 98,975 98,975
CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 150,000 150,000
------------------- --------------------
Total Liabilities 3,505,554 3,586,840
------------------- --------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.0001, 10,000,000 shares
authorized, -0- issued and outstanding --- ---
Common stock, par value $.0001, 50,000,000 shares authorized,
26,895,571 and 21,448,011 issued and outstanding 2,690 2,144
Additional paid-in capital 4,933,251 4,248,547
Accumulated (deficit) (6,422,525) (5,906,713)
------------------- --------------------
Total Stockholders' Equity (Deficit) (1,486,584) (1,656,022)
------------------- --------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,018,970 $ 1,930,818
=================== ====================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
MILITARY RESALE GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------- ----------------------------------------
2004 2003 2003 2002
------------------ ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Resale revenue $ 1,961,544 $ 1,612,597 $ 5,585,340 $ 6,015,406
Commission revenue 173,432 146,366 464,105 344,397
------------------ ------------------ ------------------ ------------------
Total Revenues 2,134,976 1,758,963 6,049,445 6,359,803
COST OF GOODS SOLD 1,782,561 1,512,326 5,349,774 5,471,846
------------------ ------------------ ------------------ ------------------
GROSS PROFIT 352,415 246,637 699,671 887,957
OPERATING EXPENSES:
Stock based compensation 410,827 206,369 1,304,250 772,511
Salary and payroll taxes 162,789 117,138 532,262 502,272
Professional fees 29,092 64,034 348,843 502,077
Occupancy 59,356 59,356 248,373 302,237
General and administrative 139,614 150,139 569,552 583,978
Depreciation 9,442 14,911 29,874 40,789
------------------ ------------------ ------------------ ------------------
Total Expenses 811,120 611,947 3,033,154 2,703,864
------------------ ------------------ ------------------ ------------------
Net (Loss) From Operations (458,705) (365,310) (2,333,483) (1,815,907)
OTHER (EXPENSES):
Interest expense (57,107) (135,385) (298,266) (477,059)
Loss on disposal of fixed assets --- --- --- (26,255)
------------------ ------------------ ------------------ ------------------
Total Other (Expenses) (57,107) (135,385) (298,266) (503,314)
------------------ ------------------ ------------------ ------------------
NET (LOSS) $ (515,812) $ (500,695) $ (2,631,749) $ (2,319,221)
================== ================== ================== ==================
NET (LOSS) PER COMMON SHARE BASIC AND
DILUTED $ (0.02) $ (0.04) $ (0.18) $ (0.25)
================== ================== ================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 23,497,984 11,684,156 14,619,599 9,156,648
================== ================== ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
MILITARY RESALE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 2004
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2001 (RESTATED) 7,505,004 $ 750 $ 442,150 $ (955,743) $ (512,843)
Issuance of common stock for debt 896,787 90 149,910 --- 150,000
Issuance of common stock for beneficial
conversion feature 896,787 90 (90) --- ---
Beneficial conversion feature --- --- 370,000 --- 370,000
Stock options granted for services --- --- 214,000 --- 214,000
Issuance of common stock for services 2,084,812 208 674,720 --- 674,928
Stock options granted for debt extension --- --- 200,000 --- 200,000
Net (loss) for the year --- --- --- (2,319,221) (2,319,221)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2002 11,383,390 1,138 2,050,690 (3,274,964) (1,223,136)
Issuance of common stock for
litigation settlement 384,000 38 49,962 --- 50,000
Issuance of common stock for exercise
of options 1,000,000 100 74,900 --- 75,000
Beneficial conversion feature --- --- 27,173 --- 27,173
Stock options granted for services --- --- 406,400 --- 406,400
Issuance of common stock for services 8,230,621 823 1,298,027 --- 1,298,850
Stock options granted for debt extension --- --- 271,440 --- 271,440
Sale of common stock 450,000 45 69,955 --- 70,000
Net (loss) for the year --- --- --- (2,631,749) (2,631,749)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, DECEMBER 31, 2003 21,448,011 2,144 4,248,547 (5,906,713) (1,656,022)
Issuance of common stock for services 597,560 60 95,940 --- 96,000
Stock options granted for services --- --- 36,000 --- 36,000
Warrants granted for note repayment --- --- 10,000 --- 10,000
Issuance of common stock for note
repayment 400,000 40 39,960 --- 40,000
Sale of common stock, net of offering
costs of $44,250 4,450,000 446 502,804 --- 503,250
Net (loss) --- --- --- (515,812) (515,812)
----------------- ----------------- -------------- -------------- ---------------
BALANCES, MARCH 31, 2004 (UNAUDITED) 26,895,571 $ 2,690 $ 4,933,251 $ (6,422,525) $ (1,486,584)
================= ================= ============== ============== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------- -------------------------------------
2004 2003 2003 2002
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (TO) OPERATING (UNAUDITED) (UNAUDITED)
ACTIVITIES:
Net (loss) $ (515,812) $ (500,695) $ (2,631,749) $ (2,319,221)
Adjustments to reconcile net
(loss) to net cash
used in operating activities:
Depreciation 9,442 14,911 29,874 40,789
Amortization of option based
interest expense 23,107 100,000 180,054 66,667
Stock issued for services 374,827 153,924 1,074,926 772,511
Options issued for services 36,000 --- 229,324 ---
Beneficial conversion feature --- 15,000 27,173 370,000
Loss on disposal of assets --- --- --- 26,255
Stock issued for settlement --- --- 50,000 ---
Issuance of note for settlement --- --- 100,000 ---
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (214,551) (69,768) (337,814) 13,021
(Increase) decrease in inventory (51,877) 9,220 (107,534) 25,014
(Increase) decrease in other
assets --- 68 618 6,090
(Increase) in deposits (5,400) --- (9,860) (2,952)
(Increase) in prepaid expenses (9,341) --- --- ---
Increase in accounts payable and
accrued expenses 3,012 133,805 1,014,317 455,447
Increase (decrease) in related
party accounts payable (23,283) --- 72,632 ---
Increase in accrued interest
payable 33,477 --- --- ---
Increase (decrease) in deferred
rent obligation --- 2,047 (54,580) 79,141
Increase in other liabilities --- 25,007 14,313 81,726
------------------- ------------------- ---------------- ----------------
Net Cash (Used In) Operating
Activities (340,399) (116,481) (348,306) (385,512)
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (T0) INVESTING
ACTIVITIES:
Purchase of fixed assets (7,332) (1,683) (4,440) (2,580)
------------------- ------------------- ---------------- ----------------
Net Cash (Used in) Investing
Activities (7,332) (1,683) (4,440) (2,580)
------------------- ------------------- ---------------- ----------------
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES:
Proceeds from stock options
exercised --- --- 75,000 ---
Payments on capital lease
obligations (19,492) (6,762) (674) (14,836)
Proceeds from issuance of notes --- 125,000 190,000 270,000
Proceeds from issuance of related
party notes --- --- 30,000 135,000
Payments on notes payable (25,000) --- (10,790) ---
Proceeds from issuance of common
stock 547,500 --- 70,000 ---
Payments of offering costs (44,250) --- --- ---
------------------- ------------------- ---------------- ----------------
Net Cash Provided by
Financing Activities 458,758 118,238 353,536 390,164
------------------- ------------------- ---------------- ----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 111,027 74 790 2,072
CASH AND CASH EQUIVALENTS,
beginning of period 2,862 2,072 2,072 ---
------------------- ------------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period$ 113,889 $ 2,146 $ 2,862 $ 2,072
=================== =================== ================ ================
Supplementary information:
Cash paid for:
Interest $ --- $ 466 $ 15,833 $ 20,327
=================== =================== ================ ===============
Income taxes $ --- $ --- $ --- $ ---
=================== =================== ================ ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------------------ --------------------------------
2004 2003 2003 2002
-------------- ----------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Non-cash investing and financing activities:
Issuance of stock in exchange for cancellation of
indebtedness $ --- $ --- $ --- $ 150,000
============== ================= ============= ==============
Issuance of stock and common stock options in
exchange for services to be rendered over six
months to one year $ 132,000 $ 205,146 $ 1,705,250 $ 181,000
============== ================= ============= ==============
Issuance of common stock options for loan
extensions $ --- $ --- $ 271,440 $ 200,000
============== ================= ============= ==============
Issuance of common stock in litigation settlement $ --- $ --- $ 50,000 $ ---
============== ================= ============= ==============
Issuance of common stock and warrants as payment
of notes payable $ 50,000 $ --- $ --- $ ---
============== ================= ============= ==============
Issuance of common stock in payment of accrued
compensation $ --- $ 32,912 $ --- $ ---
============== ================= ============= ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-8
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Military Resale Group, Inc. (the Company) was organized under the laws of the
State of New York and is a regional distributor of grocery and household items
specializing in distribution to commissaries of the U. S. Military. Currently,
the Company services six military installations located in Colorado, Wyoming and
South Dakota.
On October 15, 2001, the Company, formerly Bactrol Technologies, Inc. entered
into a stock purchase agreement with Military Resale Group, Inc., a Maryland
corporation that was formed on October 6, 1997 ("MRG"), pursuant to which 98.2%
of MRG's stock was effectively exchanged for a controlling interest in our
publicly held "shell" corporation. Concurrently with the closing of that
transaction, the Company changed its name from Bactrol Technologies, Inc. to
Military Resale Group, Inc. This transaction is commonly referred to as a
"reverse acquisition". For financial accounting purposes, this transaction has
been treated as the issuance of stock for the net monetary assets of the
Company, accompanied by a recapitalization of MRG with no goodwill or other
intangible assets recorded.
For financial reporting purposes, MRG was considered the acquirer, and
therefore, the historical operating results of Bactrol Technologies, Inc. are
not presented.
GOING CONCERN
The financial statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the normal course of business.
The Company has suffered recurring losses from operations, and its working
capital deficit raises substantial doubt about its ability to continue as a
going concern.
The Company is currently registering 10,000,000 shares of its common stock for
sale at $.25 per share on a best efforts basis.
The Company's management is currently pursuing equity and/or debt financing in
an effort to continue operations. The future success of the Company is likely
dependent on their ability to attain additional capital to develop business, and
ultimately upon their ability to attain future profitable operations. There can
be no assurance that the Company will be successful in obtaining such financing,
or that the Company will attain positive cash flow from operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
F-9
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements for the
three months ended March 31, 2004 and 2003 are presented on a basis consistent
with the audited financial statements and reflect all adjustments, consisting
only of normal recurring accruals, necessary for fair presentation of the
results of such period. The results of operations for the three moths ended
March 31, 2004 are not necessarily indicative of the results to be expected for
the year ending December 31, 2004.
CASH AND CASH EQUIVALENTS
The Company considers all cash and highly liquid investments with initial
maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company's trade accounts primarily represent unsecured receivables.
Historically, its doubtful accounts related to these trade accounts have been
insignificant. Therefore, no allowance for doubtful accounts has been provided
for.
INVENTORY
Inventory consists primarily of grocery items, and is stated at the lower of
cost or market. Cost is determined under the first-in, first-out method (FIFO)
valuation method. All items of inventory are finished goods resold to military
commissaries and wholesale food chains.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. For the three months
ended March 31, 2004 and 2003, the Company incurred $2,377 and $-0- of
advertising costs, respectively. For the years ended December 31, 2003 and 2002,
the Company incurred $-0- and $949 of advertising costs, respectively.
EQUIPMENT
The Company follows the practice of capitalizing equipment costing in excess of
$250. The cost of ordinary maintenance and repairs is charged to operations
while renewals and replacements are capitalized. Depreciation expense was $9,442
and $14,911 for the three months ended March 31, 2004 and 2003 and $29,874 and
$40,789 for the years ended December 31, 2003 and 2002, respectively.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Office equipment and software 3 to 5 years
Warehouse equipment 5 to 7 years
F-10
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of each
reporting period. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
represents the tax payable for the current period and the change during the
period in deferred tax assets and liabilities. Deferred tax assets and
liabilities have been netted to reflect the tax impact of temporary differences.
Deferred tax assets arise primarily from the net operating loss carryforward and
expenses accrued for book basis but not for tax basis. The Company is on the
accrual basis for tax purposes, which has resulted in a net operating loss
carryforward at March 31, 2004 and December 31, 2003. A full valuation allowance
has been recorded at March 31, 2004 and December 31, 2003 since management of
the Company can not determine that it is more likely than not that the tax asset
will be realized. (See Note 9)
NET (LOSS) PER COMMON SHARE
The Company computes earnings (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). This statement simplifies the standards for computing earnings per
share (EPS) previously found in Accounting Principles Board Opinion No. 15,
Earnings Per Share, and makes them more comparable to international EPS
standards. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. In addition, the Statement requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. (See Note 12).
REVENUE RECOGNITION
The Company's revenues are derived from either resale revenue or commission
revenue.
Resale Revenue: The Company purchases products from manufacturers and suppliers
for resale to the commissaries it services. Revenue from these customers is
recognized when title to products passes to the customer for the amount of the
sales less an appropriate provision for returns and allowances. The revenue
amount recorded includes: (i) the purchase price paid by the commissary plus
(ii) a negotiated storage and delivery fee paid by the manufacturer or supplier.
The Company records revenue on a gross sales basis because the Company (a) is
the primary obligor in the transaction as the Company is responsible for
fulfillment of the order and for the customer's acceptance of the goods or
services sold, (b) bears inventory risk (taking title to the goods before the
customer's order is placed or upon the customer's return), and (c) bears
physical loss of inventory risk.
F-11
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Commission Revenue: The Company records commission revenue in cases where it
acts as an agent for the manufacturer or supplier of the products it sells, and
earns a commission based upon a percentage of the suppliers' sales amount. This
revenue is recognized at the time goods are shipped by the Company to the
ultimate customer, which is when title passes.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This standard requires the Company to adopt the
"fair value" method with respect to stock-based compensation of consultants and
other non-employees. The Company did not change its method of accounting with
respect to employee stock options; the Company continues to account for these
under the "intrinsic value" method, and to furnish the proforma disclosures
required by SFAS 123.
VALUATION OF THE COMPANY'S COMMON STOCK
Unless otherwise disclosed, all stock based transactions entered into by the
Company have been valued at the market value of the Company's common stock on
the date the transaction was entered into or have been valued using the Modified
Black-Scholes European Pricing Model to estimate the fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments approximates their fair value,
because of the short-term nature of these financial instruments.
The fair value of the Company's capital lease obligations approximate their
carrying value and are based on the current rates offered for debt of the same
remaining maturities with similar collateral requirements, or that the
difference is represented by the additional costs to convert the debt to market
rates making the two presently equivalent.
CONCENTRATIONS OF RISK
The Company maintains all cash and cash equivalents in financial institutions,
which at times may exceed federally insured limits. The Company has not
experienced a loss in such accounts.
The Company's revenues from military commissary sales provide approximately
ninety two percent of their total revenues. Management believes that
concentration of customers with respect to risk is minimal due to the sales
being primarily through government contracts.
RECLASSIFICATION
Certain amounts in the prior period financial statements have been reclassified
for comparative purposes to conform to the presentation in the current year
financial statements.
F-12
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB 51 ("FIN 46"). The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
(Variable Interest Entities or "VIEs") and to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The disclosure requirements
of FIN 46 became effective for financial statements issued after January 31,
2003. The adoption of this interpretation did not have an impact on the
Company's financial statements.
In April 2003, FASB issued SFAS No. 149, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS 149") which is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. This statement amends and clarifies financial accounting
and reporting for derivative instruments including certain instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The Company has adopted SFAS
149 and its adoption did not have a material effect on its financial statements.
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, ("SFAS 150")
which is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Company has adopted SFAS 150
and its adoption did not have a material effect on its financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimated
amounts.
F-13
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 2 - PREPAID CONSULTING
Prepaid consulting expenses are recorded in connection with common stock and
options issued to purchase common stock granted to consultants for future
services and are amortized over the agreement term. The Company incurred
prepayments of $20,000 and stock based compensation expense of $298,827 during
the three months ended March 31, 2004 and incurred prepayments of $484,506 and
stock based compensation expense of $1,304,250 during the year ended December
31, 2003.
NOTE 3 - PREPAID INTEREST
Prepaid interest is recorded in connection with the issuances of options for the
extension of various notes payable. The prepaid interest is being amortized over
the extension period, with $23,107 charged to interest expense during the three
months ended March 31, 2004 and $180,054 charged to interest expense during the
year ended December 31, 2003.
NOTE 4 - RELATED PARTY TRANSACTIONS
In January 2003, the Company entered into a one-year business consulting
agreement with Edward Meyer, Jr. for marketing and managerial consulting
services, and an executive compensation agreement with Edward Whelan, Chief
Executive Officer. In consideration of the services to be rendered by Mr. Whelan
and Mr. Meyer, the Company will issue each month the number of shares determined
by dividing $12,000 by the product of 80% and the average closing low price for
the Company's common stock during each quarter.
During the year ended December 31, 2003, the Company issued 1,305,622 shares of
common stock as consideration under a January 2002 and 2003 consulting and
compensation agreements for the fourth quarter of 2002 and the four quarters of
2003 (370,831 shares to Mr. Meyer and 934,791 shares to Mr. Whelan, or their
respective designees). The transactions were valued between $0.10 and $0.27 per
share, the fair market value of our common stock on the dates of issuance.
On July 11, 2003, the Company issued 100,000 shares of our common stock to an
employee, Robert Hefner, for compensation for past employment services. These
shares were valued at $0.26 per share or $26,000, the fair value at date of
issuance.
On November 1, 2003 the Company issued 300,000 shares of common stock to Mr.
Meyer in connection with the signing of a consulting agreement. The term of the
agreement is for one year. These shares were valued at $30,000, the fair value
at date of issuance. This amount will be amortized over the term of the
agreement.
F-14
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 4 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the year ended December 31, 2003, the Company received advances from
related parties; $11,500 from individuals related to shareholders/management.
These advances are non-interest bearing and are due on demand. These amounts are
recorded as due to related parties along with $61,132 of amounts due to a
related party for expenses paid by related party on behalf of the Company.
On March 31, 2004 pursuant to a consulting agreement with the Company's chief
executive officer, the Company issued 247,560 shares of common stock and granted
options to purchase 247,560 shares of common stock at $.25 per share for a
period of five years for services rendered valued at $72,000. The value of the
stock and the value of the options was $36,000 each based on $12,000 each per
month. The number of shares and options issued was determined by dividing
$36,000 by 80% of the average low price of the common stock in each quarter.
On March 11, 2003, Edward Whelan loaned the Company $10,000. The corresponding
note bears interest at a rate of 8% per annum and is due on June 3, 2006.
On June 30, 2003, in connection with the conversion of $190,000 of demand notes
to convertible notes from Edward Whelan, Chief Executive Officer, and companies
which he controls and/or is shareholder, 1,130,000 stock options were issued.
The options expire in five years. The fair value of the options are estimated at
$235,040 based on the Modified Black-Scholes European Pricing Model. The average
risk free interest rate used was 2.9%, volatility was estimated at 94.06%, and
the expected life was five years. The demand notes have been modified to allow
the holder to convert their notes into shares of common stock at $0.25 per
share. These convertible notes do not have a beneficial conversion feature.
On June 30, 2003, in connection with the conversion of $25,000 of demand notes
to convertible notes from each of Ethan Hokit, President and Atlantic Investment
Trust, of which Richard Tanenbaum, one of the Company's directors, is the
trustee, 25,000 stock options were issued to each of such noteholders. The
options expire in five years. The fair value of the options are estimated at
$10,400 based on the Modified Black-Scholes European Pricing Model. The average
risk free interest rate used was 2.9%, volatility was estimated at 94.06%, and
the expected life was five years. The demand notes have been modified to allow
the holder to convert their notes into shares of common stock at $0.25 per
share. Such notes do not have a beneficial conversion feature.
On August 7, 2002, the Company borrowed $50,000 from Atlantic Investment Trust
and $50,000 from Eastern Investment Trust. Richard Tanenbaum, one of the
Company's Directors, is a trustee of these entities. The notes are convertible
and bear interest at 8% per annum and were due on July 30, 2003. These notes
have been extended to June 3, 2006 (See Note 5).
During 2002, Edward Whelan advanced the Company $20,000. The advances bear
interest at a rate of 10% per annum and are due on demand.
F-15
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES
During the year ended December 31, 2002, notes payable of $150,000, which
included a beneficial conversion feature, were converted into 1,793,574 shares
of the Company's common stock pursuant to the notes.
At March 31, 2004 and December 31, 2003, the Company had an aggregate of
$605,000 payable in convertible notes of which $370,000 are with related parties
(see Note 4). On June 30, 2003, notes in the amount of $215,000 that were
originally due on or before June 30, 2003 and $50,000 of notes that were
originally due September 30, 2003 were extended until June 3, 2006 and bear
interest at 8%. An additional $240,000 of demand notes were converted to
convertible notes on June 30, 2003 and are due June 3, 2006. Of these notes,
$100,000 are non-interest bearing, $60,000 bear interest at 10% and $80,000 bear
interest at 8%.
In connection with the extension of the due dates and conversion of the demand
notes to convertible notes, stock options of 1,305,000 were issued. The options
expire in five years. The fair value of the options were estimated at $271,440
based on the Modified Black-Scholes European Pricing Model. The average risk
free interest rate used was 2.9%, volatility was estimated at 94.06% and the
expected life was five years. The Company recorded prepaid interest of $271,440
and are amortizing it over the extension period. Interest expense of $23,107 and
$46,721 was recorded during the three months ended March 31, 2004 and during the
year ended December 31, 2003, respectively for amortization of the prepaid
interest.
During the year ended December 31, 2003, the Company issued $20,000 in
convertible notes bearing interest at 8% per annum due January 30, 2004 and
$15,000 in convertible notes bearing interest at 8% per annum due June 3, 2006.
The Company's convertible notes provide generally that, if the convertible notes
are not in default, the holders may convert, at any time all or a portion of the
outstanding balance under each convertible note into a number of shares (subject
to certain anti-dilution adjustments) of common stock that will allow the note
holder to receive common stock having a market value equal to 150% of the
converted balance of the note. For notes issued prior to May 30, 2003, if an
event of default has occurred in respect of such convertible notes, the holder
may convert the outstanding balance into a number of shares (subject to certain
anti-dilution adjustments) of common stock equal to twice the number of shares
the holder would have otherwise received if the convertible notes were not in
default. Among other events of default, the terms of the convertible notes
require the Company to register under the Securities Act of 1933 the shares of
common stock issuable upon conversion of the convertible notes. On June 30, 2003
the demand notes were modified to allow the holder to convert their notes into
common stock at $0.25 per share. These convertible notes do not have a
beneficial conversion feature.
F-16
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 5 - CONVERTIBLE NOTES (CONTINUED)
The Company follows EITF 98-5 in accounting for convertible notes with
"beneficial conversion features" (i.e., the notes may be converted into common
stock at the lower of a fixed rate at the commitment date or a fixed discount to
the market price of the underlying common stock at the conversion date). Because
the Company's convertible notes contained a beneficial conversion feature on the
date of issuance, the Company measured and recognized the intrinsic value of the
beneficial conversion feature of the convertible notes when the convertible
notes were issued. During the year ended December 31, 2003 and 2002 interest
expense of $27,173 and $370,000, respectively, was recognized as the intrinsic
value of the beneficial conversion feature of the convertible notes that were
issued during such periods.
NOTE 6 -NOTES PAYABLE
On March 27, 2003, the Company issued a promissory note for $100,000 to Romano,
Ltd. As of December 31, 2003, the remaining balance on this note was $89,210.
The note bears interest at 15% per annum and was due on March 26, 2004, subject
to the following contingent payment terms upon the Company raising or securing
additional funding from any third-party source:
Additional Funding Terms Modification
------------------ ------------------
$ 250,000 Payment of 10% of outstanding principal and accrued interest
$ 500,000 Payment of 15% of outstanding principal and accrued interest
$1,000,000 or more Payment of 100% of outstanding principal and accrued interest
When the Company failed to secure any of the above-referenced additional
funding, or another significant event such as a merger or acquisition of another
company, the Company was required to pay $8,000 per month commencing on July 1,
2003 until the full obligation was paid.
During the three months ended March 31, 2004 the Company reached an agreement
with Romano, Ltd. Since March 31, 2003 $50,000 cash was paid towards the
original $100,000 note, of which $25,000 was paid during the three months ended
March 31, 2004. The Company signed a $30,000 note with Romano, Ltd., for the
accrued interest on the original $100,000 loan with interest at 15% per annum,
payable beginning on April 1, 2004 with equal consecutive installments payable
on the fifteenth of every month in the amount of $5,000 until paid in full or
March 26, 2005. In addition, the Company issued 400,000 shares of common stock
and granted warrants to purchase 250,000 shares of common stock at $.25 per
share for three years as full satisfaction of the remaining $50,000 balance of
the loan.
F-17
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 6 -NOTES PAYABLE (CONTINUED)
Maturities on long term debt, including related parties, are as follows for the
three months ended March 31, 2004 and for the year ended December 31, 2003:
The Company leases certain equipment under capital leases expiring in various
years through 2006. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the asset at the inception of the lease. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation expense.
Properties under capital leases at March 31, 2004 and December 31, 2003 are as
follows:
MARCH 31, DECEMBER 31,
2004 2003
------------------- -------------------
Equipment $ 103,403 $ 103,403
Less: accumulated amortization 48,683 43,513
------------------- -------------------
Net $ 54,720 $ 59,890
=================== ===================
F-18
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 7 - CAPITAL LEASES (CONTINUED)
The following is a schedule of minimum lease payments under capital leases as of
March 31, 2004 and December 31, 2003.
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
2004 $ 42,347 $ 61,839
2005 22,818 22,818
2006 20,916 20,916
---------- ------------
Total net minimum capital lease payments 86,081 105,573
Less: amounts representing interest 17,241 17,241
---------- ------------
Present value of net minimum capital
lease payments 68,840 88,332
Less: current maturities of capital
lease obligations 32,489 51,981
---------- ------------
Obligations under capital leases, net of
current maturities $ 36,351 $ 36,351
========== ============
NOTE 8 - OPERATING LEASE COMMITMENTS
In August 2001, the Company entered into a lease agreement that expires in
August 2006 for office and warehouse space in Colorado Springs, Colorado.
Minimum future lease payments under current lease agreements at March 31, 2004
and December 31, 2003 are as follows:
The lease has an annual escalation factor. The above rental commitments reflect
the periods during which the actual obligations arise (per the lease agreement).
Rental expense has been charged to operations on a straight-line basis. The
associated liability is presented in the balance sheet as a deferred rental
obligation.
F-19
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 8 - OPERATING LEASE COMMITMENTS (CONTINUED)
Rent expense for the three months ended March 31, 2004 and 2003 was $59,356 each
year, respectively and for the years ended December 31, 2003 and 2002 was
$248,373 and $302,237, respectively.
NOTE 9 - INCOME TAXES
The components of deferred tax assets and (liabilities) and the related tax
affects of temporary differences that give rise to deferred tax assets and
(liabilities) are as follows:
MARCH 31, DECEMBER 31,
2004 2003
-------------- -------------
Net operating loss carryforward $ 1,942,723 $ 1,827,506
Less valuation allowance (1,942,723) (1,827,506)
-------------- --------------
$ --- $ ---
============== =============
The components of deferred income tax expense (benefit) are as follows:
MARCH 31, DECEMBER 31,
2004 2003
-------------- -------------
Net operating loss carryforward $ 115,216 $ 563,506
Less valuation allowance (115,216) (563,506)
-------------- --------------
$ --- $ ---
============== =============
Following is a reconciliation of the amount of income tax expense (benefit) that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense (benefit):
MARCH 31,
2004 2003
-------------- -------------
Tax expense at federal statutory rates $ (175,376) $ (170,236)
Stock based compensation 60,160 34,000
Net operating loss carryforward 115,216 136,236
-------------- -------------
$ --- $ ---
============== =============
F-20
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 9 - INCOME TAXES (CONTINUED)
DECEMBER 31,
2003 2002
-------------- -------------
Tax expense at federal statutory rates $ (894,795) (788,535)
Increase in inventory valuation allowance 6,077 ---
Other 11,723 ---
Stock based compensation 123,889 ---
Net operating loss carryforward 753,106 788,535
-------------- -------------
$ --- $ ---
============== =============
As of March 31, 2004 and December 31, 2003, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $5,714,000 and
$5,375,000, respectively, which will be available to reduce future taxable
income. The full realization of the tax benefit associated with the carryforward
depends predominantly upon the Company's ability to generate taxable income
during the carryforward period. Because of the current uncertainty of realizing
such tax assets in the future, a valuation allowance has been recorded equal to
the amount of the net deferred tax assets, which caused our effective tax rate
to differ from the statutory income tax rate.
The net operating loss carryforward, if not utilized, will expire between 2017
and 2023. At March 31, 2004 and December 31, 2003, the valuation allowance
increased by $115,216 and $563,506, respectively.
NOTE 10 - EQUITY INCENTIVE PLAN
In December 2001, the Company adopted the Military Resale Group, Inc. 2001
Equity Incentive Plan (the "Incentive Plan") for the purpose of attracting,
retaining and maximizing the performance of executive officers and key employees
and consultants. The Company has reserved 1,500,000 shares of common stock for
issuance under the Incentive Plan. The Incentive Plan has a term of ten years
and provides for the grant of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, non-statutory
stock options, stock appreciation rights, restricted stock awards, performance
share awards and compensatory share awards. The exercise price for non-statutory
stock options may be equal to or more or less than 100 percent of the fair
market value of shares of common stock on the date of grant. The exercise price
for incentive stock options may not be less than 100 percent of the fair market
value of shares of our common stock on the date of grant (110 percent of fair
market value in the case of incentive stock options granted to employees who
hold more than ten percent of the voting power of issued and outstanding shares
of common stock).
Options granted under the Incentive Plan may not have a term of more than
ten-years (five years in the case of incentive stock options granted to
employees who hold more than ten percent of the voting power of common stock)
and generally vest over a three-year period.
F-21
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 10 - EQUITY INCENTIVE PLAN (CONTINUED)
The fair value of each option granted is estimated on the grant date using the
Modified Black-Scholes European-Pricing Model. The following assumptions were
made in estimating fair value:
Dividend yield 0%
Risk-free interest rate 2.5%-3.6%
Expected life 1-5 years
Expected Volatility 233%-253%
Common stock options granted under the plan during the three months ended March
31, 2004 and during the year ended December 31, 2003 and 2002 were 0, 0 and
800,000, respectively.
During the year ended December 31, 2002 the Company issued 2,084,812 shares of
common stock to various consultants for services performed and to be performed.
The shares were valued at $674,298 based on the closing market price on the date
of signing the agreements. This amount was recorded as prepaid consulting and
was amortized over the term of the agreements.
F-22
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 11 - COMMON STOCK (CONTINUED)
During December 2003 the Company issued 384,000 shares of common stock for
settlement of litigation in the amount of $50,000. (See Note 13).
During the year ended December 31, 2003, the Company issued aggregate shares of
common stock of 8,230,621 to various consultants for services provided or to be
provided. Stock based compensation expense of $1,127,174 was recognized in 2003
and a prepaid consulting expense of $ 307,430 was recorded in 2003 for stock
issued for services. These amounts were based on the fair market value of the
shares on the date of issuance.
5,505,000 and 500,000 stock options were granted to various parties during the
years ended December 31, 2003 and 2002, respectively, for services rendered and
to be rendered. (See Notes 4 and 5). The options expire in five years. The
options issued during year ended December 31, 2003 and 2002 were valued at
$677,840, and $200,000, respectively, the fair value using the Black-Scholes
European Pricing Model. The average risk free interest rate used was 2.9%,
volatility was estimated at 94.06% and 253%, respectively, and the expected life
was five years.
Compensation cost charged to operations for options issued was $ 276,045 and
$220,000 during the years ended December 31, 2003 and 2002, respectively.
Prepaid consulting costs and prepaid interest expense for options issued are
$177,076 and $224,719, respectively at December 31, 2003.
During the three months ended March 31, 2004, the Company issued an aggregate
200,000 of the Company's common shares to a consultant for services provided and
expensed $40,000 (the value of the services) as stock based compensation.
During the three months ended March 31, 2004 the Company issued 100,000 shares
of the Company's common stock valued at $9,000, the fair market value of the
common stock, to a consultant for services to be provided. The value of the
stock is recorded as prepaid consulting and will be amortized over the term of
the agreement.
On January 29, 2004 the Company issued 50,000 shares of common stock valued at
$11,000 as a retainer fee for services to be performed in connection with
raising of capital (See Note 13). This amount is recorded as prepaid consulting
and is being amortized over the term of the agreement.
During the three months ended March 31, 2004 pursuant to a consulting agreement
with an unrelated party, the Company granted warrants to purchase 320,000 shares
of the Company's common stock at $.125 for a period of five years. These
warrants were valued at $52,870, the fair value using the Black-Scholes European
Pricing Model. The average risk free interest rate used was 3.39%, volatility
was estimated at 96% and the expected life was five years. The warrants were
granted as compensation to the Company's investment banker for raising $500,000
by selling 4,000,000 shares of common stock. This investment banker was also
paid $40,000 as commission for the sale of stock.
F-23
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 11 - COMMON STOCK (CONTINUED)
During the three months ended March 31, 2004 the Company sold 4,000,000 shares
of common stock to several individuals at $.125 per share for total
consideration of $460,000, net of offering costs paid of $40,000. These
individuals were also given warrants to purchase 2,000,000 shares of common
stock (50% of shares issued) at $.25 per share for a period of five years. The
terms of the stock subscription agreements provide that in the event the average
closing bid price of the common stock for the ten days preceding the effective
date of the Registration Statement (to be filed) is $.17 or below, then the
purchase price for the shares shall be reset to a purchase price equal to the
average price minus $.05, provided that the purchase price is not less than
$.065 per share. Upon the occurrence of the price adjustment, the Company will
issue to each subscriber the additional shares they are entitled to based upon
the adjusted price. In addition, if the Registration Statement (to be filed) is
not declared effective on or before June 30, 2004, then commencing on the first
day of each month thereafter until December 1, 2004 or the declared effective
date of the Registration Statement, the Company will issue each subscriber, as
liquidated damages, additional shares of common stock equal to 10% of the number
of shares purchased by each subscriber.
During the three months ended March 31, 2004 the Company sold 450,000 shares of
common stock to several individuals for $.10 to $.125 per share for total
consideration of $43,250, net of offering costs of $4,250. In accordance with
the terms of the stock subscription agreements, if the Company's Registration
Statement (to be filed) is not declared effective on or before June 30, 2004,
then commencing on the first day of each month thereafter until December 1, 2004
or the declared effective date of the Registration Statement, the Company will
issue each subscriber, as liquidated damages and not as a penalty, additional
shares of common stock equal to 10% of the number of shares purchased by each
subscriber.
F-24
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 12 - EARNINGS PER SHARE
For the Three Months Ended March 31, 2004
-----------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (515,812) 23,497,984 $ (0.02)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (515,812) 23,497,984 $ (0.02)
================= ================= ============
For the Three Months Ended March 31, 2003
-----------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (500,695) 11,684,156 $ (0.04)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (500,695) 11,684,156 $ (0.04)
================= ================= ============
F-25
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 12 - EARNINGS PER SHARE (CONTINUED)
For the Year Ended December 31, 2003
------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (2,631,749) 14,619,599 $ (0.18)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (2,631,749) 14,619,599 $ (0.18)
================= ================= ============
For the Year Ended December 31, 2002
------------------------------------
Per
Income/(Loss) Shares Share
(Numerator) (Denominator) Amount
----------------- ----------------- ------------
Basic EPS
Income (loss) available to common stockholders $ (2,319,221) 9,156,648 $ (.25)
Effect of Dilutive Securities --- --- ---
----------------- ----------------- ------------
Diluted EPS
Income (loss) available to common stockholders $ (2,319,221) 9,156,648 $ (.25)
================= ================= ============
NOTE 13 - CONTINGENCIES
On January 29, 2004 the Company entered into a business consulting agreement
with an unrelated party for financial advisory and investment banking services
and issued the consultant 50,000 shares of its common stock valued at $11,000.
The consultant will advise the Company as to issues of capital formation, assist
the Company on the market awareness of its stock by setting up road shows and
will assist the Company in raising $300,000 through the issuance of common stock
at $.125 and warrants to purchase 1,200,000 warrants exercisable at $.25 per
share for five years. Upon successful closing of the above raising of capital,
the Company will pay the consultant a cash fee commission of 10% of the capital
raised plus a cash non-accountable expense allowance of 2.5% of the capital
raised. In addition, upon raising the capital, the consultant will be entitled
to 300,000 warrants with similar terms as those issued in the capital raise. No
capital has been raised under this agreement to date.
F-26
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 13 - CONTINGENCIES (CONTINUED)
The Company was the plaintiff in a litigation with one of its vendors. During
the three months ended March 31, 2004 the Company entered into a judgment in
which they were ordered to pay the vendor $5,356 with the amount due accruing
interest at 8% per annum. As of March 31, 2004 the Company had not paid any
amount to this vendor. Subsequent to March 31, 2004, the Company received a Writ
of Garnishment and is expecting to have the original judgment amount of $5,356
plus interest and other charges of $181 garnished from one of their bank
accounts.
The Company was the defendant in a litigation regarding their former premises.
The plaintiff was the former landlord, who was seeking damages for an alleged
breach of the terms of several operating lease agreements for office and
warehouse space located in Colorado Springs, Colorado. On November 25, 2003 a
settlement was reached and issued with the district court of El Paso County,
Colorado. Under the terms of the settlement, the Company delivered 384,000
shares of common stock to the plaintiff for settlement of $50,000 owed and
agreed to issue a note payable to the plaintiff in the amount of $100,000
bearing interest at 10% per annum beginning November 6, 2003. Under the terms of
the note, the Company is required to begin payments of $2,000 per month on July
1, 2004 and on the first day of each and every month thereafter until all
principal and accrued interest are paid in full. If on the date of full payment
of the note or the date of maturity of the note, whichever occurs first, the
market price of the stock as of close of the market on that day is $50,000 or
greater the plaintiff must accept the stock as full satisfaction of the $50,000
liability. If the market price of the stock is less than $50,000, the plaintiff
may either retain the stock as full satisfaction of the $50,000 or surrender the
stock to the Company in exchange for simultaneous payment to the plaintiff in
cash of $50,000.
The Company was the defendant in two other litigations with two different
vendors. In accordance with the judgments issued on September 10, 2003 and
October 31, 2003, the Company is required to pay a total of $76,675
(non-interest bearing) and $39,901 (bearing interest at 8% per annum) to each
vendor respectively. As of March 31, 2004 the Company owed $69,675 and $40,433,
respectively, to each vendor.
In February 2003, a capital lease obligation, secured by equipment with a net
book value of $25,363, was accelerated due to non-payment. This obligation is
reflected in the current portion of obligations under capital leases in the
accompanying financial statements. The Company defaulted under the accelerated
terms of this agreement and the debt has been sent to a collections agency. The
Company is paying $1,000 per month on this lease until a new settlement can be
reached.
In February 2003, the Company entered into a Lease Modification Agreement for a
capital lease for equipment with a net book value of $57,183. The term of the
lease was extended through April 2007, with no required payment for the months
between November 2002 and February 2003. Minimum lease payments have increased
to $2,100 through October 2003 and $1,980 for the remaining 40 months.
F-27
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 IS UNAUDITED)
NOTE 14 - SUBSEQUENT EVENTS
On April 1, 2004 the Company entered into a one-year business consulting
agreement with an unrelated party for management and financial consulting
services. Under the terms of the agreement the consultant will receive $5,000
per month for the term of the agreement and receive 250,000 shares of common
stock valued at $47,500, the fair market value of the common stock on the date
the agreement was entered.
On May 10, 2004 the Company issued 100,000 shares of common stock to a
consultant for services to be rendered over a period of 180 days. These shares
are valued at $17,000, the fair market value of the common stock on the date the
agreement was entered.
On May 11, 2004 the Company issued 200,000 shares of common stock and granted
200,000 options to purchase common stock at $.25 per share to a stockholder for
services rendered. The stock is valued at $34,000, the fair market value of the
common stock on the day the agreement was entered.
On June 1, 2004 the Company entered into a consulting agreement for business
development, advisory and business networking services. Under the terms of the
agreement the consultant will receive 500,000 shares of common stock, valued at
$70,000, the fair market value of the common stock on the date the agreement was
entered, and $8,000 payable by July 15, 2004.
On June 10, 2004 the Company purchased all of the outstanding shares of Ohio
Street Partners, Inc. a private Delaware Corporation in exchange for 1,920,000
shares of the Company's common stock and warrants to purchase 960,000 shares of
the Company's common stock at $.25 per share. Ohio Street Partners, Inc. sole
asset is a single-family residential condominium rental property located in San
Diego, California valued at $310,000 and is subject to a loan secured by a first
deed of trust of approximately $70,000. The Company also received a loan of
$75,000 from the seller evidenced by a note payable and deed of trust recorded
against the property. The note payable accrues interest at 8% per annum and is
due on demand or September 10, 2004, or upon the sale of condominium, whichever
occurs first. In accordance with the terms of the agreement the seller is
entitled to one seat on the Company's board of directors. The Company intends to
sell the property as soon as possible.
On June 16, 2004 the Company issued 62,500 shares of common stock as liquidated
damages in accordance with the terms of a subscription agreement dated July 9,
2003. The stockholder was entitled to liquidated damages of 10% per month
beginning February 1, 2004 and continuing until June 1, 2004 of the original
number of shares purchased if the Company's registration statement did not
become effective as of January 31, 2004.
F-28
------------------------------------- -----------------------------------------
UNTIL __________ , ALL
DEALERS THAT EFFECT TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY
BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS 10,000,000 SHARES
UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. NO DEALER, SALES
REPRESENTATIVE OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE MILITARY RESALE GROUP, INC.
CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF COMMON STOCK
AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. ---------------
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE PROSPECTUS
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY ---------------
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
__________, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Sections 721 through 725 of the Business Corporation
Law of the State of New York (the "NYBCL"), which provides for indemnification
of directors and officers of New York corporations under certain circumstances.
Section 722 of the NYBCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, in connection with actions or proceedings, whether civil or
criminal (other than an action by or in the right of the corporation, a
"derivation action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute does not apply in respect of a threatened action, or a
pending action that is settled or otherwise disposed of, and requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. Section 721 of the
NYBCL provides that Article 7 of the BCL is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, disinterested director vote, shareholder vote, agreement or
otherwise.
Article 7 of our Restated Certificate of Incorporation requires us to
indemnify our officers and directors to the fullest extent permitted under the
NYBCL. Furthermore, Article XII of our Amended and Restated By-laws provides
that we may, to the full extent permitted and in the manner required by the laws
of the State of New York, indemnify any officer or director (and the heirs and
legal representatives of any such person) made, or threatened to be made, a
party in an action or proceeding (including, without limitation, one by us or in
our right to procure a judgment in our favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which of our directors or officers served in
any capacity at our request, by reason of the fact that such director or
officer, or such director's or officer's testator or intestate, was a director
or officer of ours or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity.
Section 402(b) of the NYBCL provides that a corporation's certificate of
incorporation may include a provision that eliminates or limits the personal
liability of the corporation's directors to the corporation or its shareholders
for damages for any breach of a director's duty, provided that such provision
does not eliminate or limit (1) the liability of any director if a judgment or
other final adjudication adverse to the director establishes that the director's
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that the director personally gained a financial
profit or other advantage to which the director was not legally entitled or that
the director's acts violated Section 719 of the NYBCL, or (2) the liability of
any director for any act or omission prior to the adoption of a provision
authorized by Section 402(b) of the NYBCL. Article 7 of our Restated Certificate
of Incorporation provides that none of our directors shall be liable to us or
our shareholders for any breach of duty in such capacity except for liability in
the event a judgment or other final adjudication adverse to a director
establishes that his or her acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that the director
personally gained, in fact, a financial profit or other advantage to which he or
she was not legally entitled or that such director's acts violated Section 719,
or its successor, of the NYBCL.
II-1
Any amendment to or repeal of our Restated Certificate of Incorporation or
by-laws shall not adversely affect any right or protection of any of our
directors or officers for or with respect to any acts or omissions of such
director or officer occurring prior to such amendment or repeal.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons pursuant
to the foregoing, we have been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred by us
in connection with the issuance and distribution of the Common Stock registered
hereby, all of which expenses, except for the Securities and Exchange Commission
registration fee, are estimates:
DESCRIPTION AMOUNT
------
Securities and Exchange Commission registration fee $ 320
fee
Accounting fees and expenses................... 35,000*
Legal fees and expenses........................ 195,000*
Miscellaneous fees and expenses................ 19,680*
----------
Total................................ $ 250,000*
==========
-------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information for all securities we sold
during the past three years without registration under the Securities Act:
2001
On August 1, 2001, Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), issued options to purchase 1,000,000 shares of its common
stock to Ronald Steenbergen, a consultant. In connection with our purchase of
98.2% of the outstanding capital stock of MRG-Maryland in a reverse acquisition
(the "Reverse Acquisition"), we assumed the obligations under the option. Such
options were exercisable for one year at an exercise price of $0.50 per share
and expired in August 2002 without having been exercised. Such options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
II-2
In November 2001, we issued an aggregate of 5,410,000 shares of our common
stock to the eleven stockholders of MRG- Maryland in connection with the Reverse
Acquisition. Such shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons represented to us that they were `accredited investors' as defined
in Regulation D under the Securities Act of 1933, as amended.
In December 2001, we issued an aggregate of 875,000 shares of our common
stock to an aggregate of 13 of our employees and directors as bonus compensation
for services rendered in 2001. As no additional consideration was paid to the
Company by the recipients of such shares, such issuances were not "offers" or
"sales" as defined in the Securities Act of 1933, as amended, nor subject to the
registration requirements of the Securities Act of 1933, as amended.
In December 2001, we issued $35,000 aggregate principal amount of
convertible notes to two purchasers. At the time of issuance, such notes were
convertible at any time and from time to time by the noteholders into a maximum
of 525,000 shares of our common stock (subject to certain anti-dilution
adjustments) if such convertible notes are not in default, or a maximum of
1,050,000 shares of our common stock (subject to certain anti-dilution
adjustments) if an event of default has occurred in respect of such convertible
notes. The terms of such convertible notes require us to register under the
Securities Act of 1933 the shares our common stock issuable upon conversion of
such convertible notes not later than June 3, 2006. Such notes were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
2002
In the first six months of 2002, we issued $240,000 aggregate principal
amount of convertible notes to nine purchasers. At the time of issuance, such
notes were convertible at any time and from time to time by the noteholders into
a maximum of 3,600,000 shares of our common stock (subject to certain
anti-dilution adjustments) if such convertible notes are not in default, or a
maximum of 7,200,000 shares of our common stock (subject to certain
anti-dilution adjustments) if an event of default has occurred in respect of
such convertible notes. Such notes were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In April 2002, we issued an aggregate of 1,993,573 restricted shares of
our common stock to two holders of our convertible promissory notes in
connection with the conversion of $150,000 aggregate principal amount of such
notes plus $2,380 of accrued interest thereon into shares of our common stock.
Such shares were issued by us in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
In May 2002, we issued 36,775 shares of our common stock to each of Edward
Meyer and Edward Whelan, our Chairman of the Board and Chief Executive Officer,
pursuant to the terms of a consulting agreement. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
II-3
In July 2002, we issued options to purchase an aggregate of 300,000 shares
of our common stock to consultants for services rendered. Such options were
one-year options that have an exercise price of $0.50 per share and expired on
July 1, 2003. Such options were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In July 2002, we issued 75,000 shares of our common stock to a consultant
for services rendered. Such shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such person was an `accredited investor' as defined in Regulation D under the
Securities Act of 1933, as amended.
In August 2002, we issued an aggregate of 619,540 shares of our common
stock to five consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the second half of 2002, we issued $165,000 aggregate principal amount
of convertible promissory notes with original maturity dates of June 30, 2003
that, as amended, mature on June 3, 2006 and bear interest at 8% per annum that
mature on June 30, 2003 and bear interest at the rate of 8% per annum. At the
time of issuance, such notes were convertible at any time and from time to time
by the noteholders into a maximum of 990,000 shares of our common stock (subject
to certain anti-dilution adjustments). The terms of the such notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of the notes not later than June 3, 2006. Such notes
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, on the basis that such issuance
did not involve a public offering, no underwriter fees or commissions were paid
in connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In September 2002, we issued 95,861 shares of our common stock to each of
Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer (or their designees), pursuant to the terms of a consulting agreement.
Such shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In October 2002, we issued an aggregate of 250,000 shares of our common
stock to a consultant for services rendered. In connection with such issuance,
we granted "piggy-back" registration rights to the consultant. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended. The
consulting agreement provides that we will issue additional shares of our common
stock upon the consultant's achievement of certain performance goals.
II-4
In November 2002, we issued an aggregate of 300,000 shares of our common
stock to a consultant for services rendered. In connection with such issuance,
we granted "piggy-back" registration rights to the consultant. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In November 2002, we granted one of our lenders a five-year option to
purchase 500,000 shares of our common stock at an exercise price of $0.50 per
share in consideration of the lender's willingness to extend the term of its
loan to the Company for an additional six months. Such options were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
2003
In January 2003, we issued 96,207 shares of our common stock to each of
Edward Meyer and Edward Whelan, our Chairman of the Board and Chief Executive
Officer (or their designees), pursuant to the terms of a consulting agreement
and an executive compensation agreement. Such shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In January and March 2003, we issued $15,000 aggregate principal amount of
convertible promissory notes with original maturity dates of June 30, 2003 that,
as amended, mature on June 3, 2006 and bear interest at 8% per annum. At the
time of issuance, such notes were convertible at any time and from time to time
by the noteholders into a maximum of 225,000 shares of our common stock (subject
to certain anti-dilution adjustments) if the convertible notes are not in
default, or a maximum of 450,000 shares of our common stock (subject to certain
anti-dilution adjustments) if an event of default has occurred in respect of
such notes. The terms of such notes require us to register under the Securities
Act of 1933 the shares of our common stock issuable upon conversion of such
notes not later than June 3, 2006. Such notes were issued by us in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid by us in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In January and March 2003, we issued an aggregate of 282,500 shares of our
common stock to three consultants for services rendered. Such shares were issued
by us in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid by
us in connection with such issuance and such persons were "accredited investors"
as defined in Regulation D under the Securities Act of 1933, as amended.
In May and June 2003, we issued $60,000 aggregate principal amount of
convertible promissory notes with original maturity dates of September 30, 2003
that, as amended, mature on June 3, 2006 and bear interest at 8% per annum. Such
notes are convertible at any time and from time to time by the noteholders into
a maximum of 360,000 shares of our common stock (subject to certain
anti-dilution adjustments). The terms of such notes require us to register under
the Securities Act of 1933 the shares of our common stock issuable upon
conversion of such notes not later than June 3, 2006, except for $10,000
aggregate principal amount of such notes which require us to register such
shares not later than September 30, 2003. In connection with the sale of such
notes, we issued 400,000 shares to the noteholders. Such notes and shares were
issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
II-5
In May 2003, we issued 109,259 shares of our common stock to one of our
consultants for services rendered during the first quarter of 2003. Such shares
were issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such person was an
`accredited investor' as defined in Regulation D under the Securities Act of
1933, as amended.
In May 2003, we issued 109,259 shares of our common stock to our Chief
Executive Officer as compensation for services rendered during the first quarter
of 2003. Such shares were issued by us in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such person was an `accredited investor' as defined in Regulation D under
the Securities Act of 1933, as amended.
In June 2003, we issued to a consultant 595,000 shares of our common stock
and three-year warrants to purchase an aggregate of 1,000,000 shares of our
common stock consisting of warrants to purchase 250,000 shares at each of $0.25,
$0.50, $0.75 and $1.00 per share. In connection with such issuance, we granted
"piggy-back" registration rights to the consultant. Such shares and options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In June 2003, we isssued 100,000 shares of our common stock to an employee
as bonus compensation for services rendered. Such shares were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such person had access to the same kind of information as that
which would be included in a registration statement.
In June 2003, we issued an aggregate of 500,000 shares of our common stock
to two consultants for services rendered. Such shares were issued by us in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid by us in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In June 2003, we issued options to purchase 1,305,000 shares of our common
stock to holders of our 8% and 9% convertible notes and demand notes in
consideration of their willingness to extend the maturity dates of such notes
until June 3, 2006. Such options were issued by us in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid by us in connection with
such issuance and such persons were `accredited investors' as defined in
Regulation D under the Securities Act of 1933, as amended.
In July 2003, we issued 127,272 shares of our common stock to one of our
consultants for services rendered during the second quarter of 2003. Such shares
were issued by us in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid by us in connection with such issuance and such person was an
`accredited investor' as defined in Regulation D under the Securities Act of
1933, as amended.
In July 2003, we issued 127,273 shares of our common stock to our Chief
Executive Officer as compensation for services rendered during the second
quarter of 2003. Such shares were issued by us in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such person was an `accredited investor' as defined in Regulation D under
the Securities Act of 1933, as amended.
II-6
In July 2003, we issued an aggregate of 900,000 shares of our common stock
to consultants for services rendered. Such shares were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were "accredited investors" as defined in Regulation D
under the Securities Act of 1933, as amended.
In August 2003, we issued an aggregate of 250,000 shares of our common
stock to two investors in a private sale for aggregate net proceeds to us of
$50,000. Such shares were issued by us in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid by us in connection with such issuance
and such persons were `accredited investors' as defined in Regulation D under
the Securities Act of 1933, as amended.
In October 2003, we issued an aggregate of 200,000 shares of our common
stock to two consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In November 2003, we issued 650,000 shares of our common stock to two
consultants for services rendered. Such shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were `accredited investors' as defined in Regulation D
under the Securities Act of 1933, as amended.
In December 2003, we issued 384,000 shares of our common stock to our
former landlord in settlement of certain claims. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In December 2003, we issued an aggregate of 1,538,093 shares of our common
stock to four consultants for services rendered. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In December 2003, we issued 602,051 shares of our common stock to our
Chief Executive Officer for services rendered during the third and fourth
quarters of 2003 pursuant to the terms of his employment arrangement. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such person was an `accredited
investor' as defined in Regulation D under the Securities Act of 1933, as
amended.
II-7
In December 2003, we issued 200,000 shares of our common stock to
investors in a private placement for aggregate proceeds to us of $20,000. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such persons were `accredited
investors' as defined in Regulation D under the Securities Act of 1933, as
amended.
In December 2003, we issued options to purchase an aggregate of 250,000
shares of our common stock to consultants for services to be rendered. Such
options are five year options which have an exercise price of $0.25 per share.
Such options were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In October and December 2003, we issued an aggregate of 1,000,000 shares
of our common stock to a consultant in connection with the exercise of options
which resulted in proceeds to us of $75,000. Such shares were issued in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, on the basis that such issuance did not involve a
public offering, no underwriter fees or commissions were paid in connection with
such issuance and such person was an `accredited investor' as defined in
Regulation D under the Securities Act of 1933, as amended.
2004
In the three months ended March 31, 2004, we issued to investors in a
private placement investment units consisting of an aggregate of 4,000,000
shares of our common stock and five-year warrants to purchase an aggregate of
2,000,000 shares of our common stock at $0.25 per share for gross proceeds to us
of $500,000, less sales commissions of $40,000. In connection with such
issuances, we granted registration rights to such investors. Such shares and
warrants were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended, on the basis that
such issuance did not involve a public offering and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In the three months ended March 31, 2004, we issued 450,000 shares of our
common stock to investors in a private placement for gross proceeds to us of
$47,500, less sales commissions of $4,250. In connection with such issuances, we
granted registration rights to such investors. Such shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued 400,000 shares of our
common stock and three-year warrants to purchase an aggregate of 250,000 shares
of our common stock at $0.25 per share to one of our lenders in full
satisfaction of $50,000 of our indebtedness to such lender. Such shares and
warrants were issued in reliance upon the exemption from registration provided
by Section 3(a)(9) of the Securities Act of 1933, as amended.
II-8
In the three months ended March 31, 2004, we issued 247,560 shares of our
common stock and five-year options to purchase 247,560 shares of our common
stock at $0.25 per share to our Chief Executive Officer for services rendered
during the three months ended March 31, 2004 pursuant to the terms of his
employment arrangement. The services were valued at $72,000. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an `accredited investor' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued an aggregate of
300,000 shares of our common stock to two consultants for services rendered or
to be rendered to the Company, which services were valued at $49,000 in the
aggregate. Such shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were `accredited investors' as defined in Regulation D under the
Securities Act of 1933, as amended.
In the three months ended March 31, 2004, we issued five-year warrants to
purchase an aggregate of 320,000 shares of our common stock at $0.125 per share
to a consultant for services rendered to the Company. Such warrants were valued
at $52,870 and were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering and such persons were
`accredited investors' as defined in Regulation D under the Securities Act of
1933, as amended.
In the three months ended March 31, 2004, we issued 50,000 shares of our
common stock to a consultant for business consulting services to be rendered.
Such shares were valued at $11,000 and were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering, no underwriter fees or commissions were paid in connection with such
issuance and such persons were `accredited investors' as defined in Regulation D
under the Securities Act of 1933, as amended.
In the three months ended June 30, 2004, we issued an aggregate of
1,050,000 shares of our common stock to four consultants for services rendered
or to be rendered to the Company, which services were valued at $168,500 in the
aggregate. One such consultant was also granted options to purchase 200,000
shares of our common stock at $0.25 per share. Such shares and options were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such persons were `accredited investors' as
defined in Regulation D under the Securities Act of 1933, as amended.
In the three months ended June 30, 2004, we issued 1,920,000 shares of our
common stock and five-year warrants to purchase an aggregate of 960,000 shares
of our common stock at $0.25 per share as consideration for our purchase of Ohio
Street Partners, LLC. In connection with such transaction, we granted
registration rights to the selling party. Such shares and warrants were issued
in reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such issuance did not
involve a public offering and such person was `accredited investor' as defined
in Regulation D under the Securities Act of 1933, as amended.
II-9
In the three months ended June 30, 2004, we issued 62,500 shares of our
common stock to an investor as liquidated damages for our failure to file a
registration statement covering such investor's shares on or before January 31,
2004, as required pursuant to such investor's subscription agreement. Such
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, on the basis that such
issuance did not involve a public offering, no underwriter fees or commissions
were paid in connection with such issuance and such person was an `accredited
investor' as defined in Regulation D under the Securities Act of 1933, as
amended.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
3.1* Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated By-laws of the Company.
5* Opinion of Pryor Cashman Sherman & Flynn LLP.
10.1* Amended and Restated Promissory Note dated as of June 30, 2002 from the
Company to Atlantic Investment Trust in the principal amount of $25,000
(incorporated by herein by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002 (file
no. 000-26463)).
10.2* Amended and Restated Promissory Note dated as of June 30, 2002 from the
Company to Ethan Hokit, our president and one of our directors, in the
principal amount of $25,000 (incorporated by herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2002 (file no. 000-26463)).
10.3* 2001 Equity Incentive Plan of the Company adopted in December 2001
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-8 (Registration No. 333-81258).
10.4* Amended and Restated Promissory Note dated as of May 5, 2003 from the
Company to Oncor Partners, Inc. in the principal amount of $100,000.
10.5* Lease Agreement, dated as of August 2001, between MRS Connection and
the Company related to 2180 Executive Circle, Colorado Springs,
Colorado 80906.
10.6* Promissory Note dated as of October 30, 1997 from the Company to
Shannon Investments, Inc.
10.7* Form of Subscription Agreement.
10.8* Domestic Service Agreement dated May 1, 2002 between the Company and
Tyson Foods, Inc. (Certain portions of this Exhibit have been omitted
pursuant to our request for confidential treatment).
II-10
10.9* Letter of Agreement effective November 1, 2001 between the Company and
S&K Sales, Inc. (Certain portions of this Exhibit have been omitted
pursuant to our request for confidential treatment).
10.10* Form of 9% Convertible Note (incorporated herein by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002 (File no. 000-264463)).
10.11* Description of Edward Whelan Executive Compensation Arrangement
(incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2003 (File
no. 000-264463).
10.12* $10,000 Demand Note dated November 17, 2002 from our company to Edward
T. Whelan (incorporated herein by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.13* $5,000 Demand Note dated December 11, 2002 from our company to Edward
T. Whelan (incorporated herein by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.14* $5,000 Demand Note dated December 2, 2002 from our company to Edward T.
Whelan (incorporated herein by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.15* $10,000 Demand Note dated March 11, 2003 from our company to Edward T.
Whelan (incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
2003 (File no. 000-264463).
10.16* Form of Warrant issued to certain investors during the three months
ended March 31, 2004 (incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2004 (File no. 000-264463).
10.16* Description of Registration Rights granted to certain investors during
the three months ended March 31, 2004 (incorporated herein by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for
the period ended March 31, 2004 (File no. 000-264463).
23.1 Consent of A.J. Robbins, P.C.
23.2 Consent of Rosenberg Rich Baker Berman & Company.
23.3* Consent of Pryor Cashman Sherman & Flynn LLP (included in their opinion
filed as Exhibit 5).
24* Powers of Attorney (included in the Signature Page of the
Registration Statement).
----------------
* Previously filed with the Commission.
II-11
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds, to believe that it met all
the requirements of filing on Form SB-2 and authorized this Amendment No. 6 to
Registration Statement to be signed on its behalf by the undersigned, in
Colorado Springs, Colorado on July 9, 2004.
MILITARY RESALE GROUP, INC.
By: /s/Ethan D. Hokit
-------------------------------------
Ethan D. Hokit
President and Chief Operating Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/Edward T. Whelan Chairman of the Board, Chief July 9, 2004
-------------------------- Executive Officer
Edward T. Whelan (Principal Executive Officer)
/s/Ethan D. Hokit President, Chief Operating July 9, 2004
-------------------------- Officer, Director (Principal
Ethan D. Hokit Accounting Officer and
Principal Financial Officer)
/s/Richard H. Tanenbaum Director July 9, 2004
--------------------------
Richard H. Tanenbaum
/s/Lee Brukmam Director July 9, 2004
--------------------------
Lee Brukmam
II-13
EXHIBIT 23.1
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
216 SIXTEENTH STREET
SUITE 600
DENVER,COLORADO 80202
CONSENT OF INDEPENDENT AUDITOR
As independent certified public accountants for the year ended December 31,
2003, we have issued our report dated April 7, 2004 included in Military Resale
Group. Inc.'s Annual Report on Form 10-KSB for the year ended December 31, 2003.
We hereby consent to the inclusion of said report and to the reference made to
our firm under the caption "Experts" included in or made part of this
Registration Statement No. 333-75630 of Military Resale Group, Inc. on Form SB-2
Amendment #6.
/s/ AJ. Robbins, P.C.
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Denver, Colorado
July 9, 2004
EXHIBIT 23.2
ROSENBERG RICH BAKER BERMAN & COMPANY, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
1380 FOOTHILL ROAD, PO BOX 6483
BRIDGEWATER, NEW JERSEY 08807
CONSENT OF INDEPENDENT AUDITOR
As independent certified public accountants for the year ended December 31,
2002, we have issued our report dated April 23, 2003 included in Military Resale
Group, Inc.'s Annual Report on Form 10-KSB for the year ended December 31, 2002.
We hereby consent to the inclusion of said report in Registration Statement No.
333-75630 of Military Resale Group, Inc. on Form SB-2 and in Registration
Statement Nos. 333-81258, 333-102353, 333-105836, 333-108627, 333-108628,
333-110233 of Military Resale Group, Inc. on Form S-8.
/s/ Rosenberg Rich Baker Berman & Co.
-------------------------------------
Bridgewater, New Jersey
July 9, 2004
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