-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7DiIouJjx4OvlL8Jjo/1pbkit6uSlum7IT87xQWg/qQkMjggtZnDhi6sUr7N4lQ jEaCvj/EhKQlrWcfMZeaDw== 0001144204-04-012931.txt : 20040823 0001144204-04-012931.hdr.sgml : 20040823 20040823153501 ACCESSION NUMBER: 0001144204-04-012931 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040823 DATE AS OF CHANGE: 20040823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MILITARY RESALE GROUP INC CENTRAL INDEX KEY: 0001088436 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 112665282 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26463 FILM NUMBER: 04991865 BUSINESS ADDRESS: STREET 1: 2180 EXECUTIVE CIRCLE CITY: COLORADO SPRINGS STATE: CO ZIP: 80906 BUSINESS PHONE: 7193914564 MAIL ADDRESS: STREET 1: 2180 EXECUTIVE CIRCLE CITY: COLORADO SPRINGS STATE: CO ZIP: 80906 FORMER COMPANY: FORMER CONFORMED NAME: BACTROL TECHNOLOGIES INC /FL DATE OF NAME CHANGE: 19990610 10QSB 1 v06078_10-qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ . Commission File Number 000-26463 MILITARY RESALE GROUP, INC. (Name of small business issuer as specified in its charter) New York 11-2665282 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2180 Executive Circle Colorado Springs, Colorado 80906 (Address of principal executive offices) (719) 391-4564 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 15, 2004, there were 31,113,832 shares of the issuer's common stock outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] MILITARY RESALE GROUP, INC. FORM 10-QSB INDEX Page No. PART I. Financial Information Item 1. Financial Statements Balance Sheets - June 30, 2004 and December 31, 2003........... 1 Statements of Operations - three and six months ended June 30, 2004 and 2003................................................ 3 Statements of Cash Flows - six months ended June 30, 2004 and 2003................................................ 4 Notes to Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis or Plan of Operation......11 Item 3. Controls and Procedures........................................16 PART II. Other Information Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities........................................17 Item 6. Exhibits and Reports on Form 8-K...............................18 Signatures ..................................................................19 i ITEM 1. FINANCIAL INFORMATION MILITARY RESALE GROUP, INC. BALANCE SHEETS ASSETS CONSOLIDATED AS OF JUNE 30, DECEMBER 31, 2004 2003 ----------- ----------- CURRENT ASSETS: (UNAUDITED) Cash $ 6,277 $ 2,862 Accounts receivable - trade 699,189 765,851 Inventory 417,925 334,950 Prepaid consulting 102,236 484,506 Deposits 37,118 33,218 Prepaid interest 46,245 92,681 Prepaid expenses 14,030 -- ----------- ----------- Total Current Assets 1,323,020 1,714,068 ----------- ----------- PREPAID INTEREST, NET OF CURRENT PORTION 132,038 132,038 EQUIPMENT Office equipment 24,507 15,047 Warehouse equipment 159,444 159,444 Software 16,324 16,324 ----------- ----------- 200,275 190,815 Less accumulated depreciation (124,350) (106,103) ----------- ----------- Net equipment 75,925 84,712 ----------- ----------- OTHER ASSETS Deferred offering costs 23,947 -- Investment Property 345,468 -- ----------- ----------- Total Other Assets 369,415 -- ----------- ----------- Total Assets $ 1,900,398 $ 1,930,818 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $ 2,258,151 $ 2,507,544 Accounts payable, related party 154,056 72,632 Current maturities of capital lease obligations 28,402 51,981 Deferred rent 2,729 2,729 Current portion of accrued interest payable 127,856 99,561 Current portion of notes payable 16,025 90,235 Current portion of convertible notes payable 65,000 85,000 Related party demand note payable 75,000 -- Other Current Liabilities 7,655 -- ----------- ----------- Total Current Liabilities 2,734,874 2,909,682 1 MILITARY RESALE GROUP, INC. BALANCE SHEETS (CONTINUED) OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT MATURITIES 36,351 36,351 DEFERRED RENT, NET OF CURRENT PORTION 21,832 21,832 RELATED PARTIES CONVERTIBLE NOTES PAYABLE 360,000 360,000 NOTES PAYABLE, NET OF CURRENT PORTION 98,975 98,975 CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 160,000 160,000 MORTGAGE PAYABLE 71,187 -- ----------- ----------- Total Liabilities 3,483,219 3,586,840 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, par value $.0001, 10,000,000 shares authorized, -0- issued and outstanding -- -- Common Stock Reserved (11,750) -- Common stock, par value $.0001, 50,000,000 shares authorized, 30,293,832 and 21,448,011 issued and outstanding 3,030 2,144 Additional paid-in capital 5,475,071 4,248,547 Accumulated (deficit) (7,049,172) (5,906,713) ----------- ----------- Total Stockholders' Equity (Deficit) (1,582,821) (1,656,022) ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) $ 1,900,398 $ 1,930,818 =========== =========== SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 2 MILITARY RESALE GROUP, INC. STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 UNAUDITED
CONSOLIDATED CONSOLIDATED FOR THE THREE THREE FOR THE SIX SIX MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003 ------------- ------------- ------------- ------------- REVENUES: Resale revenue $ 1,859,784 $ 1,534,377 $ 3,821,328 $ 3,146,974 Commission revenue 160,957 135,188 334,389 281,554 ------------- ------------- ------------- ------------- Total Revenues 2,020,741 1,669,565 4,155,717 3,428,528 COST OF GOODS SOLD 1,698,938 1,334,367 3,481,499 2,846,693 ------------- ------------- ------------- ------------- GROSS PROFIT 321,803 335,198 674,218 581,835 OPERATING EXPENSES: Stock based compensation 378,493 356,484 789,320 562,853 Salary and payroll taxes 193,879 141,971 356,668 259,109 Professional fees 72,507 136,056 101,599 200,090 Occupancy 59,356 59,356 118,712 118,712 General and administrative 197,181 126,734 336,795 276,793 Depreciation and amortization 8,805 2,670 18,247 17,661 ------------- ------------- ------------- ------------- Total Expenses 910,221 823,271 1,721,341 1,435,218 ------------- ------------- ------------- ------------- Net (Loss) From Operations (588,418) (488,073) (1,047,123) (853,383) OTHER (EXPENSES): Interest expense (38,229) (97,911) (95,336) (233,296) ------------- ------------- ------------- ------------- Total Other (Expense) (38,229) (97,911) (95,336) (233,296) ------------- ------------- ------------- ------------- NET (LOSS) $ (626,647) $ (585,984) $ (1,142,459) $ (1,086,679) ============= ============= ============= ============= NET (LOSS) PER COMMON SHARE BASIC AND DILUTED $ (0.02) $ (0.05) $ (0.04) $ (0.09) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 27,913,739 12,533,035 25,705,861 12,134,457 ============= ============= ============= ============= SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
3 MILITARY RESALE GROUP, INC. STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004 AND 2003 UNAUDITED CONSOLIDATED FOR THE SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2004 2003 ------------ ----------- CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net (loss) $ (1,142,459) $(1,086,679) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 18,247 17,661 Amortization of option based interest expense 46,436 133,333 Stock issued for services 682,770 491,580 Options issued for services 94,800 -- Beneficial conversion feature -- 75,000 Stock issued for liquidated damages 11,750 -- Changes in assets and liabilities: Decrease (Increase) in accounts receivable 66,662 (388,512) Decrease (Increase) in inventory (82,975) (50,335) (Increase) in other assets -- (3,856) (Increase) in deposits (3,900) -- (Increase) in prepaid expenses (13,642) -- Increase in accounts payable and accrued expenses (249,395) 577,635 Increase in related party accounts payable 81,425 -- Increase in accrued interest payable 44,085 -- Increase in deferred rent obligation -- 4,094 Decrease in mortgage payable (109) -- Increase in other liabilities 7,655 54,533 ------------ ----------- Net Cash (Used In) Operating Activities (438,650) (175,546) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (9,459) (1,765) ------------ ----------- Net Cash (Used in) Investing Activities (9,459) (1,765) ------------ ----------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Payments on capital lease obligations (23,579) (8,941) Payments on notes payable (60,000) -- Proceeds from issuance of notes 75,000 185,000 Proceeds from issuance of common stock 547,500 -- Payments of offering costs (63,450) -- Payments on deferred offering costs (23,947) -- ------------ ----------- Cash Flows Provided by Financing Activities 451,524 176,059 ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,415 (1,252) CASH AND CASH EQUIVALENTS, beginning of period 2,862 2,072 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 6,277 $ 820 ============ =========== 4 MILITARY RESALE GROUP, INC. STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004 AND 2003 UNAUDITED (CONTINUED) Supplementary information: Cash paid for: Interest paid $ 3,921 $ 466 ============ =========== Income taxes $ -- $ -- ============ =========== 2004 2003 ------------ ----------- Non-cash investing and financing activities: Issuance of stock and options in exchange for services $ 263,300 $ 716,202 ============ =========== Issuance of common stock and options as payment of notes payable $ 50,000 $ -- ============ =========== Issuance of common stock in payment of accrued compensation $ -- $ 52,445 ============ =========== Issuance of stock options in exchange for note extensions $ -- $ 364,500 ============ =========== SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS 5 MILITARY RESALE GROUP, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited financial statements of Military Resale Group, Inc., included in Form 10-KSB for the fiscal year ended December 31, 2003. The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company has suffered recurring losses from operations, and has a working capital deficit that raises substantial doubt about its ability to continue as a going concern. The Company's management is currently pursuing equity and/or debt financing in an effort to continue operations. The future success of the Company is likely dependent on its ability to attain additional capital to develop its proposed products and ultimately, upon its ability to attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the following entities, collectively referred to as "Company" or "DGTL". All significant inter-company transactions have been eliminated. Military Resale Group, Inc. Corporation Ohio Street Partners, Inc. Corporation Military Resale Group, Inc. acquired Ohio Street Partners, Inc. on June 10, 2004 and is now a wholly owned subsidiary of Military Resale Group, Inc. (See Note 11). RECLASSIFICATION Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform to the presentation in the current period financial statements. NOTE 2 - EARNINGS PER SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). This Statement simplifies the standards for computing earnings per share (EPS) previously found in Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes them more comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, the Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. However, such presentation is not required if the effect is antidilutive. Accordingly, no such presentation has been made. NOTE 3 - PREPAID CONSULTING Prepaid consulting expenses are recorded in connection with common stock and options issued to consultants for future services and are amortized over the agreement term. As of June 30, 2004, the Company had a balance of $102,236 in prepaid consulting expense. 6 MILITARY RESALE GROUP, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 4 - PREPAID INTEREST Prepaid interest is recorded in connection with the issuances of options for the extension of various notes payable. The prepaid interest is being amortized over the extension period, with $46,436 charged to interest expense during the six months ended June 30, 2004. NOTE 5 - RELATED PARTY TRANSACTIONS On March 31, 2004 and June 30, 2004 pursuant to a consulting agreement with the Company's former chief executive officer, the Company issued 247,560 and 303,261 shares of common stock, respectively, and granted options to purchase 247,560 and 303,261 shares of common stock, respectively, at $.25 per share for a period of five years for services rendered valued at $144,000. The value of the stock and the value of the options was $72,000 each based on $12,000 each per month. The number of shares and options issued was determined by dividing $36,000 by 80% of the average low price of the common stock in each quarter. NOTE 6 - SECURITIES ISSUED FOR SERVICES During the six months ended June 30, 2004, the Company issued an aggregate 200,000 of the Company's common shares to a consultant for services provided and expensed $40,000 (the value of the services) as stock based compensation. During the six months ended June 30, 2004 the Company issued 100,000 shares of the Company's common stock valued at $9,000 to a consultant for services to be provided. The value of the stock is recorded as prepaid consulting and will be amortized over the six month term of the agreement. On January 29, 2004 the Company issued 50,000 shares of common stock valued at $11,000 as a retainer fee for services to be performed in connection with raising of capital (See Note 9). This amount is recorded as prepaid consulting and is being amortized over the six month term of the agreement. During the six months ended June 30, 2004 pursuant to a consulting agreement with an unrelated party, the Company granted warrants to purchase 320,000 shares of the Company's common stock at $.125 for a period of five years. These warrants were valued at $52,870, the fair value using the Black-Scholes European Pricing Model. The average risk free interest rate used was 3.39%, volatility was estimated at 96% and the expected life was five years. The warrants were granted as compensation to the Company's investment banker for raising $500,000 by selling 4,000,000 shares of common stock. This investment banker was also paid $40,000 as commission for the sale of stock. During the six months ended June 30, 2004 the Company issued 100,000 shares of common stock valued at $17,000 to a consultant for services to be rendered over a period of 180 days. This amount is recorded as prepaid consulting and is being amortized over the term of the agreement. During the six months ended June 30, 2004 the Company entered into a one-year business consulting agreement with an unrelated party for management and financial consulting services. Under the terms of the agreement the consultant will receive $5,000 per month for the term of the agreement and received 250,000 shares of common stock valued at $47,500. This amount is recorded as prepaid consulting and is being amortized over the term of the agreement. During the six months ended June 30, 2004 the Company issued 500,000 shares of common stock to a consultants for services rendered and expensed $70,000 (the fair value of the common stock on the date of issuance) as stock based compensation. During the six months ended June 30, 2004 the Company issued 200,000 shares of common stock and granted warrants to purchase 200,000 shares of the Company's common stock at $.25 per share for a period of five years to a stockholder for services rendered. The stock was valued at $34,000 (the fair value of the common stock on the date of issuance) and expensed as stock based compensation. The warrants were valued at $22,800, the fair value using the Black-Scholes European Pricing Model and expensed as stock based compensation. The average risk free interest rate used was 3.96%, volatility was estimated at 93% and the expected life was five years. 7 MILITARY RESALE GROUP, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 7 - COMMON STOCK During the six months ended June 30, 2004 the Company sold 4,000,000 shares of common stock to several individuals at $.125 per share for total consideration of $460,000, net of offering costs paid of $40,000. These individuals were also given warrants to purchase 2,000,000 shares of common stock at $.25 per share for a period of five years. The terms of the stock subscription agreements provide that in the event the average closing bid price of the common stock for the ten days preceding the effective date of the Registration Statement (to be filed) is $.17 or below, then the purchase price for the shares shall be reset to a purchase price equal to the average price minus $.05, provided that the purchase price is not less than $.065 per share. Upon the occurrence of the price adjustment, the Company will issue to each subscriber the additional shares they are entitled to based upon the adjusted price. In addition, if the Registration Statement (to be filed) is not declared effective on or before June 30, 2004, then commencing on the first day of each month thereafter until December 1, 2004 or the declared effective date of the Registration Statement, the Company will issue each subscriber, as liquidated damages, additional shares of common stock equal to 10% of the number of shares purchased by each subscriber (See Note 12). During the six months ended June 30, 2004 the Company sold 450,000 shares of common stock to several individuals for $.10 to $.125 per share for total consideration of $43,250, net of offering costs of $4,250. In accordance with the terms of the stock subscription agreements, if the Company's Registration Statement (to be filed) is not declared effective on or before June 30, 2004, then commencing on the first day of each month thereafter until December 1, 2004 or the declared effective date of the Registration Statement, the Company will issue each subscriber, as liquidated damages and not as a penalty, additional shares of common stock equal to 10% of the number of shares purchased by each subscriber (See Note 12). During the six months ended June 30, 2004, the Company issued 62,500 shares of common stock valued at $11,750 to a stockholder as liquidated damages for the Company not registering the stockholder's common stock by January 31, 2004. The Company also recorded common stock reserved of $11,750 for an additional 62,500 shares of common stock that should have been issued as additional liquidated damages. NOTE 8 - PROMISSORY NOTE PAYABLE On March 27, 2003, the Company issued a promissory note for $100,000 to Romano, Ltd. The note bears interest at 15% per annum and was due on March 26, 2004, subject to the following contingent payment terms upon the Company's raising or securing additional funding from any third party source:
ADDITIONAL FUNDING TERMS MODIFICATION - --------------------- ----------------------------------------------------------- $250,000 Payment of 10% of outstanding principal and accrued interest $500,000 Payment of 15% of outstanding principal and accrued interest $1,000,000 or more Payment of 100% of outstanding principal and accrued interest
When the Company failed to secure any of the above-referenced additional funding, nor another significant event, such as a merger or acquisition of another company, the Company was required to pay $8,000 per month commencing on July 1, 2003 until the full obligation was paid. The Company repaid $25,000 during the year ended December 31, 2003 and repaid the remaining $75,000 principal balance during the three months ended March 31, 2004. The Company paid $25,000 and 400,000 shares of the Company's common stock and warrants to purchase 250,000 shares of the Company's common stock exercisable at $.25 per share for a period of three years. The value of the common stock and warrants was $50,000, based upon the fair market value of the note. At the time the note was exchanged for stock and warrants, the Company had entered into private placements of common stock on terms similar to the exchange transaction. The Company signed a $30,000 note with Romano, Ltd., for the accrued interest on the original $100,000 loan with interest at 15% per annum, payable beginning on April 1, 2004 with equal consecutive installments payable on the fifteenth of every month in the amount of $5,000 until paid in full or March 26, 2005. At June 30, 2004 the balance remaining on this note was $15,000. 8 MILITARY RESALE GROUP, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 9 - RELATED PARTY DEMAND NOTE PAYABLE During the six months ended June 30, 2004 the Company issued a note payable to a related party who is now the Company's Chief Executive Officer and Chairman of the Board of Directors in the amount of $75,000. The note is due on demand or September 10, 2004, or upon the sale of the San Diego condominium (See Note 11), whichever occurs sooner and bears interest at the rate of 8% per annum. NOTE 10 - COMMITMENTS AND CONTINGENCIES On January 29, 2004 the Company entered into a business consulting agreement with an unrelated party for financial advisory and investment banking services and issued the consultant 50,000 shares of its common stock valued at $11,000. The consultant will advise the Company as to issues of capital formation, assist the Company on the market awareness of its stock by setting up road shows and will assist the Company in raising $300,000 through the issuance of common stock at $.125 and warrants to purchase 1,200,000 shares of common stock exercisable at $.25 per share for five years. Upon successful closing of the above raising of capital, the Company will pay the consultant a cash fee commission of 10% of the capital raised plus a cash non-accountable expense allowance of 2.5% of the capital raised. In addition, upon raising the capital, the consultant will be entitled to 300,000 warrants with similar terms as those issued in the capital raised. No capital has been raised as of June 30, 2004. The Company was the plaintiff in litigation with one of its vendors. During the six months ended June 30, 2004 the Company entered into a judgment in which they were ordered to pay the vendor $5,356 with the amount due accruing interest at 8% per annum. As of June 30, 2004 the Company had not paid any amount to this vendor but has accrued $5,437 at June 30, 2004. Subsequent to March 31, 2004, the Company received a Writ of Garnishment and are expecting to have the original judgment amount of $5,356 plus interest and other charges of $181 garnished from one of their bank accounts. Subsequent to June 30, 2004 this amount was garnished from the Company's bank account. NOTE 11 - PURCHASE OF OHIO STREET PARTNERS, INC. On June 10, 2004 the Company acquired Ohio Street Partners, Inc. ("Ohio"), a Delaware corporation from Data Recovery Continuum, Inc. ("DRCI"). As consideration for all of the outstanding shares of the common stock of Ohio, the Company issued 1,920,000 shares of common stock valued at $211,200 (the fair market value of the common stock on the date the agreement was signed) and five year warrants to purchase 960,000 shares of common stock at $.25 to DRCI. The warrants were valued at $63,360, the fair value using the Black-Scholes European Pricing Model. The average risk free interest rate used was 3.96%, volatility was estimated at 93% and the expected life was five years. Ohio's sole asset was a single-family residential condominium located in San Diego, California. The property is valued at $345,468 (based upon the common stock and warrants issued and debt assumed) and is subject to a mortgage of $71,297. Subsequent to June 30, 2004, in accordance with the terms of the agreement, the owner of DRCI was appointed to the Board of Directors of the Company and as of August 9, 2004, became the Company's Chief Executive Officer and Chairman of the Board of Directors (See Note 12). As part of the acquisition, the owner of DRCI loaned the Company $75,000 evidenced by a demand note (See Note 9). DRCI signed a subscription agreement with the Company for the 1,920,000 shares of common stock issued. The terms of the stock subscription agreement provide that in the event the average closing bid price of the common stock for the ten days preceding the effective date of the Registration Statement (to be filed) is $.17 or below, then the purchase price for the shares shall be reset to a purchase price equal to the average price minus $.05, provided that the purchase price is not less than $.065 per share. Upon the occurrence of the price adjustment, the Company will issue to DRCI the additional shares they are entitled to based upon the adjusted price. In addition, if the Registration Statement (to be filed) is not declared effective on or before June 30, 2004, then commencing on the first day of each month thereafter until December 1, 2004 or the declared effective date of the Registration Statement, the Company will issue DRCI, as liquidated damages, additional shares of common stock equal to 10% of the number of shares issued to DRCI. (See Note 12) NOTE 12 - SUBSEQUENT EVENTS On July 16, 2004 the Company sold 400,000 shares of common stock under a stock subscription agreement to a stockholder at $.125 per share for total consideration of $50,000. The stockholder was also granted warrants to purchase 200,000 shares of common stock at $.25 per share for a period of five years. The terms of the stock subscription agreements provide that in the event the average closing bid price of the common stock for the ten days preceding the effective date of the Registration Statement (to be filed) is $.17 or below, then the purchase price for the shares shall be reset to a purchase price equal to the average price minus $.05, provided that the purchase price is not less than $.065 per share. Upon the occurrence of the price adjustment, the Company will issue to each subscriber the additional shares they are entitled to based upon the adjusted price. In addition, if the Registration Statement (to be filed) is not declared effective on or before August 31, 2004, then commencing on the first day of each month thereafter until December 1, 2004 or the declared effective date of the Registration Statement, the Company will issue each subscriber, as liquidated damages, additional shares of common stock equal to 10% of the number of shares purchased by each subscriber. 9 NOTE 12 - SUBSEQUENT EVENTS (CONTINUED) On August 7, 2004 Ed Whelan resigned as the Company's Chief Executive Officer and Chairman of the Board of Directors. Mr. Whelan entered into an agreement, release and waiver. In consideration for his resignation, Mr. Whelan will be paid monthly in arrears for a period of six months, for the period beginning September 1, 2004 in restricted shares of the Company's common stock according to the same formula he was paid prior to his resignation (See Note 5). Mr. Whelan will also receive an equal amount of five-year warrants to purchase the Company's common stock at $0.25 per share. The Company will pay for Mr. Whelan's cost of healthcare from September 1, 2004 to February 28, 2005. In addition Mr. Whelan will be reimbursed $84,751 for expenses incurred by him directly in connection with his role and obligations as Chief Executive Officer and Chairman of the Board, payable in equal monthly installments by the Company over a twenty-four month period beginning on September 30, 2004 and will be evidenced by a promissory note. Mr. Whelan will also receive as further consideration, two-year warrants to purchase 1,000,000 shares of common stock of the Company at $0.25 per share and two-year warrants to purchase 1,000,000 shares of common stock of the Company at $5.00 per share to be issued within 45 days of execution of the agreement. On August 7, 2004 Richard Tannenbaum resigned as both counsel to and from the Company's Board of Directors. Mr. Tannenbaum entered into an agreement, release and waiver. In consideration for his resignation, Mr. Tannenbaum will be paid for past services rendered in the amount of $111,954 payable in equal monthly installments over the twenty-four month period beginning on September 30, 2004 and will be evidenced by a promissory note. Mr. Tannenbaum will also receive as further consideration, two-year warrants to purchase 400,000 shares of common stock of the Company at $0.25 per share and two-year warrants to purchase 1,000,000 shares of common stock of the Company at $5.00 per share to be issued within 45 days of execution of the agreement. In connection with the acquisition of Ohio Street Partners, Inc., (See Note 11) Mr. Lee Brukman was appointed to the Company's Board of Directors on July 6, 2004. On August 9, 2004 after the resignation by Ed Whelan as Chief Executive Officer and Chairman of the Board of Directors and Richard Tannenbaum as legal counsel and member of the Board of Directors, the Company appointed Lee Brukman as Chairman of the Board of Directors and Chief Executive Officer. Subsequent to June 30, 2004 pursuant to their stock subscription agreements entered into during the six months ended June 30, 2004 (See Notes 7 and 11) the Company issued 440,000 shares of common stock value at $61,600 (the fair market value of the common stock on July 1, 2004) to several shareholders as liquidated damages for the month of July 2004. In addition, pursuant to the terms of their stock agreements entered into during 2003 and the six months ended June 30, 2004, the Company should have issued an additional 257,000 shares of common stock valued at $35,980 (the fair market value of the common stock on July 1, 2004) to several additional shareholders as liquidated damages for the month of July 2004. Pursuant to the terms of the agreements, each shareholder is entitled to ten percent of the original shares purchased each month beginning July 1, 2004 if the common stock was not registered by June 30, 2004. In addition, because the registration statement has not been declared effective as of August 1, 2004, these same shareholders are entitled to an additional 697,000 shares of common stock valued at $90,610 (the fair market value of the common stock on August 2, 2004) as liquidated damages for the month of August. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Because our common stock is considered a "penny stock," as defined by the regulations of the Securities and Exchange Commission, the safe harbor for forward-looking statements does not apply to statements by our company. Our business and results of operations are affected by a wide variety of factors that could materially and adversely affect us and our actual results, including, but not limited to: (1) the availability of additional funds to enable us to successfully pursue our business plan; (2) the uncertainties related to the addition of new products and suppliers; (3) our ability to maintain, attract and integrate management personnel; (4) our ability to complete the development of our proposed product line in a timely manner; (5) our ability to effectively market and sell our products and services to current and new customers; (6) our ability to negotiate and maintain suitable strategic partnerships and corporate relationships with suppliers and manufacturers; (7) the intensity of competition; and (8) general economic conditions. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price. Any forward-looking statements herein speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Report. 11 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Revenues. Total revenue for the three months ended June 30, 2004 of $2,020,741 reflected an increase of $351,176, or approximately 21%, compared to total revenue of $1,669,565 for the three months ended June 30, 2003. Our revenues are derived in either one of two ways. In the majority of instances, we purchase products from manufacturers and suppliers for resale to the commissaries we service. In such cases, we resell the manufacturer's or supplier's products to the commissaries at generally the same prices we pay for such products, which prices generally are negotiated between the manufacturer or supplier and the Defense Commissary Agency ("DeCA"). Revenue is recognized as the gross sales amount received by us from such sales ("resale revenues"), which include (i) the purchase price paid by the commissary plus (ii) a negotiated storage and delivery fee paid by the manufacturer or supplier. In the remaining instances, we act as an agent for the manufacturer or supplier of the products we sell, and earn a commission paid by the manufacturer or supplier, generally in an amount equal to a percentage of the manufacturer's or supplier's gross sales amount ("commission revenues"). In such cases, revenue is recognized as the commission we receive on the gross sales amount. The increase in our total revenues was primarily due to the addition of the frozen chicken line of Tyson Foods, Inc. in December 2003, a line of health and beauty aids manufactured by Alberto Culver, Inc. in January 2004 and a frozen vegetable line produced by VIP Sales Company Inc. in January 2004, all of which we sell to commissaries on a resale basis. Resale revenue for the three months ended June 30, 2004 of $1,859,784 reflected an increase of $325,407, or approximately 21.2%, compared to resale revenue of $1,534,377 for the three months ended June 30, 2003. For the three months ended June 30, 2004, approximately 50% of our gross profit was derived from sales involving resale revenue compared to approximately 59.7% for the three months ended June 30, 2003. The increase in resale revenue was attributable primarily to addition of the suppliers discussed above. We cannot be certain as to whether this trend will continue. However, in the long term, we are seeking to increase the ratio of our sales of products sold on a resale basis, rather than a commission basis, because we believe we can increase our profitability on such sales by taking advantage of payment discounts frequently offered by the manufacturers and suppliers of such products. Provided we can generate sufficient cash from operations or financing activities, we intend to do so by seeking to add new products that we can offer to commissaries on a resale basis from our existing manufactures and suppliers and from others with whom we do not currently have a working relationship. Commission revenues for the three months ended June 30, 2004 of $160,957 reflected an increase of $25,679, or approximately 19%, compared to commission revenues of $135,188 for the three months ended June 30, 2003. For the three months ended June 30, 2004, approximately 50% of our gross profit was derived from sales involving commission revenues as compared to approximately 40.3% for the three months ended June 30, 2003. The increase in commission revenues was attributable primarily to a change in our supplier of fresh chicken products in the third quarter of 2003 from Tyson Foods, Inc., whose products we sold on a resale basis, to ConAgra Foods, Inc., whose products we sell on a commission basis. Management believes our long-term success will be dependent in large part on our ability to add additional product offerings to enable us to increase our sales and revenues. However, we believe our ability to add additional product offerings, is dependent on our ability to obtain additional capital to fund new business development and increased sales and marketing efforts. We are currently in discussions with a number of other manufacturers and suppliers in an effort to reach an agreement under which we can distribute their products to the military market. While there can be no assurance that we will do so, we believe we will be successful in negotiating agreements with a number of such suppliers and manufacturers. To date, all of our sales revenue has been generated from customers located in the United States. Cost of Goods Sold. Cost of goods sold consists of our cost to acquire products from manufacturers and suppliers for resale to commissaries. In instances when we sell products on a commission basis, there is no cost of goods sold because we act as an agent for the manufacturer or supplier and earn only a commission on such sales. During the three months ended June 30, 2004, cost of goods sold increased by $364,571, or approximately 27.3%, to $1,698,938 from $1,334,367 for the three months ended June 30, 2003. This increase was attributable primarily to increased sales of products that we sold on a resale basis as discussed above. We cannot be certain as to whether or not this trend will continue; however, in the long term we are seeking to increase the ratio of our sales on a resale basis, as discussed above. Gross Profit. Gross profit for the three months ended June 30, 2004 decreased by $13,395, or approximately 4.2%, compared to the three months ended June 30, 2003, from $335,198 for the three months ended June 30, 2003 to $321,803 for the three months ended June 30, 2004. 12 Operating Expenses. Total operating expenses aggregated $910,221 for the three months ended June 30, 2004 as compared to $823,271 for the three months ended June 30, 2003, representing a increase of $86,949, or approximately 10.6%. Interest Expense. Interest expense of $38,229 for the three months ended June 30, 2004 reflected a decrease of $59,682 as compared to interest expense of 97,911 for the three months ended June 30, 2003. The decrease in interest expense was attributable primarily to decreased interest expense resulting from the recognition of the beneficial conversion feature (the right to convert debt into shares of our common stock at a discount to the fair market value of our common stock) of convertible promissory notes. We issued $60,000 aggregate principal amount of convertible promissory notes in the three months ended June 30, 2003, but did not issue any convertible notes in the three months ended June 30, 2004 Net Loss. Primarily as a result of the increased operating expenses discussed above, we incurred a net loss of $626,647 for the three months ended June 30, 2004 as compared to a net loss of $585,984 for the three months ended June 30, 2003. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Revenues. Total revenue for the six months ended June 30, 2004 of $4,155,717 reflected an increase of $727,189, or approximately 21.2%, compared to total revenue of $3,428,528 for the six months ended June 30, 2003. Resale revenue for the six months ended June 30, 2004 of $3,821,328 reflected an increase of $674,354, or approximately 21.4%, compared to resale revenue of $3,146,974 for the six months ended June 30, 2003. For the six months ended June 30, 2004, approximately 50.4% of our gross profit was derived from sales involving resale revenue compared to approximately 51.6% for the six months ended June 30, 2003. The increase in resale revenue was attributable primarily to addition of the suppliers discussed above. We cannot be certain as to whether this trend will continue. However, in the long term, we are seeking to increase the ratio of our sales of products sold on a resale basis, rather than a commission basis, because we believe we can increase our profitability on such sales by taking advantage of payment discounts frequently offered by the manufacturers and suppliers of such products. Provided we can generate sufficient cash from operations or financing activities, we intend to do so by seeking to add new products that we can offer to commissaries on a resale basis from our existing manufactures and suppliers and from others with whom we do not currently have a working relationship. Commission revenues for the six months ended June 30, 2004 of $334,389 reflected an increase of $52,835, or approximately 18.8%, compared to commission revenues of $281,554 for the six months ended June 30, 2003. For the six months ended June 30, 2004, approximately 49.6% of our gross profit was derived from sales involving commission revenues as compared to approximately 48.4% for the six months ended June 30, 2003. The increase in commission revenues was attributable primarily to a change in our supplier of fresh chicken products in the third quarter of 2003 from Tyson Foods, Inc., whose products we sold on a resale basis, to ConAgra Foods, Inc., whose products we sell on a commission basis. Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2004, cost of goods sold increased by $634,806, or approximately 22.3%, to $3,481,499 from $2,846,693 for the six months ended June 30, 2003. This increase was attributable primarily to increased sales of products that we sold on a resale basis as discussed above. We cannot be certain as to whether or not this trend will continue; however, in the long term we are seeking to increase the ratio of our sales on a resale basis, as discussed above. Gross Profit. Gross profit for the six months ended June 30, 2004 increased by $92,383, or approximately 15.9%, compared to the six months ended June 30, 2003, from $581,835 for the six months ended June 30, 2003 to $674,218 for the six months ended June 30, 2004. 13 Operating Expenses. Total operating expenses aggregated $1,721,341 for the six months ended June 30, 2004 as compared to $1,435,218 for the six months ended June 30, 2003, representing an increase of $286,123, or approximately 19.9%. Interest Expense. Interest expense of $95,336 for the six months ended June 30, 2004 reflected a decrease of $137,960 as compared to interest expense of 233,296 for the six months ended June 30, 2003. Net Loss. Primarily as a result of the increased operating expenses discussed above, we incurred a net loss of $1,142,459 for the six months ended June 30, 2004 as compared to a net loss of $1,086,679 for the six months ended June 30, 2003. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004, we had a cash balance of $6,277. Since 2001, we have funded our operations primarily from the sale of common stock and borrowings of approximately $850,000 through the issuance of demand notes and convertible notes bearing interest at either 8% or 9% per annum and having original maturity dates of three to five months following the date of issuance of such convertible notes. At June 30, 2004, none of such demand notes was outstanding and $585,000 aggregate principal amount of convertible notes were outstanding, of which $520,000 aggregate principal amount mature on or about June 3, 2006 and $65,000 aggregate principal amount have matured but have not yet been paid. Such convertible notes require us to register under the Securities Act of 1933 the shares our common stock issuable upon conversion of such convertible notes. The terms of our convertible notes provide generally that the holders may convert, at any time and from time to time, all or a portion of the outstanding balance under each convertible note into a number of shares (subject to certain anti-dilution adjustments) of our common stock that will allow the noteholder to receive common stock having a market value equal to 150% of the converted balance of the note. To achieve this result, the conversion price of such notes has been initially set at $0.25; provided, that the closing price per share of our common stock as reported on the OTC Bulletin Board on the date of conversion is at least $0.375 per share. If such closing price is less than $0.375 per share, the conversion price shall be proportionately reduced, but in no event to a conversion price that is less than $0.25 per share, to permit the noteholder to receive the number of shares discussed above. 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 shares of our common stock. In December 2001, we filed with the Securities and Exchange Commission a registration statement relating to such shares for gross sales proceeds of up to $5,000,000. Such registration statement has not yet been declared effective, and there can be no assurance that the Securities and Exchange Commission will declare such registration statement effective in the near future, if at all. In the interim, we intend to fund our operations based on our cash position and the near term cash flow generated from operations, as well as additional borrowings and the sale of unregistered shares of our common stock in private placements to accredited investors. In the six months ended June 30, 2004, we sold and issued shares of our common stock to accredited investors for aggregate gross proceeds of $547,500. Such proceeds were used for the repayment of current liabilities and for working capital purposes. In the event we are able to generate sales proceeds of at least $750,000 in our proposed public offering, we believe that the net proceeds of such sale, together with anticipated revenues from sales of our products, will satisfy our capital requirements for at least the next 12 months. However, we would require additional capital to realize our strategic plan to expand distribution capabilities and product offerings. These conditions raise substantial doubt about our ability to continue as a going concern. Our actual financial results may differ materially from the stated plan of operations. Our independent auditors have indicated in its report on our 2003 financial statements that our recurring losses from operations and our difficulties in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern. Such qualification may hinder our ability to raise or obtain the capital we require or have an adverse impact on the terms upon which we are able to attract or obtain such capital. In addition, such qualification may adversely impact our ability to attract and maintain new customer accounts. Assuming that we receive net proceeds of at least $750,000 from our proposed offering (of which there can be no assurance), we expect capital expenditures to be approximately $100,000 during the next 12 months, primarily for the acquisition of an inventory control system and a web-based marketing software program. 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 public offering of common stock. 14 At June 30, 2004, we had liquid assets of $705,466, consisting of cash and accounts receivable derived from operations, and other current assets of $617,554, consisting primarily of inventory of products for sale and/or distribution and prepaid expenses. Long term assets of $577,378 consisted primarily of warehouse equipment used in operations, the investment property and the long-term portion of prepaid interest. Current liabilities of $2,734,874 at June 30, 2004 consisted primarily of $2,412,207 of accounts payable and accrued expenses, including related party amounts. Our working capital deficit was $1,411,854 as of June 30, 2004 for the reasons described above. During the three months ended June 30, 2004, we used cash of $ 438,650 in operating activities, primarily as a result of the net loss we incurred during this period. During the three months ended June 30, 2004, we used net cash of $ 9,459 in investing activities, all of which was used for capital expenditures. Financing activities, consisting primarily of proceeds from the sale and issuance of shares of our common stock, provided net cash of $451,524 during the three months ended June 30, 2004. OFF BALANCE SHEET ARRANGEMENTS At June 30, 2004, we had no off-balance sheet arrangements that had or were reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. 15 ITEM 3. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our company's disclosure controls and procedures (as much term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. (b) Internal Control Over Financial Reporting. There have been not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 16 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES (c) Recent Sales of Unregistered Securities. (i) In the three months ended June 30, 2004, we issued to investors in a private placement investment units consisting of an aggregate of 1,920,000 shares of our common stock and five-year warrants to purchase an aggregate of 960,000 shares of our common stock at $0.125 per share for gross proceeds to us of $360,000. In connection with such issuances, we granted registration rights to such investors. Such shares and warrants were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis that such issuance did not involve a public offering and such persons were "accredited investors" as defined in Regulation D under the Securities Act of 1933, as amended. (ii) In the three months ended June 30, 2004, we issued an aggregate of 200,000 shares of our common stock and five year warrants to purchase an aggregate of 200,000 shares of our common stock at $0.125 to a consultant for business consulting services to be rendered to the Company, which services were valued at $49,000 in the aggregate. Such shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis that such issuance did not involve a public offering, no underwriter fees or commissions were paid in connection with such issuance and such persons were "accredited investors" as defined in Regulation D under the Securities Act of 1933, as amended. (iii)In the three months ended June 30, 2004, we issued 247,560 shares of our common stock and five-year options to purchase 247,560 shares of our common stock at $0.25 per share to our Chief Executive Officer for services rendered during the three months ended June 30, 2004 pursuant to the terms of his employment arrangement. The services were valued at $72,000. Such shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis that such issuance did not involve a public offering, no underwriter fees or commissions were paid in connection with such issuance and such person was an "accredited investor" as defined in Regulation D under the Securities Act of 1933, as amended. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed herewith or are incorporated by reference to Exhibits previously filed. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 Agreement, Realease & Waiver, dated August 5, 2004, between Edward Whelan and the Company. 10.2 Agreement, Realease & Waiver, dated August 7, 2004, between Richard Tanenbaum and the Company. 31.1 Certification of our Principal Executive Officer, Lee Brukman, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of our Principal Financial Officer, Ethan D. Hokit, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of our Principal Executive Officer, Lee Brukman, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of our Principal Financial Officer, Ethan D. Hokit, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. On June 29, 2004 we filed a current report on Form 8-K providing a copy of the transcript from management's teleconference presentation on June 21, 2004 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Colorado Springs, Colorado on August 10, 2004. MILITARY RESALE GROUP, INC. By: /s/ Ethan D. Hokit ------------------------- Name: Ethan D. Hokit Title: President (Principal Accounting Officer and Principal Financial Officer) 19 EX-10.1 2 v06078_ex10-1.txt Exhibit 10.1 AGREEMENT, RELEASE & WAIVER THIS AGREEMENT, RELEASE & WAIVER (the "Agreement") is made on this 5th day of August 2004, by and between Military Resale Group, Inc., a New York corporation (hereinafter "the Company") and Ed Whelan (hereinafter "Executive"). 1. Representations of Executive. Executive hereby acknowledges that: (a) I received a copy of this Agreement from the Company on the 5th day of August 2004. (b) The terms of this Agreement are a result of discussions and/or negotiations between me and/or my attorney, and the Company and/or its attorney. (c) The Company hereby advises me to consult legal counsel before entering into this Agreement. (d) I have thoroughly read and reviewed this entire Agreement, and I fully understand its meaning and effect. (e) I am not entitled to the Consideration for Release recited in Paragraph 4 of this Agreement except for the fact that I have signed this Agreement. (f) I have signed this Agreement after having been given at least twenty-one (21) days to consult legal counsel and to consider the language, meaning and effect of this Agreement. (g) I have executed this Agreement voluntarily and without any threat, intimidation, coercion, force or other type of pressure by the Company or any other person. (h) I have not transferred or assigned any claim I may have against the Company, as described in Paragraph 2, to any other person or entity. 2. Release and Waiver by Executive In exchange for the Consideration for Release given to Executive by the Company, Executive hereby fully, unequivocally, unconditionally and forever releases and discharges the Company from any and all claims, liabilities, demands and causes of action of any kind, whether statutory or common law, whether known or unknown, in contract, tort or otherwise, fixed or contingent, in law or in equity, in any way arising out of, concerning, or related to, directly or indirectly, Executive's employment, including, but not limited to, Executive's separation from employment with the Company. Executive further expressly waives any rights, which might have accrued prior to the date hereof against the Company pertaining to or arising from the employment relationship, including but not limited to his positions as Chairman of the Board of Directors and Chief Executive Officer. Further, Executive agrees not to seek reemployment or reinstatement of employment in any capacity with the Company, including as a Director on the Board of Directors. Without limiting the generality of the foregoing, this release and waiver includes, but is not limited to, a release and waiver of claims arising under the Title VII of the Civil Rights Act of 1964 and all amendments thereto, the Age Discrimination in Employment Act, and all amendments thereto, the Americans with Disabilities Act, and all amendments thereto, the Family and Medical Leave Act, and all amendments thereto, and the Employee Retirement Income Security Act, and all amendments thereto, the Worker Adjustment Retraining Notification Act, and all amendments thereto, the Fair Credit Reporting Act and all amendments thereto, and any other constitutional, federal, state and local laws, or theories governing the employment relationship and all claims growing out of any legal restrictions on the Company's rights to terminate its employees. 3. Compensation. Executive acknowledges his voluntary resignation, as both an Employee of the Company and from its Board of Directors, effective as of August 2, 2004. Executive agrees the Company has hereby paid all wages, commissions, bonuses, vacation, expenses, severance pay in lieu of notice, car allowance and every other benefit and compensation to which he is entitled, except for any vested benefits under any Company welfare, benefit or retirement plans, or stock option or other plans, if any. 4. Consideration for Release. In consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company agrees to pay to Executive for a period of six (6) months, for the period beginning on September 1, 2004 and ending on February 28, 2005, such payment shall be made in restricted shares of the Company's common stock according to same formula by which Executive was paid in restricted shares of common stock prior to his resignation from the Company and the Board, to wit: a number of shares determined by dividing $12,000 by the product of 80% and the average low price of the Company's common stock during such period. Such monthly stock issuance shall be made in arrears, i.e. following the last calendar day of each of the six (6) aforementioned months. In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company will reimburse Executive for the cost of healthcare continuation under COBRA (upon presentation by Executive of reasonable documentation of prior payment) beginning on September 1, 2004 through and including February 28, 2005. 2 In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company further agrees that it shall reimburse Executive for an amount not to exceed $85,000 for expenses incurred by Executive directly in connection with his role and obligations as CEO and Chairman, such amount to be finally determined by mutual agreement of the parties or as set forth in the dispute resolutions procedures set forth in Paragraph 18. Any such expense reimbursement shall be payable by the Company to Executive in equal installments over the twenty-four (24) month period beginning on September 30, 2004. In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company further agrees to issues, within six (6) months following the execution of this Agreement, One-Million (1,000,000) two-year warrants at a $0.25 strike price, including provisions for the cashless exercise of such warrants, but subject to the reasonable usual and customary terms of any such plan or agreement pursuant to which such warrants are authorized or issued. In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company further agrees to issues, within six (6) months following the execution of this Agreement, One-Million (1,000,000) two-year warrants at a $5.00 strike price, including provisions for the cashless exercise of such warrants, but subject to the reasonable usual and customary terms of any such plan or agreement pursuant to which such warrants are authorized or issued. It is specifically understood that the payment of the consideration under this section does not constitute an admission of any wrongdoing on the Company's part and is in addition to the compensation to which Executive was entitled and for which he has been paid, as reflected in Paragraph 3. 5. Confidentiality. Executive hereby agrees to keep the existence and terms of this Agreement confidential and to refrain from revealing any of its terms and conditions to anyone other than Executive's spouse, legal counsel, accountant, tax advisor or as required by law or as agreed in writing by the Company in connection with a legal process. Further, Executive hereby agrees not to disclose Confidential or Proprietary Information of the Company and to refrain from disclosing to or sharing such information with others who might gain from such knowledge. For the purpose of this Agreement, Confidential and Proprietary Information shall mean any confidential, financial, marketing, business, technical, or other information, including specifically but not exclusively, information which Executive prepared, caused to be prepared, or received in connection with his employment with the Company, such as merger or acquisition opportunities or prospects, trade, technical or technological secrets, customer or vendor lists, price lists, details of organization or business affairs; computer hardware configurations and software designs and programs, business plans, business strategies, software, software evaluations, trade secrets, personnel information, marketing methods and techniques, and any of the above-recited information as it relates to the Company, any subsidiaries, predecessors, successors or assigns. For purposes of this Agreement, "Confidential and Proprietary Information" specifically excludes information, which is generally known or becomes known in the industry (except when known based upon Executive's breach of this Agreement). As Executive and the Company agree and mutually acknowledge that any breach of this section would result in damage to the Company, and such damage would necessarily be of a type which is difficult to measure or quantify, Executive and the Company hereby agree that for each event of a violation of this section of the Agreement the Company shall be entitled to recover liquidated damages in the amount of $12,500 and consequential damages, including attorney's fees and costs, from Executive. 3 6. Non-Competition. (a) Executive acknowledges that during his employment with the Company he has enjoyed a position of trust and confidence that gave him complete access to Confidential and Proprietary Information, which has value to the Company. (b) Executive acknowledges that his service as Chairman of the Board of Directors and Chief Executive Officer of the Company means that he comes within the statutory exception contained in subsection 2(d) of C.R.S. ss.8-2-113, which allows for non-competition agreements between employers and executives, managers, officers and professional staff. Being cognizant of his virtually unlimited access to Confidential and Proprietary Information, which is of value to the Company, Executive also acknowledges that his subsequent employment by a competitor would be more likely than not to result in the inevitable disclosure of the trade secrets of the Company. (c) Executive accordingly agrees that for a period of thirty-six (36) months beginning on August 2, 2004 Executive shall not directly or indirectly engage in competition with the Company by taking any of the following actions: (i) Owning, managing, operating, joining, controlling or providing services to (or participating in the ownership, management, operation or control of, other than as a holder of less than 5% of the shares of a public company), aiding or assisting any corporation, association, partnership, limited liability company, proprietorship or other business entity, regardless of form, that at any location in the United engages in the business in which the Company is engaged; or, (ii) Serving as an employee, agent, consultant, officer, director, advisor, or creditor of any such business entity or enterprise described in (i) above. (d) Executive accordingly agrees that for the term of this Agreement and for a period of thirty-six (36) months beginning on August 2, 2004 that Executive shall not directly or indirectly engage in competition with the Company by taking any of the following actions: 4 Inducing or attempting to induce any customer, supplier or business relation of the Company to cease doing business with the Company or in any other way interfering with the relationship between any customer, supplier or business relation and the Company. (e) Executive acknowledges that the restrictions set forth above are reasonable and appropriate to protect the Confidential and Proprietary Information of value to the Company, which would be inevitably disclosed if he competed, directly or indirectly, as set forth above. If however, a court determines that any of the foregoing restrictions are unreasonable in duration, scope or area of restriction, then Executive and the Company agree that the restrictions shall be applied only to the activities and territory, and only for the period of time, that the court determines reasonable in light of all then-existing circumstances. 7. Non-Solicitation of Employees. The Executive agrees that for the period of thirty-six (36) months following his separation from employment for any reason he shall not directly or indirectly solicit or recruit, or attempt to solicit or recruit, or hire, any employee of the Company who is employed by the Company or was employed by the Company at any time during the last year of the Executive's employment with the Company. 8. Representations and Warranties of Executive (a) The Company's financial statements and notes, attached hereto as Exhibit A, fairly present the financial condition and the results of operations, changes in stockholders' equity and cash flow of the Company as at the respective dates of and for the periods referred to in such financial statements. Company maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal accounting controls which provide assurance that (i) transactions are executed with management's authorization; (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of the Company and to maintain accountability for the Company's consolidated assets; (iii) access to the Company's assets is permitted only in accordance with management's authorization; (iv) the reporting of the Company's assets is compared with existing assets at regular intervals; and (v) accounts, notes and other receivables and inventory are recorded accurately, and properly and adequate procedures are implemented to effect the collection thereof on a current and timely basis. (b) Exhibit B provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable, related contra-accounts, and other receivables of Company as of the respective dates of and for the periods referred to on such Exhibit B. Except as set forth in Exhibit B, all existing accounts receivable of the Company have not yet been collected, represent valid obligations of customers of Company arising from bona fide transactions entered into in the ordinary course of business; and are current and will be collected in full (without any counterclaim or setoff) on or before December 31, 2004 (net of an allowance for uncollectible accounts also as shown on Exhibit B. 5 (c) Exhibit C provides an accurate and complete breakdown and aging of all accounts payable, related contra-accounts, notes payable and other payables of Company as of the respective dates of and for the periods referred to on such Exhibit C. Except as set forth in Exhibit C, all existing accounts payable of the Company have not yet been paid, represent valid obligations of the Company arising from bona fide transactions entered into in the ordinary course of business. (d) Neither this Agreement nor any of the Company's filings with the SEC contains any untrue statement of fact; and neither this Agreement nor any of the Company's filings with the SEC omits to state any fact necessary to make any of the representations, warranties or other statements or information contained therein not misleading. All of the information set forth in this Agreement and the Company's filings with the SEC, and all other information regarding the Company and its business, condition, assets, liabilities, operations, financial performance, net income and prospects that has been furnished to the SEC or any of its representatives by or on behalf of the Company is accurate and complete in all respects. 9. Return of Company Property. Executive represents and warrants that he has returned any and all property belonging to the Company including, but not limited to, any and all documents or other media containing Confidential or Proprietary Information, as well as any training or other reference manuals, Company vehicle, telephone and gas cards or other Company credit cards, keys, computers, fax machines, pagers or the like. Executive represents and warrants that he will keep the laptop computer, blackberry and flat-screen display in his possession, but shall deliver to the undersigned Company representative all Company-related data contained therein. In return, the Company shall withhold from the cash consideration in Section 4 above an amount equal to 50% of the original purchase price of such equipment as determined by the Company. 10. Mutual Non-Disparagement The parties agree that neither shall make any disclosure, issue any public statements or otherwise cause to be disclosed any information which is designed, intended or might reasonably be anticipated to have a negative effect on the other party, or in the case of Employer, including but not limited to any of its respective directors, officers or employees. Except in such disclosures as may be required by law, neither the Company nor Executive shall issue any printed announcement or press release concerning Executive's departure without the other party's prior consent, which consent shall not be unreasonably withheld. 11. Revocation. 6 Executive understands that he may revoke this Agreement at any time prior to the expiration of seven (7) days following the execution and acceptance of this Agreement, by delivering written notice of the revocation of this Agreement to Military Resale Group, Inc. 2180 Executive Circlet, Colorado Springs, Co. 80906-4100, Attention: Lee Brukman, so the Company receives it not later than such expiration date. 12. Severability. If any provision of this Agreement is declared by any court of competent jurisdiction to be invalid for any reason, such invalidity shall not affect the remaining provisions of this Agreement, which shall be fully severable and given full force and effect. 13. Parties. The parties agree that any reference to "Military Resale Group, Inc." or "the Company" in this Agreement shall also be a reference to Military Resale Group, Inc. including its officers, directors, shareholders, employees, agents, subsidiaries, affiliates, predecessors, successors and assigns, and that every reference to "Executive" shall also be a reference to his heirs, personal or legal representatives, executors, successors and assigns. 14. Covenant Not to Sue Executive promises and covenant that he will not file any lawsuit against the Company based upon any clam covered under the foregoing release, except that Executive is not prohibited from bringing any claim under the Age Discrimination in Employment Act, as amended, wherein Executive seeks to challenge whether he knowingly and voluntarily entered into this Agreement. 15. Continued Cooperation. Executive agrees to make himself reasonably available to the Company to furnish full and truthful information concerning any events that took place during his employment, and to furnish full and truthful consultation concerning any potential or actual litigation relating to the Company. Should Executive be contacted by any person concerning any pending or potential litigation relating to the Company, Executive shall immediately notify the Company's Chief Executive Officer in writing. 16. Choice of Law/Venue. The parties agree that the laws of the state of Colorado shall govern this Agreement and any action to enforce, subject when appropriate to the provisions of Paragraph 18 (Dispute Resolution), shall be brought in a court of competent jurisdiction in Colorado. 17. Full Agreement. The parties agree that this is the entire Agreement between Executive and the Company and that neither party has relied on any representation or statement, written or oral, which is not set forth in this document. This Agreement supercedes all previous agreements entered into by and between the Company and Executive, and any pre-existing or other agreements, except those expressly referenced in Paragraph 3 above, if any, shall be terminated, deemed null and void. 7 18. Dispute Resolution Procedures. In the event that the parties are unable to agree, on or before September 30, 2004, on the amount of expenses to be reimbursed to Executive pursuant to subparagraph 3 of Paragraph 4, then either party may refer the dispute to arbitration, to be held in Colorado Springs, Colorado, pursuant to the rules of the American Arbitration Association. Military Resale Group, Inc. By: /s/ Ethan Hokit ------------------- Name: Ethan Hokit ------------------- Title: President ------------------- Date: --------------------- Executive: /s/ Edward Whelan - ----------------- Ed Whelan 8 EX-10.2 3 v06078_ex10-2.txt Exhibit 10.2 AGREEMENT, RELEASE & WAIVER THIS AGREEMENT, RELEASE & WAIVER (the "Agreement") is made on this 7th day of August 2004, by and between Military Resale Group, Inc., a New York corporation (hereinafter "the Company") and Richard H. Tanenbaum (hereinafter "Director"). 1. Representations of Director. Director hereby acknowledges that: (a) I received a copy of this Agreement from the Company on the 7th day of August 2004. (b) The terms of this Agreement are a result of discussions and/or negotiations between me and/or my attorney, and the Company and/or its attorney. (c) The Company hereby advises me to consult legal counsel before entering into this Agreement. (d) I have thoroughly read and reviewed this entire Agreement, and I fully understand its meaning and effect. (e) I am not entitled to the Consideration for Release recited in Paragraph 4 of this Agreement except for the fact that I have signed this Agreement. (f) I have executed this Agreement voluntarily and without any threat, intimidation, coercion, force or other type of pressure by the Company or any other person. (g) I have not transferred or assigned any claim I may have against the Company, as described in Paragraph 2, to any other person or entity. 2. Release and Waiver by Director In exchange for the Consideration for Release given to Director by the Company, Director hereby fully, unequivocally, unconditionally and forever releases and discharges the Company from any and all claims, liabilities, demands and causes of action of any kind, whether statutory or common law, whether known or unknown, in contract, tort or otherwise, fixed or contingent, in law or in equity, in any way arising out of, concerning, or related to, directly or indirectly, Director's service as a Director of the Company and outside counsel, including, but not limited to, Director's separation from with the Board of Directors of the Company. Director further expressly waives any rights, which might have accrued prior to the date hereof against the Company pertaining to or arising from the relationship, including but not limited to his position as Director and outside counsel.. Further, Director agrees not to seek reemployment or reinstatement of employment in any capacity with the Company, including as a Director on the Board of Directors. Without limiting the generality of the foregoing, this release and waiver includes, but is not limited to, a release and waiver of claims arising under the Title VII of the Civil Rights Act of 1964 and all amendments thereto, the Age Discrimination in Employment Act, and all amendments thereto, the Americans with Disabilities Act, and all amendments thereto, the Family and Medical Leave Act, and all amendments thereto, and the Employee Retirement Income Security Act, and all amendments thereto, the Worker Adjustment Retraining Notification Act, and all amendments thereto, the Fair Credit Reporting Act and all amendments thereto, and any other constitutional, federal, state and local laws, or theories governing the employment relationship and all claims growing out of any legal restrictions on the rights to terminate its Directors. 3. Compensation. Director acknowledges his voluntary resignation as both counsel to and from its Board of Directors, effective as of August 7, 2004. 4. Consideration for Release. In consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company agrees that it shall pay Director for past services rendered in the amount of $111,953.84 as fees. Such payment for past services now due and payable shall be payable by the Company to Director in equal installments over the twenty-four (24) month period beginning on September 30, 2004 and shall be evidenced by a promissory note in substantially the form attached hereto as Exhibit D, (the "Note") with the provisions in the Note incorporated by reference herein. In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company further agrees to issues, within 45 days following the execution of this Agreement, Four Hundred Thousand (400,000) two-year warrants at a $0.25 strike price, including provisions for the cashless exercise of such warrants, but subject to the reasonable usual and customary terms of any such plan or agreement pursuant to which such warrants have been authorized or issued in the past by the Company to others. 2 In further consideration of the release and waiver set forth in Paragraph 2 of this Agreement, and in reliance on the Representation and Warranties set forth in Paragraph 8 below, the Company further agrees to issue, within 45 days following the execution of this Agreement, One-Million (1,000,000) two-year warrants at a $5.00 strike price, including provisions for the cashless exercise of such warrants, but subject to the reasonable usual and customary terms of any such plan or agreement pursuant to which such warrants have been authorized or issued in the past by the Company to others. It is specifically understood that the payment of the consideration under this section does not constitute an admission of any wrongdoing on the Company's part and is in addition to the compensation to which Director was entitled and for which he has been paid, as reflected in Paragraph 3. 5. Mutual Confidentiality. Director and the Company hereby agree to keep the existence and terms of this Agreement confidential and to refrain from revealing any of its terms and conditions to anyone other than Director's spouse, or Director's or the Company's legal counsel, accountant, tax advisor, or as required by law, or as agreed in writing by the Company or the Director in connection with a legal process. Further, Director hereby agrees not to disclose Confidential or Proprietary Information of the Company and to refrain from disclosing to or sharing such information with others who might gain from such knowledge. For the purpose of this Agreement, Confidential and Proprietary Information shall mean any confidential, financial, marketing, business, technical, or other information, including specifically but not exclusively, information which Director prepared, caused to be prepared, or received in connection with his employment with the Company, such as merger or acquisition opportunities or prospects, trade, technical or technological secrets, customer or vendor lists, price lists, details of organization or business affairs; computer hardware configurations and software designs and programs, business plans, business strategies, software, software evaluations, trade secrets, personnel information, marketing methods and techniques, and any of the above-recited information as it relates to the Company, any subsidiaries, predecessors, successors or assigns. For purposes of this Agreement, "Confidential and Proprietary Information" specifically excludes information, which is generally known or becomes known in the industry (except when known based upon Director's breach of this Agreement). As Director and the Company agree and mutually acknowledge that any breach of this section would result in damage to the Company, and such damage would necessarily be of a type which is difficult to measure or quantify, Director and the Company hereby agree that for each event of a violation of this section of the Agreement the Company shall be entitled to recover liquidated damages in the amount of $12,500, including attorney's fees and costs, from Director. 6. Non-Competition. (a) Director acknowledges that during his relationship with the Company he has enjoyed a position of trust and confidence that gave him complete access to Confidential and Proprietary Information, which has value to the Company. (b) Director acknowledges that his service as a Director of the Company means that he comes within the statutory exception contained in subsection 2(d) of C.R.S. ss.8-2-113, which allows for non-competition agreements between employers and Directors, managers, officers and professional staff. Being cognizant of his virtually unlimited access to Confidential and Proprietary Information, which is of value to the Company, Director also acknowledges that his subsequent employment by a competitor would be more likely than not to result in the inevitable disclosure of the trade secrets of the Company. 3 (c) Director accordingly agrees that for a period of thirty-six (36) months beginning on August 7, 2004 Director shall not directly or indirectly engage in competition with the Company by taking any of the following actions: (i) Owning, managing, operating, joining, controlling or providing services to (or participating in the ownership, management, operation or control of, other than as a holder of less than 5% of the shares of a public company), aiding or assisting any corporation, association, partnership, limited liability company, proprietorship or other business entity, regardless of form, that at any location in the United States engages in the business in which the Company is now engaged; or, (ii) Serving as an employee, agent, consultant, officer, director, advisor, or creditor of any such business entity or enterprise described in (i) above. (d) Director accordingly agrees that for the term of this Agreement and for a period of thirty-six (36) months beginning on August 7, 2004 that Director shall not directly or indirectly engage in competition with the Company by taking any of the following actions: Inducing or attempting to induce any customer, supplier or business relation of the Company to cease doing business with the Company or in any other way interfering with the relationship between any customer, supplier or business relation and the Company. (e) Director acknowledges that the restrictions set forth above are reasonable and appropriate to protect the Confidential and Proprietary Information of value to the Company, which would be inevitably disclosed if he competed, directly or indirectly, as set forth above. If however, a court determines that any of the foregoing restrictions are unreasonable in duration, scope or area of restriction, then Director and the Company agree that the restrictions shall be applied only to the activities and territory, and only for the period of time, that the court determines reasonable in light of all then-existing circumstances. 7. Non-Solicitation of Employees. The Director agrees that for the period of thirty-six (36) months following his separation from employment for any reason he shall not directly or indirectly solicit or recruit, or attempt to solicit or recruit, or hire, any employee of the Company who is employed by the Company or was employed by the Company at any time during the last year of the Director's employment with the Company. 8. Representations and Warranties of Director 4 The Company's SB-2 filed with the SEC within the past 60 days is to the best of Director's information, belief and knowledge, without independent verification or investigation, true and accurate and does not fail to include any material matter relevant thereto. 9. Mutual Non-Disparagement The parties agree that neither shall make any disclosure, issue any public statements or otherwise cause to be disclosed any information which is designed, intended or might reasonably be anticipated to have a negative effect on the other party, or in the case of Employer, including but not limited to any of its respective directors, officers or employees. Except in such disclosures as may be required by law, neither the Company nor Director shall issue any printed announcement or press release concerning Director's departure without the other party's prior consent, which consent shall not be unreasonably withheld. 10. Release and Waiver by the Company Except for acts or omissions by Director which constitute gross negligence, reckless and/or unlawful or illegal activity, the Company does hereby remise, release and forever discharge, and by these presents does for itself, and its successors, assigns, heirs, executors and administrators, remise, release and forever discharge Director of and from all manner of actions, causes of actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, guaranties, claims and demands whatsoever, in law, in admiralty, in equity, existing or otherwise arising or threatened hereafter with regard to the Director's having served as an officer, director, employee or otherwise with the Company, and does hereby further agree to indemnify Director against any loss, liability, cost, expense (including reasonable attorneys fees) which Director may incur for any reason hereafter relating to or arising out of the foregoing. Notwithstanding anything herein to the contrary the foregoing shall not apply to any breach by Director of this Agreement or as to any misrepresentation by Director herein. The Company acknowledges that Director has disclosed the facts and circumstances concerning certain IRS claims against it and does hereby release Director accordingly. 11. Severability If any provision of this Agreement is declared by any court of competent jurisdiction to be invalid for any reason, such invalidity shall not affect the remaining provisions of this Agreement, which shall be fully severable and given full force and effect. 5 13. Parties The parties agree that any reference to "Military Resale Group, Inc." or "the Company" in this Agreement shall also be a reference to Military Resale Group, Inc. including its officers, directors, shareholders, employees, agents, subsidiaries, affiliates, predecessors, successors and assigns, and that every reference to "Director" shall also be a reference to his heirs, personal or legal representatives, executors, successors and assigns. 14. Mutual Covenant Not to Sue Director promises and covenant that he will not file any lawsuit against the Company based upon any claim covered under the foregoing release.Except for acts or omissions by Director which constitute gross negligence, reckless and/or unlawful or illegal activity, or breach of this Agreement, the Company promises and covenants that it will not file any lawsuit against the Director based upon any claim covered under the foregoing release 15. Mutual Continued Cooperation Director agrees to make himself reasonably available to the Company and the Company agrees to make itself reasonably available to the Director to furnish full and truthful information concerning any events that took place during his employment, and to furnish full and truthful consultation concerning any potential or actual litigation relating to the Company or the Director. Should Director be contacted by any person concerning any pending or potential litigation relating to the Company, Director shall immediately notify the Company's Chief Director Officer in writing. Should Company be contacted by any person concerning any pending or potential litigation relating to Director, Company shall immediately notify the Director in writing. If Director's services are required in excess of 10 hours, then Director shall be paid by the Company at his normal and customary hourly rate for Director's continued service to the Company as requested by the Company. . 16. Choice of Law/Venue The parties agree that the laws of the state of Colorado shall govern this Agreement and any action to enforce this Agreement or the Note, subject when appropriate to the provisions of Paragraph 18 (Dispute Resolution Procedures), shall be brought in a court of competent jurisdiction in Colorado. 17. Full Agreement The parties agree that this is the entire Agreement between Director and the Company and that neither party has relied on any representation or statement, written or oral, which is not set forth in this document. This Agreement supercedes all previous agreements entered into by and between the Company and Director, and any pre-existing or other agreements, if any, shall be terminated, deemed null and void. 6 18. Dispute Resolution Procedures In the event that the parties have any disputes related to this Agreement or the Note and are unable to agree, then either party may refer the dispute to binding arbitration, to be held in Colorado Springs, Colorado, pursuant to the rules of the American Arbitration Association. Military Resale Group, Inc. By: /s/Ethan Hokit ------------------- Ethan Hokit President Director: /s/ Richard H. Tanenbaum - ------------------------ Richard H. Tanenbaum 7 EX-31.1 4 v06078_ex31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, LEE BRUKMAN, CHIEF EXECUTIVE OFFICER OF MILITARY RESALE GROUP, INC., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Military Resale Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 23, 2004 /s/ Lee Brukman ---------------------------- Lee Brukman Chief Executive Officer EX-31.2 5 v06078_ex31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, ETHAN D. HOKIT, CHIEF FINANCIAL OFFICER OF MILITARY RESALE GROUP, INC., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Military Resale Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 23, 2004 /s/ Ethan D. Hokit --------------------------- Ethan D. Hokit Chief Financial Officer EX-32.1 6 v06078_ex32-1.txt EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, LEE BRUKMAN, Chief Executive Officer of Military Resale Group, Inc. (the "Registrant"), do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Lee Brukman ------------------------------- Name: Lee Brukman Title: Chief Executive Officer August 23, 2004 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Military Resale Group, Inc. and will be retained by Military Resale Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 v06078_ex32-2.txt EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, Ethan D. Hokit, Chief Financial Officer of Military Resale Group, Inc. (the "Registrant"), do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Ethan D. Hokit ------------------------------ Name: Ethan D. Hokit Title: Chief Financial Officer August 23, 2004 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Military Resale Group, Inc. and will be retained by Military Resale Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----