UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10KSB/A Amendment No. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] For the transition period from to . ------------ ------------ Commission File Number 000-26463 --------- MILITARY RESALE GROUP, INC. (Name of small business issuer in its charter) ---------------------------------------------- New York 11-2665282 ----------------------------------- ----------------------------------- (State or other jurisdiction of I.R.S. Employer Identification No. incorporation or organization) 2180 Executive Circle, Colorado Springs, Colorado 80906 ------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (719) 391-4564 --------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.0001 par value -------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure is contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State registrant's revenues for its most recent fiscal year. $4,851,433 ---------- As of March 15, 2002, the registrant had outstanding 7,805,004 shares of its common stock. As of March 15, 2002, the aggregate market value of the registrant's common stock held by non-affiliates was $1,597,902 (based upon the closing price ---------- ($0.58) of the registrant's common stock on the OTC Bulletin Board on such date). MILITARY RESALE GROUP, INC. 2001 FORM 10-K/A ANNUAL REPORT TABLE OF CONTENTS PAGE NO. INTRODUCTORY NOTE II PART I ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 1 ITEM 7. FINANCIAL STATEMENTS F-1 i INTRODUCTORY NOTE We are filing this Form 10-KSB/A in order to amend and restate the information disclosed in Items 6 and 7 of Part I. The principal changes we made were as follows: (i) we revised our statement of operations to recognize additional interest expense relating to the beneficial conversion feature of $35,000 aggregate principal amount of convertible promissory notes that were issued in the fourth quarter of 2001 and (ii) we revised the manner in which we accounted for the issuance of 875,000 shares of our common stock to certain of our employees and directors in the fourth quarter of 2001. This Form 10-KSB/A does not necessarily reflect events occurring after the filing of the original Form 10-KSB. ii PART I ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Because our common stock is considered a "penny stock" as defined by the regulations of the Securities and Exchange Commission, the safe harbor for forward-looking statements does not apply to statements by our company. The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Report. Our business and results of operations are affected by a wide variety of factors that could materially and adversely affect us and our actual results, including, but not limited to: (1) the availability of additional funds to enable us to successfully pursue our business plan; (2) the uncertainties related to the effectiveness of our technologies and the addition of new products and suppliers; (3) our ability to maintain, attract and integrate management personnel; (4) our ability to complete the development of our proposed product line in a timely manner; (5) our ability to effectively market and sell our products and services to current and new customers; (6) our ability to negotiate and maintain suitable strategic partnerships and corporate relationships with suppliers and manufacturers; (7) the intensity of competition; and (8) general economic conditions. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price. Any forward-looking statements herein speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Prior to November 15, 2001, we did not generate any signification revenue, and accumulated no significant assets, as we explored various business opportunities. On November 15, 2001, we acquired 98.2% of the issued and outstanding capital stock of Military Resale Group, Inc., a Maryland corporation ("MRG-Maryland"), in exchange for a controlling interest in our publicly-held "shell" corporation ("the Reverse Acquisition"). For financial reporting purposes, MRG-Maryland was considered the acquirer in such transaction. As a result, our historical financial statements for any period prior to November 15, 2001 are those of MRG-Maryland. RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Revenue. Total revenue for the year ended December 31, 2001 of $4,851,433 reflected an increase of $371,128, or approximately 8.3%, compared to total revenue of $4,480,305 for the year ended December 31, 2000. Our revenues are derived in either one of two ways. In the majority of instances, we purchase products from manufacturers and suppliers for resale to the commissaries we service. In such cases, we resell the manufacturer's or supplier's products to the commissaries at generally the same prices we pay for such products, which prices generally are negotiated between the manufacturer or supplier and the Defense Commissary Agency ("DeCA"). Revenue is recognized as the gross sales amount received by us from such sales ("resale revenues"), which includes (i) 1 the purchase price paid by the commissary plus (ii) a negotiated storage and delivery fee paid by the manufacturer or supplier. In the remaining instances, we act as an agent for the manufacturer or supplier of the products we sell, and earn a commission paid by the manufacturer or supplier, generally in an amount equal to a percentage of the manufacturer's or supplier's gross sales amount ("commission revenues"). In such cases, revenue is recognized as the commission we receive on the gross sales amount. Resale revenue for the year ended December 31, 2001 of $4,560,347 reflected an increase of $528,072, or approximately 13.1%, compared to resale revenue of $4,032,275 for the year ended December 31, 2000. For the year ended December 31, 2001, approximately 49.1% of our gross profit was derived from sales involving resale revenue compared to approximately 36.9% for the year ended December 31, 2000. These increases were attributable primarily to the addition of the new products we began supplying to commissaries during the fourth quarter of fiscal 2001, including Slimfast, L'eggs, Bush Beans and Rayovac Batteries, and during the first quarter of fiscal 2002, including a line of feminine hygiene products and a line of infant feeding products supplied by Playtex Products, Inc. which we sell on a resale basis, as well as the implementation of our long-term strategy to increase our ratio of sales of products we sell on a resale basis, rather than a commission basis, due to the payment discounts we often receive from the manufacturers and suppliers of the goods we purchase for resale. Commission revenues for the year ended December 31, 2001 of $291,086 reflected a decrease of $156,944, or approximately 35%, compared to commission revenues of $448,030 for the year ended December 31, 2000. For the year ended December 31, 2001, approximately 50.9% of our gross profit was derived from sales involving commission revenues as compared to approximately 63.1% for the year ended December 31, 2000. These decreases were attributable primarily to the implementation of our long-term strategy to increase our ratio of sales of products sold on a resale basis, rather than a commission basis. We cannot be certain as to whether or not these trends will continue; however, in the long term we are seeking to increase the ratio of our sales of products sold on a resale basis, rather than a commission basis, because we believe we can increase our profitability on such sales by taking advantage of payment discounts frequently offered by the manufacturers and suppliers of such products. To do so, we intend to continue to seek to add new products that we can offer to commissaries on a resale basis from our existing manufactures and suppliers and from others with whom we do not currently have a working relationship. In March 2002, we entered into an agreement with Playtex Products, Inc. to distribute, on a resale basis, approximately 70 Stock Keeping Units (SKUs) manufactured or supplied by Playtex, including a line of feminine hygiene products and a line of infant feeding products. We have been advised by Playtex, and verified with DeCA, that sales by Playtex in 2001 to the commissaries we currently service amounted to approximately $350,000. However, there can be no assurance that our annual sales of Playtex products will reach such amount, and the amount of our actual sales of Playtex products may differ materially from the amounts sold by Playtex in 2001 as a result of one or more of the factors described above, among others. In April 2002, we began distributing products for Pfizer, Inc. under an agreement that provided for the distribution of approximately 114 SKUs of Pfizer products. In June 2002, the agreement was terminated by Pfizer because we were unable to consistently meet our delivery obligations due to our insufficient working capital. During the term of our agreement with Pfizer, we received revenue from the sale of Pfizer products of approximately $168,000. Management believes the termination of the Pfizer agreement will not have a material adverse impact on our results of operations for fiscal 2002. In October 2002, we added to our supplier network the Hillshire Farm and Kahn's product groups of Sara Lee Foods-USA and certain consumer products distributed by Chattem, Inc. Hillshire Farm and Kahn's are product lines of packaged meats and hams. Chattem is a manufacturer of branded consumer products, principally over-the-counter healthcare products, including Aspercreme, Gold Bond, Sportscreme, Pamprin, Dexatrim, Rejuvex and Flexall. We have been advised by Sara Lee Foods-USA, and verified with DeCA, that sales of Hillshire Farm and Kahn's products in 2001 to the commissaries we currently service amounted to approximately $950,000. We have been advised by Chattem, and verified with DeCA, that sales of Chattem's line of products in 2001 to the commissaries we currently service amounted to approximately $200,000. However, there can be no assurance that our annual sales of these products will reach such amounts, and the amount of our actual sales of Hillshire Farm and Kahn's Products and Chattem products may differ materially from the amounts sold by Sara Lee Foods-USA and Chattem, respectively, in 2001. 2 Management believes our long-term success will be dependent in large part on our ability to add additional product offerings to enable us to increase our sales and revenues. However, we believe our ability to add additional product offerings is dependent on our ability to obtain additional capital to fund new business development and increased sales and marketing efforts. We are currently in discussions with a number of other manufacturers and suppliers in an effort to reach an agreement under which we can distribute their products to the military market. While there can be no assurance that we will do so, we believe we will be successful in negotiating agreements with a number of such suppliers and manufacturers. To date, all of our sales revenue has been generated from customers located in the United States. Cost of Goods Sold. Cost of goods sold consists of our cost to acquire products from manufacturers and suppliers for resale to commissaries. In instances where we sell products on a commission basis, there is no cost of goods sold because we act as an agent for the manufacturer or supplier and earn only a commission on such sales. During the year ended December 31, 2001, cost of goods sold increased by $509,355, or approximately 13.5%, to $4,279,449 from $3,770,094 for the year ended December 31, 2000. This increase was attributable primarily to the addition of new products in the 2001 fiscal year that we sell on a resale basis. Gross Profit. Gross profit for the year ended December 31, 2001 decreased by $138,227, or approximately 19.5%, compared to the year ended December 31, 2000, from $710,211 for the year ended December 31, 2000 to $571,984 for the year ended December 31, 2001. This decrease was attributable primarily to an increase in our inventory on hand as of December 31, 2001 compared to December 31, 2000. Operating Expenses. Total operating expenses aggregated approximately $1,271,223 for the year ended December 31, 2001 as compared to approximately $711,763 for the year ended December 31, 2000, representing an increase of $559,460, or approximately 44.0%. The increase in total operating expenses for the 2001 period was attributable primarily to increased professional fees of approximately $103,000 resulting primarily from the costs of the Reverse Acquisition in November 2001 and the costs of the preparation of the registration statement under the Securities Act of 1933 relating to this offering; increased occupancy expense of approximately $75,000 resulting from our move to larger office and warehouse facilities in September 2001; increased salary and wages of approximately $54,000 due primarily to the addition of office and warehouse personnel and, to a lesser extent, increased wages; increased general and administrative expenses of $284,734 due primarily to the issuance of 875,000 shares of our common stock in the fourth quarter as bonus compensation to certain employees and directors for services rendered in 2001; and increased trucking expense of approximately $42,000 due primarily to the addition of one truck and the renewal of two truck leases at higher rates. Interest Expense. Interest expense of $46,755 for the year ended December 31, 2001 reflected an increase of $34,634 as compared to interest expense of $12,121 for the year ended December 31, 2000. The increase in interest expense was attributable primarily to interest expense resulting from the recognition of the beneficial conversion feature (the right to convert debt into shares of our common stock at a discount to the fair market value of our common stock) of $35,000 aggregate principal amount of convertible promissory notes issued in the fourth quarter of 2001. Net Loss. Primarily as a result of the increased expenses discussed above, we incurred a net loss of $745,994 for the year ended December 31, 2001 as compared to a net loss of $13,673 for the year ended December 31, 2000. 3 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, we had a zero cash balance. Our principal source of liquidity has been borrowings. Since November 2001, we have funded our operations primarily from borrowings of approximately $410,000. In the fourth quarter of 2001 and the first and second quarters of 2002, we issued $260,000 aggregate principal amount of convertible promissory notes (the "9% Convertible Notes") that mature on December 31, 2002 and bear interest at the rate of 8% per annum prior to June 30, 2002 and 9% per annum thereafter. In April 2002, $150,000 aggregate principal amount of 9% Convertible Notes (and $2,380 accrued interest thereon) was converted by the holders into an aggregate of 1,993,573 shares of our common stock. The remaining 9% Convertible Notes are convertible at any time and from time to time by the noteholders into a maximum of 1,153,900 shares of our common stock (subject to certain anti-dilution adjustments) if the 9% Convertible Notes are not in default, or a maximum of 2,307,800 shares of our common stock (subject to certain anti-dilution adjustments) if an event of default has occurred in respect of such notes. The terms of the 9% Convertible Notes require us to register under the Securities Act of 1933 the shares our common stock issuable upon conversion of the 9% Convertible Notes not later than December 31, 2002. In the third quarter of 2002, we issued $105,000 aggregate principal amount of convertible promissory notes (the "8% Convertible Notes") that mature on either June 30, 2003 or July 30, 2003 and bear interest at the rate of 8% per annum. The 8% Convertible Notes are convertible at any time and from time to time by the noteholders into a maximum of 489,667 shares of our common stock (subject to certain anti-dilution adjustments). The terms of the 8% Convertible Notes require us to register under the Securities Act of 1933 the shares of our common stock issuable upon conversion of the 8% Convertible Notes not later than December 31, 2002. Our current cash levels, together with the cash flows we generate from operating activities, are not sufficient to enable us to execute our business strategy. As a result, we intend to seek additional capital through the sale of up to 5,000,000 shares of our common stock. In December 2001, we filed with the Securities and Exchange Commission a registration statement relating to such shares. Such registration statement has not yet been declared effective, and there can be no assurance that the Securities and Exchange Commission will declare such registration statement effective in the near future, if at all. In the interim, we intend to fund our operations based on our cash position and the near term cash flow generated from operations, as well as additional borrowings. In the event we sell only a nominal number of shares (i.e. 500,000 shares) in our proposed offering, we believe that the net proceeds of such sale, together with anticipated revenues from sales of our products, will satisfy our capital requirements for at least the next 12 months. However, we would require additional capital to realize our strategic plan to expand distribution capabilities and product offerings. These conditions raise substantial doubt about our ability to continue as a going concern. Our actual financial results may differ materially from the stated plan of operations. Assuming that we receive a nominal amount of proceeds from our proposed offering of common stock, we expect capital expenditures to be approximately $200,000 during the next twelve months, primarily for the acquisition of an inventory control system. It is expected that our principal uses of cash will be to provide working capital, to finance capital expenditures, to repay indebtedness and for other general corporate purposes, including sales and marketing and new business development. The amount of spending for any particular purpose is dependent upon the total cash available to us and the success of our offering of common stock. At December 31, 2001, we had liquid assets of $441,058, consisting of accounts receivable derived from operations, and other current assets of $279,544, consisting primarily of inventory of products for sale and/or distribution. Long term assets of $192,411 consisted primarily of warehouse equipment used in operations. Current liabilities of $1,369,735 at December 31, 2001 consisted of $1,047,207 of accounts payable and $260,522 for the current portion of notes payable, of which approximately $210,000 was payable to our officers or our other affiliates. Our working capital deficit was $649,133 as of December 31, 2001 for the reasons described above. 4 We used cash of $87,386 in operating activities during the year ended December 31, 2001, primarily as a result of the net loss incurred during the periods. We used net cash of $123,502 in investing activities during the year ended December 31, 2001, all of which was used for capital expenditures. Financing activities consisting primarily of short-term borrowings provided net cash of $211,338 during the year ended December 31, 2001. ITEM 7. FINANCIAL STATEMENTS Our financial statements for the years ended December 31, 2001 and 2000 are attached and included as a part of this report. 5 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Colorado Springs, Colorado, on November 4, 2002 MILITARY RESALE GROUP, INC. By: /s/Ethan D. Hokit ------------------- Ethan D. Hokit President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates stated:SIGNATURE TITLE DATE /s/Edward T. Whelan Chairman of the Board, November 4, 2002 ---------------------- Chief Executive Officer Edward T. Whelan (Principal Executive Officer) /s/Ethan D. Hokit President, Chief Operating Officer, November 4, 2002 ---------------------- Director (Principal Accounting Officer Ethan D. Hokit and Principal Financial Officer) /s/Richard H. Tanenbaum Director November 4, 2002 -------------------------- Richard H. Tanenbaum 6 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Edward T. Whelan, certify that: 1. I have reviewed this annual report on Form 10-KSB of Military Resale Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Edward T. Whelan ------------------------------------ Name: Edward T. Whelan Title: Chief Executive Officer NOVEMBER 4, 2002 7 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Ethan D. Hokit, certify that: 1. I have reviewed this annual report on Form 10-KSB of Military Resale Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ Ethan D. Hokit ------------------------------------ Name: Ethan D. Hokit Title: Chief Financial Officer November 4, 2002 8 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Auditors F-2 Balance Sheets as of December 31, 2000 and 2001 F-3 Statements of Operations for the years ended December 31, 2000 and 2001 F-4 Statements of Cash Flows for the years ended December 2000 and 2001 F-5 Statements of Shareholders' Equity for the years ended December 31, 2000 and 2001 F-6 Notes to Financial Statements F-7 F-1 REPORT OF INDEPENDENT AUDITORS INDEPENDENT AUDITOR'S REPORT Board of Directors Military Resale Group, Inc. Colorado Springs, Colorado We have audited the accompanying balance sheets of Military Resale Group, Inc. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flow for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Military Resale Group, Inc., as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company's recurring losses from operations and its difficulties in generating sufficient cash flow to meet its obligation and sustain its operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. MICHAEL B. JOHNSON & CO., LLC By: /s/Michael B. Johnson ----------------------- Michael B. Johnson Denver, Colorado February 18, 2002 October 25, 2002 F-2 MILITARY RESALE GROUP, INC. Balance Sheets December 31, ASSETS 2001 2000 ---- ---- CURRENT ASSETS: Accounts receivable -trade ...................... $ 441,058 $ 457,574 Inventory ....................................... 252,430 90,936 Deposits ........................................ 20,406 -- Prepaid expenses ................................ 6,708 -- ----------- ----------- Total Current Assets .................................. 720,602 548,510 ----------- ----------- FIXED ASSETS: Office Equipment ................................ 9,121 1,691 Warehouse Equipment ............................. 203,132 83,110 Vehicles ........................................ 64,366 64,366 Leasehold Improvements .......................... 2,440 2,440 Software ........................................ 15,609 15,609 ----------- ----------- 294,668 167,216 Less Accumulated Depreciation ................... (102,257) (67,217) ----------- ----------- Net Fixed Assets ............................. 192,411 99,999 ----------- ----------- OTHER ASSETS: Goodwill , net of amortization .................. -- 1,834 ----------- ----------- TOTAL ASSETS .......................................... $ 913,013 $ 650,343 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable - trade ........................ $ 1,047,207 $ 544,698 Bank Overdraft .................................. 1,349 38,223 Accrued Interest Payable ........................ 60,657 23,540 Notes Payable - current portion ................. 260,522 86,073 ----------- ----------- Total Current Liabilities ...................... 1,369,735 692,534 ----------- ----------- LONG-TERM DEBT: Notes Payable - long-term portion ............... 91,121 17,358 ----------- ----------- Total Long-term Debt ............................ 91,121 17,358 ----------- ----------- TOTAL LIABILITIES ..................................... 1,460,856 709,892 ----------- ----------- STOCKHOLDERS' EQUITY: Common Stock, par value $.0001, 60,000,000 shares 7,505,004 and 5,360,000 issued and outstanding at December 31, 2001 and 2000 respectively ........ 750 536 Additional Paid-In Capital ...................... 407,150 149,664 Retained Deficit ................................ (955,743) (209,749) ----------- ----------- Total Stockholders' Equity ...................... (547,843) (59,549) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 913,013 $ 650,343 =========== =========== The accompanying notes are an integral part of the financial statements. F-3 MILITARY RESALE GROUP, INC. Statement of Operations for the years ended December 31, 2001 2000 ---- ---- REVENUES: Gross Sales ................ $ 4,560,347 $ 4,032,275 Commissions sales - net .... 291,086 448,030 ----------- ----------- Total Revenues ............ 4,851,433 4,480,305 ----------- ----------- COST OF GOODS SOLD ......... (4,279,449) (3,770,094) ----------- ----------- GROSS PROFIT ............... 571,984 710,211 ----------- ----------- OPERATING EXPENSES: Salary & payroll taxes ..... 415,525 361,623 Professional Fees .......... 153,856 50,795 Occupancy .................. 155,503 80,805 General and administrative . 333,881 49,147 Amortization/Depreciation .. 36,874 36,039 Lease and auto/truck expense 175,584 133,354 ----------- ----------- Total Expenses ............. 1,271,223 711,763 ----------- ----------- NET LOSS FROM OPERATIONS ... (699,239) (1,552) ----------- ----------- OTHER INCOME/(EXPENSES) Interest expense ........... (46,755) (12,121) ----------- ----------- NET LOSS ................... $ (745,994) $ (13,673) =========== =========== Per Share Information: Weighted average number of common shares outstanding 5,644,584 5,360,000 ----------- ----------- Net Loss per common share .. $ (0.13) $ (0.01) =========== =========== The accompanying notes are an integral part of the financial statements. F-4 MILITARY RESALE GROUP, INC. Statement of Stockholders' Equity (Deficit) Common Stock Additional Retained Total --------------------- Paid-In Earnings Stockholders' Shares Amount Capital (Deficit) Equity -------------------------------------------- ------ ------ ------------- ------------- ------------- Balance, October 6, 1997 ............... -- $ -- $ -- $ -- $ -- Issuance of common stock for cash ...... 800,000 80 120 -- 200 Net loss for period ended .............. -- -- -- (6,756) (6,756) --------- --------- --------- --------- --------- Balance, December 31, 1997 ............. 800,000 80 120 (6,756) (6,556) --------- --------- --------- --------- --------- Issuance of common stock for cash ...... 40,000 4 14,996 -- 15,000 Issuance of common stock for services .. 3,000,000 300 (300) -- -- Net loss for year ended ................ -- -- -- (43,372) (43,372) --------- --------- --------- --------- --------- Balance, December 31, 1998 ............. 3,840,000 384 14,816 (50,128) (34,928) --------- --------- --------- --------- --------- Issuance of common stock ............... 1,520,000 152 134,848 -- 135,000 Net loss for year ended ................ -- -- -- (145,948) (145,948) --------- --------- --------- --------- --------- Balance, December 31, 1999 ............. 5,360,000 536 149,664 (196,076) (45,876) --------- --------- --------- --------- --------- Net loss for year ended ................ -- -- -- (13,673) (13,673) --------- --------- --------- --------- --------- Balance, December 31, 2000 ............. 5,360,000 536 149,664 (209,749) (59,549) --------- --------- --------- --------- --------- Issuance of common stock for services .. 875,000 87 253,663 -- 253,750 Acquisition of Bactrol Technologies, Inc 1,270,004 127 3,823 -- 3,950 Net loss for year ended ................ -- -- -- (745,994) (745,994) --------- --------- --------- --------- --------- Balance, December 31, 2001 ............. 7,505,004 $ 750 $ 407,150 $(955,743) $(547,843) --------- --------- --------- --------- --------- The accompanying notes are an integral part of the financial statements. F-5 MILITARY RESALE GROUP, INC. Statement of Cash Flows For the years ended December 31, 2001 2000 ---- ---- Cash Flows from Operating Activities: Net Loss .................................... $(745,994) $ (13,673) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation .............................. 35,040 35,039 Amortization .............................. 1,834 1,000 Stock issued for services ................. 253,750 -- Changes in Assets & Liabilities: Decrease (Increase) in accounts receivable 16,516 (157,932) (Increase) in inventory ................... (161,494) (202) Increase in prepaid expenses .............. (6,708) -- Increase in notes receivable .............. (20,406) -- Increase in accounts payable .............. 502,509 135,130 Increase in accrued expenses .............. 37,117 7,758 --------- --------- Net Cash Used In Operating Activities .............. (87,836) 7,120 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of business ..................... 3,950 -- Purchase of fixed assets .................... (127,452) (14,515) --------- --------- Cash Flows Used In Investing Activities ............ (123,502) (14,515) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft .............................. (36,874) 38,223 Short-term borrowings ....................... 248,212 -- Note principal payments ..................... -- (34,604) --------- --------- Cash Flows Provided By Financing Activities ........ 211,338 3,619 --------- --------- Net (Decrease) Increase in Cash and Cash Equivalents -- (3,776) Cash and Cash Equivalents at Beginning of Period ... -- 3,776 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ -- $ -- ========= ========= SUPPLEMENTAL INFORMATION: Interest Paid ............................... $ 9,263 $ 4,365 ========= ========= Income Taxes Paid ........................... $ -- $ -- ========= ========= The accompanying notes are an integral part of the financial statements. F-6 MILITARY RESALE GROUP, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - GENERAL ------- THE COMPANY On October 15, 2001, the Company, formerly Bactrol Technologies, Inc. and Military Resale Group, Inc. ("MRG"), a Maryland corporation which was formed on October 6, 1997 executed a Stock Purchase Agreement pursuant to which 98.2% of MRG's stock was effectively exchanged for a controlling interest in a publicly held "shell" corporation that concurrently changed its name to Military Resale Group, Inc. This transaction is commonly referred to as a 'reverse acquisition." For financial accounting purposes, this transaction has been treated as the issuance of stock for the net monetary assets of the Company, accompanied by a recapitalization of MRG with no goodwill or other intangible assets recorded. For financial reporting purposes, MRG is considered the acquirer, and therefore, the historical operating results of Bactrol Technologies, Inc. are not presented. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ----------------------------------------------- CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, 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, the Company's bad debt write-offs related to these trade accounts have been insignificant. PROPERTY AND EQUIPMENT The Company follows the practice of capitalizing property and equipment over $250 at cost. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized. Depreciation is computed on the straight-line method over the following estimated useful lives. Office Equipment & Software 3 to 5 years Warehouse Equipment 5 to 7 years Vehicles 5 years ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States, 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. NET LOSS PER SHARE Net loss per share is based on the weighted average number of common shares and common shares equivalent outstanding during the period. F-7 REVENUE RECOGNITION The Company's revenues are derived in either one of two ways: resale revenue or commission revenue. Resale Revenue. In the majority of instances, the Company purchases products from manufacturers and suppliers for resale to the commissaries its services. Revenue is recognized in the amount of the gross sales amount received by the Company (subject to an appropriate provision for returns and allowances from such sales), which 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 it is responsible for fulfillment of the order and for the customer's acceptance of the goods or services sold, (b) bears inventory risk (it takes 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. Commission Revenue. In the remaining instances, the Company acts as an agent for the manufacturer or supplier of the products it sells, and earns a commission paid by the manufacturer or supplier, generally in an amount equal to a percentage of the manufacturer's or supplier's gross sales amount. In such cases, revenue is recognized on the date goods are shipped in the amount of the commission received by the Company on the gross sales amount. The Company recognizes both resale revenue and commission revenue on the date goods are shipped because title to the goods passes, and the payment obligation of the customer or supplier to the Company arises, upon shipment of the goods to the commissaries. The Company believes that adoption of Staff Accounting Bulletin (SAB) 101- "Revenue Recognition in Financial Statements" had no effect on its financial statements. COMPENSATORY EQUITY ISSUANCES The Company applies the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) for options granted to employees, directors and non-employees. As allowed under the provisions of SFAS No. 123, the Company applies Accounting Principal Board Opinion No. 25 and related interpretations, in accounting for its stock plans. Information with respect to all stock options is summarized below: Weighted 2001 Plan Average Exercise Options Price ---------- ------------------ Outstanding at December 31, 2000 Granted 1,000,000 $0.50 Exercised 0 0 Expired 0 0 ---------- -------- Outstanding at December 31, 2001 1,000,000 $0.50 ========== ======== On August 1, 2001, in connection with a consulting arrangement, the Company, issued options to purchase 1,000,000 shares of common stock at an exercise price of $0.50 per share, which price was in excess of the fair market value of the common stock on the date of grant. The options expired on August 1, 2002. As none of such options were exercised prior to expiration, no amounts have been accrued in respect of such options. F-8 In 2001, the Company issued 875,000 shares of its restricted common stock to participating employees based upon salary levels and minimum service requirements. Compensation costs of $0.29 per share (representing the closing bid price on the date of issuance of $0.32 per share less a discount of approximately 10% due to the fact that such shares were " restricted stock" and were subject to statutory transfer restrictions on the date of issue) have been charged against operations for 2001. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments. OTHER COMPREHENSIVE INCOME The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods. FEDERAL INCOME TAXES The Company accounts for income taxes under SFAS No 109, which requires the asset and liability approach to accounting for income taxes. Under this approach, deferred income taxes are determined based upon differences between the financial statement and tax bases of the Company's assets and liabilities and operating loss carryforwards using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the future tax benefit will be realized. NOTE 2 INVENTORY --------- Inventories at December 31, 2001 by major classification, were comprised of the following: Finished goods $252,430 -------- $252,430 ======== Inventory consists primarily of grocery items and are stated at the lower of costs 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. SEGMENT INFORMATION The Company operates primarily in a single operating segment, distributing and marketing resale grocery products to military commissaries. F-9 NOTE 3 - NOTES PAYABLE -------------- The following is a summary of notes payable as of December 31, 2001: Note payable to finance company, collateralized by auto, monthly payments of $1,053, maturity date - June 2003 $ 18,240 Note payable to investment company, unsecured loan, 10% interest, Due on demand 60,000 Note payable - freezer, secured by property leased, 19% interest, Maturity dated October 2006 72,266 Note payable - cooler, secured by property leased, 24% interest, Maturity date November 2004 31,137 Convertibles Notes, unsecured loan, 8% interest, maturity date December 31, 2002 35,000 Notes payable, unsecured, 8% interest, due on demand 135,000 ========== 351,643 Less: Current Portion (260,522) ---------- Total Long-Term Debt $ 91,121 ========== Maturities of long-term debt at December 31, 2001, were as follows: 2002 $260,522 2003 28,963 2004 25,807 2005 17,311 2006 19,040 -------- Total $351,643 ======== The terms of the Company's convertible notes provide generally, that, if the convertible notes are not in default, the holders may convert, at any time and from time to time, all or a portion of the outstanding balance under each convertible note into a number of shares (subject to certain anti-dilution adjustments) of the Company's common stock that will allow the noteholder to receive common stock having a market value equal to 150% of the converted balance of the note. If an event of default has occurred in respect of such convertible notes, the holder may convert the outstanding balance into a number of shares (subject to certain anti-dilution adjustments) of the Company's common stock equal to twice the number of shares the holder would have otherwise received if the convertible notes were not in default. Among other events of default, the terms of the convertible notes require the Company to register under the Securities Act of 1933 the shares its common stock issuable upon conversion of the convertible notes not later than December 31, 2002. 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, 2001, interest expense of $35,000 (representing the aggregate proceeds to the Company from convertible notes issued during such period), was recognized as the intrinsic value of the beneficial conversion feature of the convertible notes that were issued during such period. F-10 NOTE 4 - COMMITMENTS AND CONTIGENCIES -------------------------------- OPERATING RENTAL LEASE In August 2001, the Company entered into lease agreements for office and warehouse space in Colorado Springs, Colorado that expire in August 2006. Rental expense for the year was $80,805. Minimum future lease payments under current lease agreements at December 31, 2001 are as follows: 2002 $182,839 2003 191,030 2004 199,216 2005 207,402 2006 141,908 -------- $922,395 ======== NOTE 5- CAPITAL STOCK TRANSACTION --------------------------- On May 24, 1999, the Company's Board of Directors and shareholders approved the following capital stock transaction: authorizing a 40,000-to-1 split of common stock. On October 15, 2001, the Company's Board of Directors and shareholders authorized increasing the number of authorized common shares to 60,000,000 and designating a par value of $.0001 per share for the Common Stock. All shares and per share amounts in the accompanying financial statements of the Company and notes thereto have been retroactively adjusted to give effect to the stock splits and new par value per share. NOTE 6- CONCENTRATION OF RISK ----------------------- The Company's revenues from military commissary sales provide approximately ninety eight percent of their base of operations. Management believes that concentration of customers with respect to risk is minimal due to the sales being primary through government contracts. NOTE 7- INCOME TAXES ------------- Significant components of the Company's deferred tax liabilities and assets at December 31, 2001 are as follows: Deferred Tax Assets Net Operating Loss Carryforwards $955,743 Less Valuation Allowance (955,743) --------- Total Deferred Tax Assets $ - ========= As of December 31, 2001, the Company had a net operating loss carryforward for federal income tax purposes approximately equal to the accumulated deficit recognized for book purposes, 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 the Company's effective tax rate to differ from the statutory income tax rate. The net operating loss carryforward, if not utilized, will begin to expire in the year 2007. F-11 NOTE 8 - 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's current liabilities exceed current assets by $649,133 and the Company lost $745,994 in operations in 2001. The Company's management is currently pursuing equity and/or debt financing in an effort to restart operations. The future success of the Company is likely dependent on its ability to attain additional capital to develop its proposed products and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. NOTE 9 - RELATED PARTY TRANSACTIONS ---------------------------- CONSULTING AGREEMENTS In February 2001, the Company entered into a (11) eleven month consulting agreement with Edward Whelan , chairman of Board and principal shareholder, and Edward Meyer, Jr., one of the principals shareholders. In consideration for consulting services rendered, the Company issued 145,000 shares of common stock to each individual. In January 2002, the Company entered into a one-year business consulting agreement with Edward Whelan and Edward Meyer, Jr. for the provision of marketing and managerial consulting services. In consideration of the services to be rendered by Messrs. Whelan and Meyer, the Company will issue in respect of each month the number of shares determined by dividing $12,000 by the product of 80% and the average closing bid price for the Company's common stock during such month. LOANS PAYABLE In October 1997, the Company borrowed $60,000 from Shannon Investments, which is controlled by Edward Whelan. The note is payable on demand and bears interest at the rate of 10% per annum. On August 14, 2001, the Company borrowed $100,000 from Oncor Partners, Inc., a company of which Edward Whelan, is president and shareholder. In December 2001, the Company borrowed $25,000 from Ethan Hokit, one of the company's directors, and Atlantic Investment Trust, of which Richard Tanenbaum, one of the Company's directors is a trustee. In connection with each such loan, the Company executed a demand promissory note that bears interest at the rate of 8% per annum. In December 2001, the Company issued $35,000 aggregate principal amount of convertible notes to two purchasers. Such notes are convertible at any time and from time to time by the noteholders into a maximum of 367,150 shares of the Company's common stock (subject to certain anti-dilution adjustments) if such convertible notes are not in default, or a maximum of 734,300 shares of the Company's 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 the Company to register under the Securities Act of 1933 the shares its common stock issuable upon conversion of such convertible notes not later than December 31, 2002. F-12