AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL ___, 2002
REGISTRATION NO. 333-75630
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MILITARY RESALE GROUP, INC.
(Name of Small Business Issuer in Its Charter)
NEW YORK 5141 11-2665282
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(719) 391-4564
(Address and Telephone Number of Principal Executive Offices)
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(Address of Principal Place of Business or Intended Principal Place of Business)
ETHAN D. HOKIT, PRESIDENT
MILITARY RESALE GROUP, INC.
2180 EXECUTIVE CIRCLE
COLORADO SPRINGS, COLORADO 80906
(719) 391-4564
(Name, address and telephone number of agent for service)
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COPIES TO:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022-4441
(212) 421-4100
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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5,000,000 SHARES
MILITARY RESALE GROUP, INC.
COMMON STOCK
Military Resale Group, Inc., a New York corporation, is offering up to
5,000,000 shares of its common stock at a price of $1.00 per share. We may offer
the shares for cash from time to time from the date of this prospectus until the
termination of this offering.
Our common stock is traded in the over-the-counter market and prices
are reported on the OTC Bulletin Board under the symbol "MYRG."
See "Risk Factors" beginning on page 3 for risks of an investment in
the securities offered by this prospectus, which you should consider before your
purchase any shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
We are offering the shares on a "best efforts, no minimum" basis. In a
"best efforts, no minimum offering," we do not need to reach a specific level of
subscriptions before the proceeds are available to us. There will be no escrow
of funds. There is no underwriter assisting us in the offer and sale of the
shares.
We intend to keep the offering open until September 30, 2002. However,
if we have not sold all of the shares by that date, we may extend the offering
period at our sole discretion for an additional 120 days, and we may offer the
remaining shares on a continuous basis thereafter.
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Underwriting Discounts and Proceeds to
Price to Public(2) Commissions(1) Company(2)
Per Share............................. $1.00 $0.00 $1.00
Total................................. $5,000,000 $0.00 $5,000,000
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(1) We have not engaged a selling agent or underwriter. See "Plan of
Distribution."
(2) Assumes the sale of the maximum number of shares offered by this prospectus
before deducting expenses, including professional fees, printing costs, and
filing fees related to the offering payable by us, estimated at $125,000.
The date of this prospectus is __________, 2002
We have not registered the sale of the shares under the securities laws
of any state. Brokers or dealers effecting transactions in the shares should
confirm that the shares have been registered under the securities laws of the
state or states in which sales of the shares occur as of the time of such sales,
or that there is an available exemption from the registration requirements of
the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
shares. This prospectus is not an offer to sell securities in any circumstances
in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, Military Resale Group,
Inc., or the shares that is different from the information included in this
prospectus. You should not assume that the information in this prospectus, or
any supplement to this prospectus, is accurate at any date other than the date
indicated on the cover page of this prospectus or any supplement to it.
TABLE OF CONTENTS
Page
Prospectus Summary............................................................................... 1
Risk Factors..................................................................................... 3
Special Note Regarding Forward-Looking Statements................................................ 10
Use of Proceeds.................................................................................. 10
Dilution......................................................................................... 11
Determination of Offering Price.................................................................. 13
Market for Common Equity and Related Shareholder Matters......................................... 13
Management's Discussion and Analysis or Plan of Operation........................................ 15
Business......................................................................................... 18
Management....................................................................................... 27
Principal Stockholders........................................................................... 30
Certain Relationships and Related Transactions................................................... 32
Description of Securities........................................................................ 33
Plan of Distribution............................................................................. 34
Legal Matters.................................................................................... 34
Experts.......................................................................................... 34
Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............. 35
Where You Can Find Additional Information........................................................ 35
Index to Financial Statements.................................................................... F-1
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE SHARES. YOU ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY.
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We are a regional distributor of grocery and household items
specializing in distribution to the military market. We distribute a wide
variety of items, including fresh and frozen meat and poultry, seafood, frozen
foods, canned and dry goods, beverages, dairy products, paper goods and cleaning
and other supplies. Our operations are currently directed to servicing the
commissary at each of six military installations located in Colorado, Wyoming
and South Dakota, including the Air Force Academy, located in Colorado Springs,
Colorado. We are approved by the Department of Defense to contract with military
commissaries and exchanges.
Military commissaries are large supermarket-type stores operated by the
United States Defense Commissary Agency ("DeCA") to provide grocery items for
sale to authorized patrons at the lowest practicable prices in facilities
designed and operated under standards similar to those in commercial food
stores. As of September 2000, there were 296 commissaries worldwide, of which
182 were located in the Continental U.S. and 114 were located overseas.
Commissaries are authorized by law to sell goods only to authorized patrons,
which include the approximately 1.4 million active duty U.S. military personnel,
their dependents and certain authorized reservists and retirees. As of September
30, 2000, these authorized patrons totaled approximately 13.7 million
individuals. Annual worldwide commissary sales totaled more than $5 billion in
2000.
We were formed as a New York corporation on August 31, 1983 under the
name Owl Capital Corp. On June 17, 1988, we changed our name to Bactrol
Technologies, Inc. On November 15, 2001, we acquired 98.2% of the issued and
outstanding shares of Military Resale Group, Inc., a Maryland corporation, in a
reverse acquisition (the "Reverse Acquisition") and subsequently changed our
name to Military Resale Group, Inc. In connection with the Reverse Acquisition,
we commenced operations in our current line of business. Prior to the Reverse
Acquisition, we were inactive and had nominal assets and liabilities. Our
principal address is 2180 Executive Circle, Colorado Springs, Colorado 80906,
and our telephone number at that address is (719) 391-4564. In this Prospectus,
reference to the terms "Military Resale Group," "we," "us" and "the company"
refer collectively to Military Resale Group, Inc. (a New York corporation)
unless otherwise indicated.
ABOUT THIS OFFERING
We are offering up to 5,000,000 shares of common stock at a price of
$1.00 per share. At April 11, 2002, we had 7,805,004 shares of common stock
issued and outstanding. If we were to sell all of the shares offered by us in
this offering, there would be 12,805,004 shares of common stock outstanding
after the offering. There is no underwriter of this offering. We are offering
the shares on a best efforts, no minimum basis. This means that, although we are
offering up to 5,000,000 shares, we are not required to sell a specified number
of shares in this offering prior to accepting any subscriptions. As a result, we
may only sell a nominal amount of shares and receive minimal proceeds from this
offering. In addition, we may terminate the offering at any time before we have
sold all 5,000,000 shares. We will not escrow any of the proceeds we receive
from this offering. There is no minimum offering and the proceeds from any
subscription accepted by us will be immediately available to us. We may reject
any subscription in whole or in part. If we reject a subscription we will return
the investor's check or other funds without deduction and without the payment of
any interest.
Common Stock Offered.......................................... 5,000,000 shares
Common Stock Outstanding Immediately
Prior to the Offering...................................... 7,805,004 shares (1)
Common Stock to be Outstanding Following
the Offering................................................ 12,805,004 shares (1) (2)
Use of Proceeds............................................... The net proceeds of this offering will be
used (i) to acquire an inventory control
system, (ii) for sales and marketing,
(iii) to repay indebtedness; (iv) for
working capital and general purposes and
(v) for acquisitions and new business
development. See "Use of Proceeds"
OTC Bulletin Board Ticker Symbol.............................. MYRG
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(1) Does not include (i) 1,300,000 shares reserved for issuance upon the
exercise of outstanding options and (ii) up to 2,439,667 shares issuable
upon the conversion of outstanding bridge notes.
(2) Assumes the sale of all 5,000,000 shares of our common stock offered in
this Offering.
SELECTED FINANCIAL INFORMATION
The selected financial information presented below is derived from and
should be read in conjunction with our financial statements, including notes
thereto, appearing elsewhere in this Prospectus. See "Financial Statements."
MILITARY RESALE GROUP, INC.
SUMMARY OPERATING INFORMATION
FISCAL YEAR ENDED DECEMBER 31,
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1999 2000 2001
---- ---- ----
Net sales.......................................... $ 3,117,010 $ 4,480,305 $4,851,433
Net loss........................................... (145,948) (13,673) (465,994)
Net loss per common share.......................... (0.03) (0.01) (0.08)
Weighted average number of common
shares outstanding............................... 2,982,837 5,360,000 5,644,584
SUMMARY BALANCE SHEET INFORMATION
DECEMBER 31,
---------------------------------------------
1999 2000 2001
---- ---- ----
Working capital ............. $ (80,452) $ (144,024) $ (614,133)
Total assets................. 517,509 648,509 913,013
Total liabilities ........... 563,385 709,892 1,425,856
Stockholders' equity ........ (45,876) (59,549) (512,843)
2
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING
SHARES IN THIS OFFERING. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE SERIOUSLY
HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT.
OUR OPERATING HISTORY IS LIMITED, SO IT WILL BE DIFFICULT FOR YOU TO EVALUATE
OUR BUSINESS IN MAKING AN INVESTMENT DECISION.
Although, we were incorporated in 1983, we commenced operations in our
current line of business in November 2001 (at which time we acquired Military
Resale Group, Inc., a Maryland corporation that commenced operations in November
1998) and have a limited operating history. We are still in the early stages of
our development, which makes the evaluation of our business operations and our
prospects difficult. Before buying our common stock, you should consider the
risks and difficulties frequently encountered by early stage companies. These
risks and difficulties, as they apply to us in particular, include:
o potential fluctuations in operating results and uncertain growth
rates;
o limited market acceptance of the products we distribute;
o concentration of our revenues in a single market;
o our dependence on the military market for most of our revenue;
o our need to expand our direct sales force;
o our need to manage rapidly expanding operations; and
o our need to attract and train qualified personnel.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE MAY BE UNABLE TO ACHIEVE
PROFITABILITY OR GENERATE POSITIVE CASH FLOW.
We incurred net losses of $145,948 in 1999, $13,673 in 2000 and
$465,994 in 2001 and we may be unable to achieve profitability in the future. If
we continue to incur net losses in future periods, we may be unable to achieve
one or more key elements of our business strategy, including the following:
o increase the number of products we distribute;
o increase our sales and marketing activities, including the number
of our sales personnel;
o increase the number of regions in which we distribute products; or
o acquire additional distributorships.
As of December 31, 2001, we had an accumulated deficit of approximately
$675,743. We may not achieve profitability if our revenues increase more slowly
than we expect, or if operating expenses exceed our expectations or cannot be
adjusted to compensate for lower than expected revenues. If we do achieve
profitability, we may be unable to sustain or increase profitability on a
quarterly or annual basis. Any of the factors discussed above could cause our
stock price to decline.
OUR RELATIONSHIPS WITH THIRD PARTY PRODUCERS AND MANUFACTURERS FOR THE PRODUCTS
WE DISTRIBUTE MAY BE TERMINATED AT ANY TIME.
3
Although we have good working relationships with our principal
suppliers, we do not have long-term arrangements with these entities. Our
relationships with the suppliers for which we distribute products may be
terminated at any time by any supplier. Therefore, we cannot be assured that we
will be able to maintain or increase the number of producers and manufacturers
for which we distribute and products that we currently distribute and sell. Any
disruption in our relationship with the producers and manufacturers for which we
distribute goods could result in the termination of our representation of such
producers and manufacturers and their products, which would reduce our revenues
and could adversely affect our prospects for achieving profitability.
OUR REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OF A MAJOR SUPPLIER.
We derive a significant portion of our revenues from the distribution
of products that are manufactured by a limited number of suppliers. The loss of
any major supplier could dramatically reduce our revenues and adversely affect
our prospects for achieving profitability. In 2000, products supplied by Tyson
Foods, Inc. accounted for approximately 48% of our revenues, products supplied
by Jimmy Dean Foods accounted for approximately 12% of our revenues and products
supplied by another supplier accounted for approximately 9% of our revenues. In
2001, products supplied by Tyson Foods Inc. accounted for approximately 46% of
our revenues, products supplied by S&K Sales, Inc. accounted for approximately
14% of our revenues and products supplied by Jimmy Dean Foods, Inc. accounted
for approximately 10% of our revenues.
VARIOUS CHANGES IN THE DISTRIBUTION AND RETAIL MARKETS IN WHICH WE OPERATE HAVE
LED AND MAY CONTINUE TO LEAD TO REDUCED SALES AND MARGINS AND LOWER
PROFITABILITY FOR OUR CUSTOMERS AND, CONSEQUENTLY, FOR US.
The distribution and retail markets in which we operate are undergoing
accelerated change as distributors and retailers, including military
commissaries, seek to lower costs and provide additional services in an
increasingly competitive environment. An example of this is the growing trend of
large self-distributing chains consolidating to reduce costs and gain
efficiencies. Eating away from home and alternative format food stores, such as
warehouse stores and supercenters, have taken market share from traditional
supermarket operators, including military commissaries, some of which are our
customers. Venders, seeking to ensure that more of their promotional fees and
allowances are used by retailers to increase sales volume, increasingly direct
promotional dollars to large self-distributing chains. We believe that these
changes have led to reduced sales, reduced margins and lower profitability among
many of our customers and, consequently, for us. If the strategies we have
developed in response to these changing market conditions are not successful, it
could harm our financial condition and business prospects.
CONSUMABLE GOODS DISTRIBUTION IS A LOW-MARGIN BUSINESS AND IS SENSITIVE TO
ECONOMIC CONDITIONS.
We derive most of our revenues from the consumable goods distribution
industry. This industry is characterized by a high volume of sales with
relatively low profit margins. A significant portion of our sales are at prices
that are based on product cost plus a percentage markup. Consequently, our
results of operations may be negatively impacted when the price of consumable
goods go down, even though our percentage markup may remain constant. The
consumable goods industry is also sensitive to national and regional economic
conditions, and the demand for our consumable goods has been adversely affected
from time to time by economic downturns. Additional, our distribution business
is sensitive to increases in fuel and other transportation-related costs.
REDUCTIONS IN THE ARMED FORCES MAY ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.
4
We distribute and sell products for resale to active and retired
military personnel. Since the end of the Cold War, the United States has
streamlined its Armed Forces by reducing the number of military personnel and
closing military bases. Reductions in funding for force modernization and
military end strength have outpaced reductions in support services and overhead.
Proposals have been made to decrease the cost to taxpayers of operating
commissaries, including:
o increasing the surcharge charged to commissary patrons;
o merging commissaries with exchanges; and
o privatizing the commissary system.
Funding for commissaries has decreased since the early 1990s. In October 1996,
DeCA became a "Performance Based Operation," which has resulted in DeCA's
obtaining special waivers from Federal procurement regulations for the purpose
of striving to operate more efficiently by adopting some characteristics of
private-sector companies. The impact of these trends on our business is
uncertain and could lead to reduced revenues, increased competition and reduced
margins.
THERE IS NO MINIMUM NUMBER OF SHARES TO BE SOLD IN THIS OFFERING AND THERE IS A
RISK THAT WE WILL BE UNABLE TO SELL A SUFFICIENT NUMBER OF SHARES TO ENABLE US
TO CARRYOUT OUR BUSINESS PLAN.
There is no minimum number of shares of common stock that we must sell
in this offering prior to the initial closing, and we expect to accept
subscriptions for shares of common stock as they are received. In addition, this
offering is a self-underwritten offering, and therefore there is no guarantee
that we will sell all or any part of the shares offered in this offering. As a
result, there can be no assurance that we will raise sufficient funds in this
offering to carry out our business plan as currently proposed, or that the net
proceeds from the initial subscriptions for shares will be in an amount
sufficient to enable us to continue operations in any meaningful manner.
WE MAY NEED ADDITIONAL FINANCING TO IMPLEMENT OUR BUSINESS PLAN.
Assuming at least 500,000 shares of common stock offered hereby are
sold in this offering, we believe the net proceeds from this offering, together
with our projected cash flow from operations, will be sufficient to fund our
operations as currently conducted for at least the next 12 months. Such belief,
however, cannot give rise to an assumption that our cost estimates are accurate
or that unforeseen events will not occur that will require us to seek additional
funding to meet our operational needs. As a result, we may require substantial
additional financing in order to implement our business objectives. There can be
no assurances that we will be able to obtain additional funding when needed, or
that such funding, if available, will be obtainable on terms we find acceptable.
In the event our operations do not generate sufficient cash flow, or we cannot
obtain additional funds if and when needed, we may not be able to:
o attract additional suppliers;
o expand into additional regions;
o develop or enhance our product line;
o take advantage of future opportunities; or
o respond to competitive pressures or unanticipated requirements.
5
For additional information on our anticipated future capital requirements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
OUR RELATIONSHIPS WITH THIRD PARTY BROKERS TO STOCK AND DISPLAY THE PRODUCTS WE
DISTRIBUTE MAY BE TERMINATED AT ANY TIME.
We rely on a network of brokers to ensure that sufficient inventories
of products are received by commissaries and exchanges and that products are
properly stocked and displayed. Our arrangements with brokers may be terminated
at any time by any broker. Although we have good working relationships with our
brokers, there can be no assurance that we will be successful in maintaining our
existing arrangements with brokers or in acquiring, or entering into
arrangements with, additional brokers. In addition, we do not have exclusive
relationships with the brokers we utilize. Many of these brokers may represent
other products in addition to the products we distribute. There can be no
assurance that the representation by brokers of multiple products does not
result in conflicts of interest.
WE CARRY ONLY A LIMITED AMOUNT OF PRODUCT LIABILITY INSURANCE AND ANY
SIGNIFICANT PRODUCT LIABILITY CLAIM MAY ADVERSELY AFFECT US.
The marketing and sale of products of the type we distribute entails a
risk of product liability claims by consumers and others. Although we have
obtained product liability insurance in the amount of $2,000,000, there is no
assurance that such policy will be sufficient to cover us against all possible
liabilities or that the policy can be maintained in force at a cost we find
acceptable. In the event of a successful product liability claim against us,
lack or insufficiency of insurance coverage could impair our ability to fund
current operations and prevent us from carrying out our strategic plans.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our quarterly operating results have varied significantly in the past
and will likely fluctuate significantly in the future. Significant annual and
quarterly fluctuations in our results of operations may be caused by, among
other factors:
o the volume of revenues we have generated;
o the timing of our announcements for the distribution of new
products, and any such announcements by our competitors;
o the acceptance of the products we distribute in the military
marketplace; and
o general economic conditions.
There can be no assurance that the level of revenues and profits, if
any, achieved by us in any particular fiscal period will not be significantly
lower than in other, including comparable, fiscal periods. We believe
quarter-to-quarter comparisons of our revenues and operating results are not
necessarily meaningful and should not be relied on as indicators of future
performance. Operating expenses are based on management's expectations of future
revenues and are relatively fixed in the short term. We plan to increase
operating expenses to:
o expand our product line;
o expand our sales and marketing operations;
o increase our services and support capabilities; and
6
o improve our operational and financial systems.
If our revenues do not increase along with these expenses, our business will be
seriously harmed and net losses in a given quarter would be larger than
expected. It is possible that in some future quarter our operating results may
be below the expectations of public market analysts or investors, which could
cause a reduction in the market price of our common stock.
WE MAY PURSUE ACQUISITIONS THAT BY THEIR NATURE PRESENT RISKS AND THAT MAY NOT
BE SUCCESSFUL.
Our growth strategy includes the acquisition of additional distributors
and, possibly, of brokers in the business of selling consumer goods in the
military market. Our ability to accomplish our acquisition strategy will depend
upon a number of factors including, among others, our ability to:
o identify acceptable acquisition candidates;
o consummate the acquisition of such businesses on terms that we
find acceptable;
o retain, hire and train professional management and sales personnel
at each such acquired business; and
o promptly and profitably integrate the acquired business operations
into our then-existing business.
No assurance can be given that we will be successful with respect to such
factors or that any acquired operations will be profitable or be successfully
integrated into our then-existing business without substantial costs, delays or
other problems. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates may
be bid to higher levels. In any event, there can be no assurance that businesses
acquired in the future will achieve sales and profitability that justify the
investments we make therein.
THE LOSS OF THE SERVICES OF ETHAN D. HOKIT, OUR PRESIDENT, COULD IMPAIR OUR
ABILITY TO SUPPORT CURRENT OPERATIONS AND DEVELOP NEW BUSINESS.
Our success will be dependent on the efforts of Ethan D. Hokit, our
President. We have no employment agreement with Mr. Hokit. In addition, we have
no key man life insurance on the life of any of our employees, and we have not
entered into any employment agreements or non-competition arrangements with any
of our key personnel. Our key personnel at the present time, however, are our
executive officers and directors, and we believe such persons have certain
fiduciary obligations to our company. The loss of the services of Mr. Hokit, or
our inability to attract and retain other qualified personnel could impair our
ability to support current operations and develop new business..
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Assuming all shares of common stock offered hereby are sold in this offering,
upon completion of this offering our executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 39.4% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or present an outside party from acquiring or
merging with us. For a full presentation of the equity ownership of these
stockholders, see "Principal Stockholders."
7
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE PUBLIC OFFERING PRICE.
There has been only a limited public market for our common stock prior
to this offering. The public offering price for our common stock has been
determined arbitrarily by our management and bears no relationship to our
assets, book value, net worth or other economic or recognized criteria of value.
This public offering price may vary from the market price of our common stock
after the offering. If you purchase shares of common stock, you may not be able
to resell those shares at or above the public offering price. The market price
of our common stock may fluctuate significantly in response to factors, some of
which are beyond our control, including the following:
o actual or anticipated fluctuations in our operating results;
o changes in market valuations of other companies in our industry;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o additions or departures of key personnel; and
o sales of common stock in the future.
In addition, the stock market has experienced extreme volatility that
often has been unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to fall regardless of our
performance.
You should read the information under the heading "Market For Common
Equity and Related Shareholder Matters" for a more complete discussion of the
factors which were considered in determining the public offering price of our
common stock.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The public offering price is expected to be substantially higher than
the book value per share of our outstanding common stock immediately after this
offering. For example, if we sell all 5,000,000 shares offered hereby and you
purchase common stock in this offering, you will incur immediate dilution of
approximately $0.65 in the book value per share of our common stock from the
price you pay for our common stock. If we sell half (2,500,000) of the shares
offered hereby, you will incur immediate dilution of approximately $0.81 in such
book value per share, and if we sell only 500,000 of the shares offered hereby,
you will incur immediate dilution of $0.98 in such book value per share. For
additional information on these calculations, see "Dilution."
WE FACE SIGNIFICANT COMPETITION FROM COMPETITORS WITH GREATER RESOURCES THAN
OURS.
We operate in a highly competitive industry. Many companies are engaged
in the sale and distribution of consumer products to the military market, and we
compete on the basis of price, quality and assortment, schedules and reliability
of deliveries and the range and quality of services provided. Many of our
competitors have financial resources, research and development capabilities,
marketing staffs and facilities substantially greater than ours.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
8
We currently have 6,323,400 shares of our common stock outstanding that
are "restricted securities", as that term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). In general,
under Rule 144, a person who has satisfied a one-year holding period may, under
certain circumstances, sell within any three-month period a number of shares of
common stock that does not exceed the greater of 1% of the then outstanding
shares of our common stock or the average weekly trading volume in such shares
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity or other
limitation by a person who is not one of our affiliates and who has satisfied a
two-year holding period. Any substantial sale of restricted securities under
Rule 144 could have a significant adverse effect on the market price of our
common stock. In addition, the sale of these shares could impair our ability to
raise capital through the additional sale of stock.
We have reserved 1,500,000 shares of our common stock for issuance to
key employees, officers, directors and consultants pursuant to options granted
or available for grant under our existing equity incentive plan. We have
reserved 1,300,000 shares of our common stock for issuance upon exercise of
options issued to consultants to the company and 2,439,667 shares of common
stock for issuance upon the conversion of bridge notes issued to creditors of
the Company. The existence of any outstanding options issued under equity
incentive plan, and other options or warrants or convertible bridge notes may
prove to be a hindrance to future financings, since the holders of such warrants
and options or convertible bridge notes may be expected to exercise or convert
them (as the case may be) at a time when we would otherwise be able to obtain
additional equity capital on terms we would find more favorable.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
The holders of our common stock are entitled to receive dividends when,
as and if declared by our board of directors out of funds legally available
therefor. To date, we have not paid any cash dividends. Our board of directors
does not intend to declare any cash dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in our business
operations.
OUR COMMON STOCK IS SUBJECT TO SPECIAL REGULATIONS GOVERNING THE SALE OF PENNY
STOCKS, WHICH COULD MAKE IT MORE DIFFICULT FOR YOU TO SELL YOUR SHARES IN THE
FUTURE.
Our 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
9
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 Exchange Act, 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements involve risks known to us,
significant uncertainties, and other factors which may cause our actual results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by those forward-looking statements.
You can identify forward-looking statements by the use of the words
"may," "will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential," "proposed," or "continue" or
the negative of those terms. These statements are only predictions. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined above. These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the exceptions reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
USE OF PROCEEDS
We expect to incur expenses in connection with this offering of
approximately $125,000 for our legal fees, accounting fees, printing, Blue Sky
legal and filing fees and other miscellaneous expenses. The net proceeds of this
offering, estimated to be $4,875,000 if the maximum of 5,000,000 shares is sold,
$3,625,000 if 75% (3,750,000) of the share are sold, $2,375,000 if 50%
(2,250,000) of the shares are sold and $1,125,000 if only 25% (1,250,000) of the
shares are sold, are expected to be allocated as follows:
10
1,250,000 2,500,000 3,750,000 5,000,000
SHARES SHARES SHARES SHARES
----------- ----------- ----------- -----------
Acquisition of Inventory Control System........ $ 200,000 $ 200,000 $ 200,000 $ 200,000
Sales and marketing............................ -- 200,000 400,000 500,000
Repayment of indebtedness (1).................. 700,000 700,000 700,000 700,000
Working capital................................ 225,000 1,025,000 1,825,000 2,475,000
Acquisitions and new business development...... -- 250,000 500,000 1,000,000
----------- ----------- ----------- -----------
Totals $ 1,125,000 $ 2,375,000 $ 3,625,000 $ 4,875,000
=========== =========== =========== ===========
--------------
(1) Includes interest and principal on $500,000 aggregate principal amount of
convertible bridge note indebtedness that matures on June 30, 2002. In the
event one or more holders of such notes elect to convert all or a portion
of the principal and interest due on such notes into shares of our common
stock pursuant to the terms of such notes, the net proceeds allocated to
the repayment of such indebtedness will be reallocated to working capital
purposes.
As reflected in the table above, we intend to use approximately
$190,000 to repay a portion of our outstanding indebtedness, of which, at April
11, 2002, approximately $60,000 of principal was owed to Shannon Investments,
Inc., one of our principal shareholders that is controlled by Edward T. Whelan,
our Chairman of the Board and Chief Executive Officer, and approximately
$100,000 of principal was owed to Oncor Partners, Inc., a company of which Mr.
Whelan is President and Mr. Whelan and Edward Meyer, Jr., one of our principal
shareholders are the sole shareholders. The loan from Shannon Investments, Inc.
interest at the rate of 10% per annum and is payable on demand. The loan from
Oncor Partners, Inc. is non-interest bearing prior to any default and matures on
August 14, 2002. The proceeds of the loan from Oncor Partners Inc., which was
made on August 14, 2001, were used for short- term working capital purposes.
In the event the net proceeds from this offering are less than
$1,125,000, such proceeds will be applied first, to the extent necessary, to the
repayment of the bridge note indebtedness discussed above, then, if we raise net
proceeds of at least $750,000, to the acquisition of an inventory control
system. Any other net proceeds will be applied to working capital and for
general corporate purposes.
The foregoing represents our current estimate of the uses of the net
proceeds of this offering and is based on certain assumptions regarding our
business, including the assumption that our sales and marketing plan can be
accomplished at the projected costs. Future events, including the problems,
delays, expenses and complications frequently encountered by companies which
seek to establish new products or introduce products to a new market, as well as
changes in economic, regulatory or competitive conditions, and the success of
our marketing activities, may make shifts in the allocation of funds necessary
or desirable. There can be no assurance that our estimates will prove to be
accurate or that unforeseen expenses will not be incurred.
We believe the net proceeds of the sale of at least 500,000 shares in
this offering, together with anticipated revenues from sales of our products,
will satisfy our capital requirements for at least the next 12 months.
DILUTION
If you purchase shares in this offering, you will experience immediate
and substantial dilution in your investment. "Dilution" is the reduction in the
value of a purchaser's investment and represents the difference between the
price paid for the shares and the "net tangible book value" per share of the
common
11
stock acquired in the offering. Net tangible book value per share represents the
book value of our tangible assets less the amount of our liabilities, divided by
the number of shares of common stock outstanding.
At December 31, 2001, there were 7,505,004 shares of common stock
issued and outstanding. Without taking into account any changes in our net
tangible book value after that date other than to give effect to the estimated
net cash proceeds of $4,875,000 from the sale of the 5,000,000 shares offered
hereby (after deducting estimated expenses of the offering that total
approximately $125,000), at an offering price of $1.00 per share, the amount of
increase in net tangible book value as of that date attributable to the sale of
shares offered hereby would have been $0.35 per share, representing an immediate
dilution to investors in this offering of $0.65 per share and an immediate
increase of $0.42 per share to present shareholders.
The following table illustrates the per share dilution if we sell all
5,000,000 shares at a price of $1.00 per share, less offering expenses of
$125,000.
Net tangible book value per share at December 31, 2001...................... $(0.07)
Pro Forma net tangible book value per share after the offering.............. 0.35
Pro Forma increase in net tangible book value per share
attributable to investors in this offering................................ 0.42
Pro Forma dilution per share to investors in the offering................... 0.65
The following table illustrates the per share dilution if we sell only
2,500,000 shares at a price of $1.00 per share, less the offering expenses of
$125,000.
Net tangible book value per share at December 31, 2001...................... $(0.07)
Pro Forma net tangible book value per share after the offering.............. 0.19
Pro Forma increase in net tangible book value per share
attributable to investors in this offering................................ 0.26
Pro Forma dilution per share to investors in the offering................... 0.81
The following table illustrates the per share dilution if we sell only
500,000 shares at a price of $1.00 per shares, less the offering expenses of
$125,000.
Net tangible book value per share at December 31, 2001...................... $(0.07)
Pro Forma net tangible book value per share after the offering.............. (0.02)
Pro Forma increase in net tangible book value per share
attributable to investors in this offering................................ 0.05
Pro Forma dilution per share to investors in the offering................... 0.98
The following table summarizes the investments of all existing
shareholders and the new investors after giving effect to the sale of all of the
shares offered hereby:
SHARES PURCHASED
-------------------------- TOTAL
NUMBER PERCENT AMOUNT
---------- ------- ----------
Existing Shareholders.............. 7,505,004 60% ($512,843)
New Investors(1)................... 5,000,000 40 5,000,000
--------- --- ----------
Total.............................. 12,505,004 100% $4,487,157
========== === ==========
---------------
12
(1) Assumes the sale of all 5,000,000 shares offered under this prospectus. The
dilutive effect of the offering would be different if we are unsuccessful
in selling all of the shares. For example, if we were to sell only (A)
500,000 shares in this offering, or (B) half of the shares offered by this
prospectus, the investment by the new investors and existing shareholders
would be as follows:
SHARES PURCHASED
---------------- TOTAL
(A) NUMBER PERCENT AMOUNT
------ ------- ------
Existing Shareholders.............. 7,505,004 93.8% $(512,843)
New Investors...................... 500,000 6.2 500,000
--------- ---- ---------
Total............................ 8,005,004 100% ($12,843)
========= ==== =========
SHARES PURCHASED
---------------- TOTAL
(B) NUMBER PERCENT AMOUNT
------ ------- ------
Existing Shareholders.............. 7,505,004 75.0% ($512,843)
New Investors...................... 2,500,000 25.0 2,500,000
---------- ---- ----------
Total............................ 10,005,004 100% $1,987,157
========== ==== ==========
DETERMINATION OF OFFERING PRICE
Our management has arbitrarily determined the offering price of the
shares offered hereby. The offering price bears no relationship to our assets,
book value, net worth, or other economic or recognized criteria of value. You
should not regard the offering price to be an indication of future market price
of our securities. In determining the offering price, we considered factors such
as the prospects for our products, our management's previous experience, our
historical and anticipated results of operations and our present financial
resources.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS
MARKET FOR COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"MYRG."
Our shares began trading on the OTC Bulletin Board on January 10, 2001.
Prior to that date, there was no public market for our shares.
The following table contains information about the range of high and
low bid prices for our common stock for each full quarterly period since our
shares began publicly trading, based upon reports of transactions on the OTC
Bulletin Board.
HIGH LOW
----- -----
2001
First Quarter (commencing January 10)...... $1.88 $0.03
Second Quarter............................. 0.75 0.20
Third Quarter.............................. 2.27 0.45
Fourth Quarter............................. 1.32 0.32
2002
First Quarter ............................. 1.54 0.31
13
HIGH LOW
----- -----
Second Quarter (through April 11).......... 0.51 0.38
The source of these high and low prices was the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions. The high and low
prices listed have been rounded up to the next highest two decimal places.
The market price of our common stock is subject to significant
fluctuations in response to variations in our quarterly operating results, our
public announcements regarding our then-pending acquisition of Military Resale
Group, general trends in the market for the products we distribute, and other
factors, over many of which we have little or no control. In addition, board
market fluctuations, as well as general economic, business and political
conditions, may adversely affect the market for our common stock, regardless of
our actual or projected performance. On April 11, 2002, the closing bid price of
the common stock as reported by the OTC Bulletin Board was $ 0.38 per share.
As of December 31, 2001, there were approximately 42 shareholders of
record of our common stock.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and do not intend
to pay any cash dividends in the foreseeable future.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with our financial
statements and notes appearing elsewhere in this Prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth below.
During the years ended December 31, 1999 and 2002, and prior to
November 15, 2001 in fiscal year 2001, we did not generate any signification
revenue, and accumulated no significant assets, as we explored various business
opportunities. On November 15, 2001, the date of the Reverse Acquisition, we
acquired 98.2% of the issued and outstanding capital stock of Military Resale
Group, Inc., a Maryland corporation ("MRG-Maryland"), in exchange for a
controlling interest in our publicly-held "shell" corporation. For financial
reporting purposes, MRG-Maryland was considered the acquirer in such
transaction. As a result, our historical financial statements for any period
prior to November 15, 2001 are those of MRG-Maryland.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED
DECEMBER 31, 2000
SALES. Sales for the year ended December 31, 2001 of $4,851,433
reflected an increase of $371,128, or approximately 8.3%, compared to sales of
$4,480,305 for the year ended December 31, 2000. This increase was attributable
primarily to the addition of the new products we began offering during the 2001
period, including Slimfast, L'Eggs, Bush Beans and Rayovac Batteries.
Approximately 60% of our 2001 sales were derived from the sale of products we
purchased from manufacturers and suppliers for resale to commissaries. In such
instances, revenue was recognized as the gross sales amount of such products.
Approximately 40% of our 2001 sales were derived from the sale of products on a
consignment basis, in which case, we acted as an agent for the manufacturer or
supplier of the products we sold, and earned a commission based on the amount of
the sale. In these instances, revenue was recognized as the net sales amount of
such products after deducting the manufacturer's or supplier's cost. We intend
to continue to seek to add new products that we can offer to commissaries or
exchanges from our existing manufactures and suppliers and from others with
which we do not currently a working relationship.
In January 2002, we entered into an agreement with Pfizer, Inc. to
distribute approximately 114 SKUs supplied by Pfizer, including Listerine,
Benadryl, Rolaids and Zantac. In March 2002, we entered into an agreement with
Playtex Products, Inc. to distribute approximately 70 SKUs manufactured or
supplied by Playtex, including a line of feminine hygiene products and a line of
infant feeding products. Based upon the amount of Pfizer sales made in 2001 to
the commissaries we currently service, we estimate that the inclusion of
Pfizer's products should add approximately $1 million to our annual sales. If
that is the case, on a pro forma basis, assuming we had carried Pfizer's
products throughout the year, Pfizer products would have accounted for
approximately 17% of our 2001 sales. With the addition of the products supplied
by Playtex and Pfizer, we anticipate that our 2002 sales will reach
approximately $7 million. However, there can be no assurance that our sales will
reach such projected amount, and the amount of our actual sales may differ
materially from such projections as a result of one or more of the factors
described above, among others.
Management believes our long-term success will be dependent in large
part on our ability to add
15
additional product offerings to enable us to increase our sales and revenues.
However, we believe our ability to add additional product offerings is dependent
on our ability to obtain increased capital to fund new business development and
increased sales and marketing efforts. We are currently in discussions with a
number of other manufacturers and suppliers in an effort to reach a distribution
agreement for their products to the military market. While there can be no
assurance that we will do so, we believe we will be successful in negotiating
agreements with a number of such suppliers and manufacturers, and that by the
end of fiscal year 2002, aggregate monthly sales levels will reach at least $1
million on an annualized basis. However, there can be no assurance that our
sales will reach such projected amount, and the amount of our actual sales may
differ materially from such projections as a result of one or more of the
factors described above, among others.
To date, all of our sales revenue has been generated from customers
located in the United States.
COST OF GOODS SOLD. In instances where we purchase products from
manufacturers and suppliers for resale to commissaries, cost of goods sold
consists of our cost to acquire such products. In instances where we sell
products on a consignment basis, there is no cost of goods sold because we act
as an agent for the manufacturer or supplier and earn only a commission on such
sales. During the year ended December 31, 2001, cost of goods sold increased by
approximately $500,000, or approximately 13.5%, to $4.3 million from $3.8
million for the year ended December 31, 2000. This increase was attributable
primarily to an increase in sales of purchased products, rather than commission
sales, for the 2001 period.
GROSS PROFIT. Gross profit for the year ended December 31, 2001
decreased by approximately $139,000, 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 increase in cost of goods sold as discussed above.
OPERATING EXPENSES. Total operating expenses aggregated approximately
$1,026,000 for the year ended December 31, 2001 as compared to approximately
$712,000 for the year ended December 31, 2000, representing an increase of
approximately $314,000, or approximately 43.4%. The increase in total operating
expenses for the 2001 period was attributable primarily to increased
professional fees of approximately $103,000, or 200%, 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 a proposed offering of equity securities; increased occupancy
expense of approximately $75,000, or 32%, resulting from our move to larger
office and warehouse facilities in September 2001; increased salary and wages of
approximately $54,000, or 15%, due primarily to the addition of office and
warehouse personnel and, to a lesser extent, increased wages; and increased
trucking expense of approximately $42,000, or 32%, due primarily to the addition
of one truck and the renewal of two truck leases at higher rates.
NET LOSS. Primarily as a result of the increased expenses and cost of
goods sold discussed above, we incurred a net loss of $465,994 for the year
ended December 31, 2001 as compared to a net loss of $13,673 for the year ended
December 31, 2000.
16
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had a negative cash balance approximately
$1,300. Our principal source of liquidity has been borrowings. In 2001, we
funded our operations from borrowings of approximately $195,000. In the first
quarter of 2002, we issued $235,000 aggregate principal amount of convertible
promissory notes that mature on June 30, 2002 and bear interest at the rate of
8% per annum. The notes are convertible into a maximum of 2,439,667 shares of
our common stock at the option of the note holders at any time after a
registration statement for our common stock is declared effective. The failure
to have such registration statement declared effective by April 15, 2002 caused
an event of default under the notes. The promissory notes are subject to certain
anti-dilution adjustments.
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 this offering. In the interim, we
are funding our operations based on our cash position and the near term cash
flow generated from operations, as well as additional borrowings. These
conditions raise substantial doubt about our ability to continue as a going
concern.
In the event that we sell only a nominal number of shares (i.e. 500,000
shares) in this 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 implement fully our strategic plan to expand our
distribution capabilities and product offerings.
Assuming that we receive a nominal amount of proceeds from this
offering, we expect capital expenditures to be approximately $200,000 during the
next 12 months, primarily for the acquisition of an inventory control system. It
is expected that our principal uses of cash during that period will be to
provide working capital, to finance capital expenditures, to repay indebtedness
and for other general corporate purposes, including sales and marketing and new
business development. The amount of spending for any particular purpose is
dependent upon the total cash available to us and the success of our offering.
At December 31, 2001, we had liquid assets of $441,000, consisting of
accounts receivable derived from operations, and other current assets of
$280,000, 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 $1.3 million at December 31, 2001 consisted of
approximately $1 million of accounts payable and $260,000 for the current
portion of notes payable, of which approximately $190,000 was payable to our
officers or our other affiliates. Our working capital deficit was $600,000 as of
December 31, 2001 for the reasons described above.
We used cash of $84,000 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 $128,000 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 $211,000 during the year ended December 31, 2001.
17
BUSINESS
OVERVIEW
We are a regional distributor of grocery and household items
specializing in distribution to the military market. We distribute a wide
variety of items, including fresh and frozen meat and poultry, seafood, frozen
foods, canned and dry goods, beverages, dairy products, paper goods and cleaning
and other supplies. Our operations are currently directed to servicing the
commissary at each of six military installations located in Colorado, Wyoming
and South Dakota, including the Air Force Academy located in Colorado Springs,
Colorado. We are approved by the Department of Defense to contract with military
commissaries and exchanges.
Military commissaries are large supermarket-type stores operated by the
United States Defense Commissary Agency ("DeCA") to provide grocery items for
sale to authorized patrons at the lowest practicable prices in facilities
designed and operated under standards similar to those in commercial food
stores. As of September 2000, there were 296 commissaries worldwide, of which
182 were located in the continental United States and 114 were located overseas.
Commissaries are authorized by law to sell goods only to authorized patrons,
which include the approximately 1.4 million active duty U.S. military personnel,
their dependents and certain authorized reservists and retirees. As of September
30, 2000, these authorized patrons totaled approximately 13.7 million
individuals. Annual worldwide commissary sales totaled more than $5 billion in
2000.
The categories and varieties of merchandise that may be sold in a
commissary is strictly regulated by DeCA, as is the cost at which items may be
purchased for resale. Under DeCA regulations, all items sold though the
commissary system must be sold at cost. The military commissary system is
generally self-funded and receives an annual appropriation from Congress
primarily to pay the salaries of those who work for the commissaries. Store
operations are funded by a 5% surcharge (not a tax) levied on the total amount
of the customers' purchases. The surcharge pays for new commissary construction
and renovation, new equipment and maintenance, paper bags, shopping carts and
other operating costs. In selling products at cost, commissaries are considered
an integral part of the military's pay and compensation package.
The military exchange system consists of nearly two dozen separate
business enterprises, including main exchange stores, convenience stores,
package stores, food operations, gas stations, movie theaters and others,
operated by the various military services for the benefit of military personnel
and other qualified patrons. As of September 30, 2000, there were 548 "main
exchanges" worldwide, and approximately 20,000 other exchange service-operated
facilities. Annual sales from the exchange systems' worldwide business
operations totaled approximately $9.75 billion in fiscal year 2000. We do not
currently sell products to any stores in the military exchange system; however,
we plan to begin marketing to various businesses in the exchange system during
the fourth quarter of 2002.
STRATEGIC PLAN
The Company's strategy is to establish itself as a leading provider of
goods to the military market. To accomplish this, our management intends to
execute the following:
EXPAND DISTRIBUTION CAPABILITIES. We currently direct our focus to the
distribution of products to commissaries located in the Midwest Region of the
United States, which represents only one of the seven DeCA regions. We do not
currently sell to commissaries located overseas or to military exchanges. An
important part of our strategic plan is to expand our distribution capabilities,
both in the domestic and overseas markets, by acquiring or contracting with
distributors, as opportunities permit.
18
EXPAND PRODUCT OFFERINGS. Industry data indicate that the average
number of items stocked by the typical civilian supermarket is approximately
18,015 as compared to approximately 13,111 for a commissary. We believe the
discrepancy results primarily from the reluctance of certain large manufacturers
and many medium and small manufacturers to undertake the administrative burden
of obtaining DeCA's approval of products to be sold to commissaries. Under
Federal procurement rules, a manufacturer may either represent itself or retain
a third-party representative on an exclusive basis to negotiate, supply, invoice
and otherwise manage its products within the DeCA system. Our management
believes there are many additional manufacturers with products that would meet
the DeCA procurement standards and are desirous of selling to the military but
that are unable or unwilling to commit the personnel and other resources
necessary to comply with the DeCA procurement regulations and procedures
required to enable them to sell their products to military commissaries. We
intend to continue marketing to manufacturers, suppliers and brokers in an
effort to establish new relationships that will allow us to increase the amount
and types of products we offer.
GROWTH THROUGH ACQUISITIONS. We intend to pursue an acquisition program
to increase the number of our offered products, strengthen our ability to sell
to the military exchange and commissary systems, and broaden our geographic
reach to sell and distribute products in domestic and overseas regions that we
do not currently service. We believe the industry in which we operate is highly
fragmented, consisting primarily of small local brokers and distributors that
limit their operations to a narrow range of offered products or distribute
products only to commissaries or exchanges in selected regions. In view of the
current state of the industry and the trend to centralize the management of the
commissary system and enhance its cost-effectiveness, we believe significant
opportunities are available to a business that can consolidate the capabilities
and resources of a number of existing brokers and distributors in the military
consumer goods market, including the cost savings that are inherent in a
vertically integrated business. We intend to implement an aggressive acquisition
program promptly that is designed to expand our range of offered products and
enable us to distribute products to commissaries and exchanges in additional
geographic markets.
Acquiring additional broker or distribution businesses will require
additional capital and may have a significant impact on our financial position.
We currently intend to finance future acquisitions by using our common stock for
all or a portion of the consideration to be paid. In the event our common stock
does not maintain sufficient value, or potential acquisition candidates are
unwilling to accept our common stock as consideration for the sale of their
businesses, we may be required to utilize more of our cash resources, if
available, in order to continue our acquisition program. If we do not have
sufficient cash resources, our growth could be limited unless we are able to
obtain capital through the issuance of additional debt or the issuance of one or
more series or classes of our equity securities, which could have a dilutive
effect on our then-outstanding capital stock. We do not currently have a line of
credit or other lending arrangement with a lending financial institution, and
there can be no assurance that we will be able to obtain such an arrangement on
terms we find acceptable or sufficient for our needs, if at all, should we
determine to do so. Acquisitions could result in the accumulation of substantial
goodwill and intangible assets, which may result in substantial amortization
charges that could our reduce reported earnings.
Although we intend to perform a detailed investigation of each business
that we acquire, there may nevertheless be liabilities that we fail or are
unable to discover, including liabilities arising from non-compliance with
environmental laws by prior owners, and for which we, as a successor owner, may
be responsible. We will seek to minimize the impact of these liabilities by
obtaining indemnities and warranties from the seller that may be supported by
deferring payment of a portion of the purchase price. However, these indemnities
and warranties, if obtained, may not fully cover the liabilities due to their
limited scope, amount or duration, the financial limitations of the indemnitor
or warrantor, or other reasons.
19
IMPROVE MANAGEMENT INFORMATION SYSTEMS. We are committed to improving
our management information systems to enable management to more efficiently
track sales and product shipments. We believe that, upon completion of this
project, we will have achieved significant progress in creating an improved
infrastructure capable of supporting expanded product offerings.
PURCHASING AND SUPPLY
At December 31, 2001, we distributed an aggregate of over 3,325 Stock
Keeping Units (SKUs) that we acquired from approximately 65 manufacturers or
suppliers. Products distributed include fresh and frozen meat and poultry,
seafood, frozen foods, canned and dry goods, beverages, dairy products, paper
goods and cleaning and other supplies. In 2001, we distributed 39 SKUs supplied
by Tyson Foods, Inc., 58 SKUs supplied by S&K Sales, Inc. and 24 SKUs supplied
by Jimmy Dean Foods, and approximately 70% of our aggregate revenues was derived
from the sale of products manufactured or supplied by such suppliers. In April
2002, we began distributing approximately 114 SKUs supplied by Pfizer, Inc.,
including Listerine, Benadryl, Rolaids and Zantac.
The majority of our revenues are derived from products that we purchase
outright from manufacturers and resell to commissaries. In this arrangement, the
manufacturer maintains an account with DeCA through the Electronic Data
Interchange ("EDI") system. Generally, the manufacturer also selects the broker
or brokers to merchandise the products and is actively involved in the sale of
its products to commissaries/exchanges and the interaction between the
commissaries/exchanges, brokers and us. Payment for products are remitted by
DeCA to the manufacturer within seven days after the end of each roll-up period
with respect to meats, 10 days with respect to dairy products and 23 days with
respect to most other products. The manufacturer pays us a fee based on a
specified percentage of the purchase price paid by DeCA.
For the year ended December 31, 2001, approximately 40% of our revenues
were derived from the sale of products acquired on a consignment basis. In a
consignment sale, the manufacturer is involved in all facets of the transaction.
It appoints and monitors brokers, maintains the account with DeCA, receives
payment from DeCA, and pays us a fee based on a percentage of the purchase price
paid by DeCA.
For the year ended December 31, 2001, approximately 60% of our revenues
were derived from the purchase and sale of products in which we acted as
principal and dealt directly with DeCA. In such instances, we purchase the
product from manufacturers and resell such products to commissaries at the best
price attainable. We, rather than the manufacturer, maintain an account with
DeCA through the EDI system and receive payments directly from DeCA as if we
were the manufacturer of the products.
We believe all of our suppliers have sufficient resources to continue
supplying the products we distribute and do not foresee any shortage of product
availability from any of our suppliers.
MARKETING AND CUSTOMER SERVICE
Our senior management is involved in maintaining relationships with key
customers and securing new accounts. We also maintain good relationships with
brokers, which have been an effective source of new products. We believe that
our ability to consistently provide a high level of service makes us desirable
to brokers who want to ensure on-time delivery of the products they represent.
We rigorously monitor the quality of our service. Our personnel frequently visit
the commissaries that we serve and we are in constant communication with
commissaries in order to ensure on-time order fulfillment.
20
OPERATIONS AND DISTRIBUTION
Our operations can generally be categorized into two business
processes: (i) product replenishment and (ii) order fulfillment. Product
replenishment involves the management of logistics from the vendor location
through the delivery of products to our distribution center. Order fulfillment
involves all activities from order placement through delivery to the commissary
location. We determine the quantities in which such products will be ordered
from manufacturers. Order quantities for each product are systematically
determined by us. Given our experience in managing our product flow, losses due
to shrinkage, damage and product obsolescence represented less than 1/3 of 1% of
2000 net sales.
We work closely with the commissaries in order to optimize
transportation from vendor locations to the distribution center. By utilizing
our own trucks and our expertise in managing transportation, we can ensure
on-time delivery of products on a cost-effective basis. We believe that we
realize significant cost savings by the consolidation of products from more than
one vendor or for use by more than one commissary. We also utilize a number of
third party carriers to provide in-bound transportation services. None of these
carriers is material to our operations.
We currently warehouse approximately 3,325 Stock Keeping Units (SKUs)
for distribution to commissaries. Products are inspected at our distribution
center upon receipt and stored in racks. Our distribution center includes
approximately 28,746 square feet of dry storage space, 2,000 square feet of
frozen storage space, and 2,000 square feet of refrigerated storage space, as
well as offices for operating, sales and customer service personnel and a
management information system.
We place a significant emphasis on providing a high service level in
order fulfillment. We believe that by providing a high level of service and
reliability, we reduce our costs by reducing the number of reorders and
redeliveries. Each commissary places product orders based on recent usage,
estimated sales and existing inventories. We have developed pre-established
routes and pre-arranged delivery times with each customer. Product orders are
placed with us six times a week either through our customer service
representative or through electronic transmission using the EDI system.
Approximately 60% of our orders are received electronically. Orders are
generally placed on a designated day in order to coordinate with our
pre-established delivery schedules. Processing and dispatch of each order is
generally completed within seven hours of receipt and our standards require each
order to be delivered to the customer within one hour of a pre-arranged delivery
time.
Products are picked and labeled at each distribution center. The
products are placed on pallets for loading of outbound trailers. Delivery routes
are scheduled to both fully utilize the trailers' load capacity and minimize the
number of miles driven. We transport approximately 1,950 tons of product
annually. Our trucks travel in excess of 139,000 miles annually.
THE MILITARY MARKET
GENERAL. The United States military market is composed of three main
groups: the active members of the four branches of the United States military --
Army, Navy, Air Force and Marines; military retirees; and members of the
military reserve. Including disabled veterans, overseas civil service personnel
and dependents of all of these groups, and patrons of military commissaries and
exchanges number over 13 million.
Accordingly to DeCA trade publications, active duty personnel generally
are well-educated, well paid and sophisticated. They enjoy a high standard of
living with excellent benefits, and, therefore, constitute an excellent market
for a variety of goods and services. Military retirees consist of military
21
personnel who retire after 20 years or more of service with full commissary and
exchange privileges. Military retirees generally are younger than civilian
retirees and tend to engage in second careers after retirement. As a result,
they generally are affluent, and like active duty personnel, provide an
excellent market for goods and services offered by commissaries and exchanges.
Within the last several years, reservists were granted full commissary and
exchange benefits while on active duty. Reservists for the most part mirror a
cross-section of the general United States population. Generally, they do not
shop at commissaries and exchanges as often as members of the other military
groups, but tend to buy larger quantities at each trip.
The United States has streamlined its Armed Forces in the post-Cold War
era. Despite these reductions, the United States military resale market
continues to remain strong. In the fiscal year of DeCA ended September 30, 2000,
total annual worldwide commissary and exchange sales was approximately $15
billion, with approximately $11.8 billion of these sales in the United States.
Since 1945, there has been a major military build-down following each of World
War II, the Korean War and the Vietnam war. The military market for consumer
goods continued to prosper through each one. The post-Cold War reduction in
manpower has not been as severe as previous reductions, and largely has been
achieved by early retirement, and the curtailment of inductees. Retirees have
earned and retained the privilege to shop in commissaries and exchanges, and
Congress has elected to extend the shopping privilege to those forced out prior
to retirement.
THE COMMISSARY SYSTEM. Military commissaries are the supermarkets of
the military. The stated mission of the commissary system is to provide grocery
items for sale to authorized patrons at the lowest possible prices in facilities
designed and operated like private-sector supermarkets. The assortment of brands
of merchandise, however, is limited to those that meet the reasonable demands of
commissary patrons, and commissaries currently are prohibited by law from
carrying certain merchandise, including beer and wine and automotive supplies.
Commissaries primarily stock and generally sell leading name brands and do not
offer private label or unknown brands. In the case of many remote military
bases, the commissary is the only source of groceries for military personnel.
Commissaries sell their products at prices equal to cost plus a five
percent surcharge. The only promotional fee that commissaries can accept is a
direct reduction in price. Commissaries are prohibited from accepting other
promotional items offered to private-sector stores, such as slotting allowances,
display allowances or volume rebates. The commissary system receives an annual
appropriation from Congress that pays for the salaries of commissary personnel
and for the purchase of consumer goods for resale. Store operations otherwise
are funded from the five percent surcharge on purchases. Proceeds from the
surcharge also pay for new commissary construction, renovation, new equipment
and maintenance, shopping bags, shopping carts and various other items. Overseas
commissaries also receive Federal funds for transportation and utility costs.
Through payment of the surcharge, the patrons of the commissaries essentially
have created a worldwide military shoppers' cooperative.
The benefit provided by commissaries is an integral part of the
military's pay and compensation package. Recent re-enlistment surveys show that
commissaries rank second in importance only to the medical/dental benefit.
Commissaries are among the only benefits aimed exclusively at the military
family. As commissaries are prohibited by law from selling any product below
cost, certain items (those used as loss leaders by private-sector stores) may be
priced lower at private sector stores. Nevertheless, the annual savings amounts
to approximately 25%. It has been estimated that the commissary system results
in approximately $2 billion of annual savings for its patrons. As a result,
based upon the annual Congressional appropriation of approximately $1 billion
available to DeCA, the commissary system provides one of the few government
benefits that delivers more than two dollars in direct benefit to the
beneficiary for every dollar spent by the taxpayer.
22
As of September 2000, there were a total of 296 commissaries worldwide,
of which 182 were located in the continental United States. At such date, the
average gross square footage of these commissaries was approximately 57,500, and
the average monthly sales per square foot of selling space, a commonly used
measure of efficiency of retail operations, was approximately double that of
commercial supermarkets. In the fiscal year of DeCA ended September 30, 2000,
total annual worldwide commissary sales were approximately $5 billion, with
approximately $4.3 billion of these sales in the United States.
The table below shows the dollar volume of commissary sales over the
three-year period ended September 30, 2000, as reported by the American
Logistics Association.
FISCAL YEAR WORLDWIDE STORE SALES (000S)
----------- ----------------------------
2000 $5,038,880
1999 $4,945,204
1998 $4,902,746
DeCA recently completed the implementation of a store modernization
program that has resulted in the opening or reopening of five to ten new stores
a year, each generating between 25% to 30% more business from the same trading
area. We believe DeCA's efforts to modernize facilities and merchandising and
provide easy access, shorter lines and more convenient hours at commissaries
will all contribute to increased sales volume in the commissary system.
THE EXCHANGE SYSTEM. The military exchange system consists of nearly
two dozen separate "businesses," including main exchange stores (department
stores), convenience stores, package stores, food operations, gas stations,
movie theaters, and others. The exchange system is a vast, logistically complex
worldwide operation. Like the commissary system, the stated purpose of the
exchange system is to improve the quality of life of military personnel and
their families.
The exchange system is a "non-appropriated fund" government activity,
and, therefore, does not receive taxpayer subsidies. It is self-sustaining and
operates at a profit generated by patron purchases. After expenses, all exchange
earnings are returned to patrons in the form of new and improved exchanges and
dividends paid to the sponsoring service's morale, welfare and recreation
("MWR") funds. Appropriations by Congress only fund the cost of transporting
goods from the United States to overseas military exchanges. All other costs and
expenses, including building and operating costs, such as employees' salaries,
are paid from exchange revenues. Unlike the commissary system, which is managed
by one central governmental authority, each military service manages its own
exchange program. These include the Army and Air Force Exchange Service (a joint
military command), the Navy Exchange Service Command, the Marine Corps Retail
Operations Branch, the Coast Guard and the Department of Veterans Affairs.
Military exchanges consistently are ranked by military personnel among
the top benefits provided to the military community. As is the case with
commissaries, exchanges are prohibited from pricing products below cost;
therefore, certain items offered as "loss leaders" in private-sector stores may
be priced below prices offered by exchanges. Notwithstanding this constraint,
exchanges typically provide their customers with savings ranging from 20% to 25%
compared to civilian mass-merchandisers and department stores.
At September 30, 2000, there were 548 "main exchanges" worldwide and
approximately 20,000 exchange service-operated facilities. In the fiscal year of
DeCA ended September 30, 2000, total annual
23
worldwide exchange sales was approximately $9.75 billion, with approximately $7
billion of these sales in the United States. We do not currently sell products
to any stores in the military exchange system; however, we plan to begin
marketing to various businesses in the exchange system during the fourth quarter
of 2002.
THE DEFENSE COMMISSARY AGENCY. DeCA, which is headquartered in Fort
Lee, Virginia, was formed in October 1991 in an effort to consolidate the
commissary system of each branch of the military into one efficient unit. Its
stated mission is to ensure the commissary system provides United States
military personnel and their families with needed groceries at the lowest
possible price. DeCA's mission is recognized by many as essential to the
military preparedness of the United States by assisting to maintain the morale,
readiness and effectiveness of active duty troops, and by encouraging
reenlistment of highly trained quality personnel.
DeCA is part of the Department of Defense ("DoD") under the Assistant
Secretary of Defense for Personnel and Readiness. It manages the total resources
of all DoD commissaries worldwide, including personnel, facilities, supplies,
equipment and funds. In October 1996, DeCA became a Performance Based Operation
("PBO"). This resulted in DeCA's obtaining special waivers from Federal
procurement regulations, thereby allowing it to operate more efficiently and to
adopt some characteristics of private-sector companies. As a PBO, DeCA will be
striving for progressive market excellence through its "SAVER 2000" initiative
-- providing Service, Access, Value, Efficiency and Response to customers and
taxpayers.
DeCA commands and centrally manages the commissary system through four
commissary regions. Three regions are located in the continental United States
and one in Europe. Daily operational support to the agency's regions, zone
managers, commissaries and associated facilities is provided by an Operations
Support Center located in Fort Lee, Virginia (the "OSC"), which is responsible
for acquisitions, financial management, information technology/electronic
commerce management, inventory management, food safety, marketing and
transportation. All suppliers of goods to the commissary system are required to
interface with the Marketing Business Unit (the "MBU") of the OSC, which
combines several disciplines, such as operations, acquisition management and
information management. The MBU is responsible for DeCA's electronic data
interchange system, the preparation and administration of the resale ordering
agreement used with suppliers, merchandising and marketing, and maintenance of
the catalog master file, the list of products authorized to be carried by
commissaries.
The great majority of the DeCA buying and merchandising decisions for
the seven DeCA regions are handled at DeCA's headquarters in Fort Lee, Virginia.
Each region has its own Region Stock List ("RSL"). Within each RSL is a "Key
Item List," which is a list of items that each store within that region should
carry. Suppliers of brand name products must sell their products to the regional
buyers to have their products included on that region's RSL. Once a product is
listed on an RSL, it is the responsibility of the individual supplier to ensure
that the product gets on the shelf. Many suppliers employ brokers, like us who
function as sales representatives and provide a liaison with DeCA. Brokers also
serve to promote the suppliers' products and ensure that the products are
properly displayed and stocked on the shelf. Suppliers also contract with
distributors who warehouse and ship the suppliers' products to the commissaries.
Any supplier wishing to sell a product in the commissary system must
complete and submit a product application to DeCA. DeCA analyzes each proposed
product on the basis of price, quality, anticipated demand and other factors. If
the proposed product meets DeCA's requirements, it will be assigned a Local
Stock Number, a product identification number ("LSN"), and included on one or
more RSLs. If the product is unique to the tastes of a particular region or
regions, it will be placed on the RSL
24
for those regions only. Depending on the type of product, it may also be
included on the Key Item List of one or more regions.
COMPETITION
The military resale market is a highly competitive market that is
served by several large distributors, most notably SuperValu, Inc., Nash Finch
Company and Fleming Companies, Inc., but is otherwise highly fragmented with
hundreds of small, privately-held firms operating in the various distribution
layers. We face competition from local, regional and national distributors on
the basis of price, quality and assortment, schedules and reliability of
deliveries and the range and quality of services provided.
Because there are relatively low barriers to entry in the military
resale market, we expect competition from a variety of established and emerging
companies. Many of our competitors have longer operating histories,
substantially greater financial, technical, marketing or other resources, or
greater name recognition than we have. Our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. In addition, consolidation in the industry, heightened competition
among our vendors, new entrants and trends toward vertical integration could
create additional competitive pressures that reduce our margins and adversely
affect our business. If we fail to successfully respond to these competitive
pressures or to implement our strategies effectively, it could have a material
adverse effect on our financial condition and prospects.
PROPERTIES
Our corporate headquarters is located at our distribution center in
Colorado Springs, Colorado. The lease for our distribution center and corporate
headquarters includes approximately 32,748 square feet, of which approximately
1,000 square feet is used for our corporate headquarters. The lease expires in
the year 2006. The annual rent for our distribution center is approximately
$180,000 per annum, with annual rental increases of approximately $8,000 per
year during the term of the lease.
EMPLOYEES
At April 11, 2002, we employed 14 persons on a full-time basis, of
which two were management personnel, three were office staff and nine were
warehouse and distribution personnel. None of our employees are members of a
trade union. All of our employees are employed at our corporate offices and
distribution center located in Colorado, Springs, Colorado.
LEGAL PROCEEDINGS
We are a defendant in a landlord-tenant suit captioned WAREHOUSE, LTD
V. MILITARY RESALE GROUP, INC., Civil Action No. 01CV3230, Div. No. 2, District
Court, El Paso County, Colorado. Our former landlord is seeking damages for an
alleged breach of the terms of several lease agreements for office and warehouse
space located in Colorado Springs, Colorado. We filed an answer to the
landlord's complaint in which we asserted affirmative defenses and made
counterclaims against the landlord. Although this lawsuit is in its preliminary
stages and the amount of the landlord's claim has not been disclosed, we believe
the potential dollar amount of such claims will not have a material adverse
effect on our overall operations. We intend to defend such lawsuit and pursue
our counterclaims vigorously.
25
BUSINESS OF PREDECESSOR
MRG-Maryland, a Maryland corporation in which we acquired a 98.2%
interest on November 15, 2001, was formed in October 1997 by Richard Tanenbaum,
one of our directors. Prior to November 15, 2001, we were inactive and had
nominal assets and liabilities. As MRG-Maryland was considered the acquirer in
such acquisition for financial reporting purposes, our historical financial
statements for any period prior to November 15, 2001, as well as the description
of our business operations for such periods, are those of MRG-Maryland.
In connection with the acquisition, we issued an aggregate of 5,410,000
shares of our common stock to purchase approximately 98.2% of the outstanding
capital stock of MRG-Maryland, including 2,210,050 shares to Xcel Associates,
Inc., a corporation controlled by Edward T. Whelan, our Chairman of the Board
and Chief Executive Officer, an aggregate of 400,000 shares to Shannon
Investments, Inc., a corporation controlled by Mr. Whelan, an additional
1,039,950 shares directly to Mr. Whelan, an aggregate of 440,000 shares to Ethan
D. Hokit, our President and one of our directors, and his wife, and 450,000
shares to Richard H. Tanenbaum, one of our directors.
26
MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to each
of our officers or directors as of April 11, 2002:
NAME AGE POSITION
---- --- --------
Edward T. Whelan.................. 51 Chairman of the Board and Chief Executive Officer
Ethan D. Hokit.................... 63 President, Chief Operating Officer, Treasurer and Director
Richard H. Tanenbaum.............. 54 Director and Secretary
EDWARD T. WHELAN was a co-founder of MRG-Maryland in October 1997 and
served as its Chairman and Chief Executive Officer until the consummation of the
Reverse Acquisition in November 2001, at which time he became our Chairman of
the Board, Chief Executive Officer and Secretary. Since April 1998, Mr. Whelan
has also served as the President and a principal stockholder of Xcel Associates,
Inc., a company engaged in providing financial consulting to small and
medium-sized companies and to high net worth individuals. From 1989 to December
2001, Mr. Whelan also served as President and a principal shareholder of Shannon
Investments, Inc., a consulting firm to small and medium-sized companies. From
1968 to 1971, Mr. Whelan attended St. Peters College in Jersey City, New Jersey,
where he majored in Economics. Mr. Whelan spends approximately 50% of his
professional time performing services on our behalf.
ETHAN D. HOKIT was a co-founder of MRG-Maryland in October 1997 and
served as its President and Chief Operating Officer, and was a director, until
the consummation of the Reverse Acquisition in November 2001, at which time he
became our President, Chief Operating Officer and Treasurer and one of our
directors. From 1983 until February 1998, Mr. Hokit was the President of Front
Range Distributors, Inc., a regional distributor of groceries and household
goods to the military market serving the five military bases in and around
Colorado Springs, Colorado. Mr. Hokit graduated from the University of Oklahoma
with a Bachelor of Science degree in Chemistry in 1960 and a Master's Degree in
Clinical Chemistry in 1962.
RICHARD H. TANENBAUM was the general counsel and a director of
MRG-Maryland since its inception in October 1997 until the consummation of the
Reverse Acquisition in November 2001, at which time he became our general
counsel and one of our directors. Since 1984, Mr. Tanenbaum has practiced law in
Bethesda, Maryland, with an emphasis on contract negotiations, the purchase and
sale of businesses, loan and real estate acquisitions, and related tax matters.
Mr. Tanenbaum received his Juris Doctorate degree at Columbia Law School of the
Catholic University of America in 1974. He received a Bachelor of Science degree
from Bradley University in 1967.
TERMS OF OFFICERS AND DIRECTORS
Our Board of Directors currently consists of three directors. Pursuant
to our By-laws, each of our directors serves until the next annual meeting of
stockholders or until his or her successor is duly elected or appointed.
27
Our executive officers are appointed by the Board of Directors and
serve at the pleasure of the Board. There are no family relationships among any
of our executive officers or directors.
EXECUTIVE COMPENSATION
The table below sets forth the compensation earned for services
rendered in all capacities for the fiscal years ended December 31, 1999, 2000
and 2001 by our executive officers in their capacities as officers and directors
of MRG-Maryland.
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME OF PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
-------------------------- ---- ------- ----- ------------ ------------
Ethan D. Hokit, President and Chief 1999 $24,000 - - -
Operating Officer 2000 60,000 - - -
2001 60,000 $9,000(1)
Edward T. Whelan, Chairman and Chief 1999 - - - -
Executive Officer 2000 - - - -
2001 - - - $51,000(2)
---------------
(1) Represents the value of 90,000 shares of common stock issued to Mr. Hokit
as additional compensation for services rendered in 2001.
(2) Represents the value of 145,000 shares of common stock issued to Mr. Whelan
for consulting services preformed for us in February 2001 prior to our
acquisition of MRG-Maryland and 220,000 shares of common stock issued to
Mr. Whelan as compensation for services rendered in 2001.
DIRECTORS' COMPENSATION
Our directors are reimbursed for expenses incurred in attending
meetings of the Board of Directors. Directors generally are not paid any
separate fees for serving as directors. However, in December 2001, we issued
200,000 shares of common stock to Richard H. Tanenbaum for services rendered as
one of our directors.
EXECUTIVE EMPLOYMENT AGREEMENTS
We do not have an employment agreement with any of our executive
officers.
EQUITY INCENTIVE PLAN
In December 2001, we 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. We have reserved 1,500,000 shares of our 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
28
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 our issued and outstanding shares of common stock).
Options granted under the Incentive Plan may not have a term of more
than a ten-year period (five years in the case of incentive stock options
granted to employees who hold more than ten percent of the voting power of our
common stock) and generally vest over a three-year period. Options generally
terminate three months after the optionee's termination of employment by us for
any reason other than death, disability or retirement, and are not transferable
by the optionee other than by will or the laws of descent and distribution.
The Incentive Plan also provides for grants of stock appreciation
rights ("SARs"), which entitle a participant to receive a cash payment, equal to
the difference between the fair market value of a share of our common stock on
the exercise date and the exercise price of SAR. The exercise price of any SAR
granted under the Incentive Plan will be determined by our board of directors in
its discretion at the time of the grant. SARs granted under the Incentive Plan
may not be exercisable for more than a ten year period. SARs generally terminate
one month after the grantee's termination of employment by us for any reason
other than death, disability or retirement. Although our board of directors has
the authority to grant SARs, it does not have any present plans to do so.
Restricted stock awards, which are grants of shares of our common stock
that are subject to a restricted period during which such shares may not be
sold, assigned, transferred, made subject to a gift, or otherwise disposed of,
or mortgaged, pledged or otherwise encumbered, may also be made under the
Incentive Plan.
Performance share awards, which are grants of shares of our common
stock upon the achievement of specific performance objectives, may also be made
under the Incentive Plan. At this time, our board of directors has not granted,
and does not have any plans to grant, performance shares of common stock.
Compensatory share awards, which are grants of shares of our common
stock as consideration for services rendered by our employees or consultants,
may also be made under the Incentive Plan. In January 2002, our board of
directors authorized the issuance of an aggregate of 300,000 compensatory shares
of common stock to two of our consultants.
As of April 11, 2002, options to purchase an aggregate of 1,300,000
shares of our common stock have been granted to our employees, officers,
directors and/or consultants under the Incentive Plan. Such options are one-year
options to purchase an aggregate of 1,000,000 shares of our common stock at an
exercise price of $0.50 and three year options to purchase an aggregate of
300,000 shares of our common stock at an exercise price of $0.50.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 11, 2002 certain information
regarding the beneficial ownership of our common stock by (a) each person who is
known to us to be the beneficial owner of more than five percent (5%) of our
common stock, (b) each director and executive officer and (c) all directors and
executive officers as a group. Except as otherwise indicated, the persons or
entities listed below have sole voting and investment power with respect to all
shares of common stock beneficially owned by them, except to the extent such
power may be shared with a spouse. The percentage of beneficial ownership is
based upon 7,805,004 shares of our common stock outstanding as of April 11,
2002.
SHARES OF COMMON STOCK BENEFICIAL OWNERSHIP AFTER
OWNED PRIOR TO OFFERING(1) OFFERING(%)(1)
-------------------------- ----------------------------------
NAME AND ADDRESS 500,000 2,500,000 5,000,000
---------------- AMOUNT % SHARES SHARES SHARES
------------ ----- ------- --------- ---------
Edward T. Whelan ...................................... 3,870,000(2) 49.6% 46.6% 37.6% 30.2%
135 First Street
Keyport, New Jersey 07735
Edward Meyer, Jr ...................................... 2,930,500(3) 37.6% 35.3% 28.4% 22.9%
32 Daniel Drive
Hazlet, New Jersey 07730
Xcel Associates, Inc.(4) .............................. 2,210,050 28.3% 26.6% 21.5% 17.3%
224 Middle Road
Hazlet, New Jersey 07730
Ronald Steenbergen .................................... 1,000,000(5) 12.8% 12.0% 9.7% 7.8%
4 Cho Yuen Street
Wah Shun Industrial Building
Yau Tong, Kolwoon
Peoples Republic of China
Ethan D. Hokit ........................................ 530,000(6) 6.8% 6.4% 5.1% 4.1%
3305 Blodgett Drive
Colorado Springs, Colorado 80919
Richard H. Tanenbaum .................................. 650,000 8.3% 7.8% 6.3% 5.1%
7315 Wisconsin Avenue
Suite 775N
Bethesda, Maryland 20814
Shannon Investments, Inc.(7) .......................... 400,000 5.1% 4.8% 3.9% 3.1%
224 Middle Road
Hazlet, New Jersey 07730
Directors and executive officers as
a group (three persons) ............................. 5,050,000 64.7% 60.8% 49.0% 39.4%
30
------------------
(1) For purposes of this table, information as to the beneficial ownership of
shares of our common stock is determined in accordance with the rules of
the Securities and Exchange Commission and includes general voting power
and/or investment power with respect to securities. Except as otherwise
indicated, all shares of our common stock are beneficially owned, and sole
investment and voting power is held, by the person named. For purposes of
this table, a person or group of persons is deemed to have "beneficial
ownership" of any shares of our common stock which such person has the
right to acquire within 60 days after the date of this Report. For purposes
of computing the percentage of outstanding shares of our common stock held
by each person or group of persons named above, any shares which such
person or persons has the right to acquire within 60 days after the date of
this Report is deemed to be outstanding but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
The inclusion herein of such shares listed beneficially owned does not
constitute an admission of beneficial ownership.
(2) Includes 400,000 shares of our common stock owned of record by Shannon
Investments, Inc., of which Mr. Whelan is a principal shareholder, and
2,210,050 shares owned of record by Xcel Associates, Inc., of which Mr.
Whelan is a principal shareholder.
(3) Includes 2,210,050 shares owned of record by Xcel Associates, of which Mr.
Meyer is a principal shareholder.
(4) Xcel Associates Inc. is controlled by Edward T. Whelan and Edward Meyer,
Jr.
(5) Represents 1,000,000 shares of our common stock issuable upon the exercise
of currently exercisable stock options issued pursuant to our Equity
Incentive Plan. See "Management - Equity Incentive Plan."
(6) Includes 400,000 shares of our common stock owned of record by Mary Hokit,
the wife of Mr. Hokit.
(7) Shannon Investments, Inc. is controlled by Edward T. Whelan for the benefit
of his family.
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, we borrowed $60,000 from Shannon Investments, Inc.,
one of our principal shareholders that is controlled by Edward T. 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 is payable on demand. As of December
31, 2001, the outstanding principal balance due under the promissory note was
approximately $60,000.
Mr. Whelan is also the President and a principal shareholder of Xcel
Associates, Inc., which is one of our principal shareholders.
Since October 1997, Xcel Associates, Inc. has maintained office space
in our corporate offices without charge.
In February 2001, we entered into an 11-month consulting agreement with
each of Mr. Whelan and Edward Meyer, Jr., one of our principal shareholders. In
consideration of consulting services rendered under such agreements, in February
2001 we issued 145,000 shares of common stock to each of Messrs. Whelan and
Meyer.
In February 2001, we issued 50,000 shares of our common stock to Jerry
Gruenbaum, Esq., our corporate counsel at the time of issuance, for legal
services performed for the company. On March 23, 2001, we placed a stop transfer
order on these 50,000 shares due to Mr. Gruenbaum's failure to perform the legal
services for which he was retained.
On August 14, 2001, we borrowed $100,000 from Oncor Partners, Inc., a
company of which Edward T. Whelan, our Chairman of the Board and Chief Executive
Officer, is President and a shareholder. The loan bears no interest and has a
term of one year. As of December 31, 2001, the outstanding principal balance due
under the promissory note was approximately $100,000.
In August 2001, we issued 20,000 shares of our common stock to Alan
Finfer, a director and our Secretary and Treasurer at the time of issuance, for
consulting services performed on our behalf.
In December 2001, we borrowed $25,000 from each of Ethan D. Hokit, our
President and one of our directors, and Atlantic Investment 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 interest at the rate
of 8% per annum.
In January, 2002, we entered into a one-year business consulting
agreement with Edward T. Whelan and Edward Meyer, Jr., individually, of Xcel
Associates, Inc. for the provision of marketing and managerial consulting
services. In consideration of the services to be rendered by Messrs. Whelan and
Meyer, we will issue a number of shares determined by the formula contained in
the agreement. As of April 11, 2002, no shares of our common stock have been
issued to Messrs. Whelan or Meyer under this agreement.
32
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 April 11, 2002, 7,805,004 shares of common stock
were issued and outstanding and no shares of preferred stock were issued and
outstanding. In addition, at such date, 1,300,000 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants.
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.
TRANSFER AGENT AND REGISTRAR
Our Transfer Agent and Registrar for our common stock is Continental
Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
33
PLAN OF DISTRIBUTION
We are offering up to 5,000,000 shares of our common stock on a "best
efforts, no minimum" basis at a price of $1.00 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 terminated on September 30, 2002, unless, in
our discretion, we terminate the offering before that date. We also reserve the
right to extend the offering beyond September 30, 2002, if we have not sold all
of the shares prior to that date. We will not extend the offering beyond a date
that is more than two years from the effective date of the registration
statement of which this prospectus is a part. The first closing will occur at
our discretion.
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 need 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 5,000,000 shares offered
hereby for offer and sale in each of the states of Connecticut, Maryland, New
Jersey, New York and Pennsylvania.
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.
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.
EXPERTS
The consolidated financial statements as of December 31, 1999 and 2000
and for each of the two years in the period ended December 31, 2000 included in
this Prospectus have been audited by Michael Johnson & Co. LLC, Denver,
Colorado, independent accountants, as stated in its report appearing herein
34
and elsewhere in this Registration Statement, 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.
35
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
36
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.
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.......... $ 1,195
Accounting fees and expenses................................. 25,000
Legal fees and expenses...................................... 125,000
Miscellaneous fees and expenses.............................. 23,805
--------
Total...................................................... $175,000
========
------------------
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:
1999
On various dates in 1999, our predecessor, Military Resale Group, Inc.,
a Maryland corporation ("MRG-Maryland"), sold an aggregate of 1,520,000 shares
of its common stock to Xcel Associates, Inc., one of our principal shareholders,
for aggregate consideration of $135,000.
2000
None.
2001
On August 1, 2001, MRG-Maryland issued options to purchase 1,000,000
shares of its common stock to Ronald Steenbergen, a consultant. In connection
with the Reverse Acquisition, we assumed the obligations under the option
agreement and, upon exercise, will issue shares of our common stock in
substitution for the shares of the MRG-Maryland. Such options are exercisable
for one year at an exercise price of $0.50 per share.
37
In November 2001, we issued an aggregate of 5,410,000 shares of our
common stock to the Stockholders of Military Resale Group, Inc., a Maryland
corporation, in connection with the Reverse Acquisition. Such shares were issued
by us in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended. No underwriter fees or commissions were
paid by us in connection with such issuances.
In December 2001, we issued an aggregate of 875,000 shares of our
common stock to employees and directors of the Company for services rendered to
the Company in 2001.
2002
In the first quarter of 2002, we issued to ten investors $235,000
aggregate principal amount of convertible promissory notes. Such notes are
convertible into a maximum of 2,439,667 shares of our common stock at the option
of the note holders at any time after a registration statement for our common
stock is declared effective.
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 Promissory Note dated December 12, 2001 from the Company to
Atlantic Investment Trust in the principal amount of $25,000
(incorporated by herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-KSB (file no. 000-26463)).
10.2 Promissory Note dated December 12, 2001 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 (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* Promissory Note dated August 14, 2001 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.
38
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 Consulting Agreement dated January 3, 2002 between the Company and
Edward T. Whelan and Edward Meyer, Jr., individually, of Xcel
Associates, Inc. (incorporated herein by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-KSB (file no.
000-26463)).
23.1 Consent of Michael Johnson & Co., LLC.
23.2 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.
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(1)(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; and
(iii) Include any additional or changed material information on
the plan of distribution.
39
(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.
40
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. 1 to
Registration Statement to be signed on its behalf by the undersigned, in
Colorado Springs, Colorado on April 15, 2002.
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 Executive April 15, 2002
-------------------------------------- Officer (Principal Executive Officer)
Edward T. Whelan
/s/ Ethan D. Hokit President, Chief Operating Officer, Director April 15, 2002
-------------------------------------- (Principal Accounting Officer and
Ethan D. Hokit Principal Financial Officer)
/s/ Richard H. Tanenbaum Director April 15, 2002
--------------------------------------
Richard H. Tanenbaum
41