UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR QUARTER ENDED October 31, 2006 COMMISSION FILE NO. 000-8512 ------------------ ---------- MONARCH SERVICES, INC. ------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Maryland 52-1073628 --------------------------------- -------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation) 4517 Harford Road, Baltimore, Maryland 21214 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code 410-254-9200 ------------- Not applicable ------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [ X ] As of December 15, 2006, the number of shares outstanding of the issuer's common stock was 1,619,620 shares. Transitional Small Business Issue Format (check one): YES [ ] NO [ X ] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MONARCH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED) October 31, 2006 ------------------ (000's Omitted) ASSETS CURRENT ASSETS Cash and cash equivalents $ 20 Certificates of deposit 65 Other prepaid expenses 25 Note receivable 900 Other current assets 26 Assets held for sale 3,062 ----- TOTAL CURRENT ASSETS 4,098 ----- PROPERTY AND EQUIPMENT Machinery, equipment, furniture and fixtures 119 Leasehold improvements 324 ----- 443 Less accumulated depreciation (385) ----- TOTAL PROPERTY AND EQUIPMENT - NET 58 ----- TOTAL ASSETS $4,156 ----- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 211 Loan payable - related party 100 Income tax payable 98 Accrued expenses 95 ----- TOTAL CURRENT LIABILITIES 504 STOCKHOLDERS' EQUITY Common Stock - par value $.001 per share: Authorized - 10,000,000 shares; shares outstanding 1,619,620 2 Capital surplus 3,781 Retained deficit (131) ------ TOTAL STOCKHOLDERS' EQUITY 3,652 ----- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,156 -----MONARCH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended October 31, October 31, ------------------ ---------------- 2006 2005 2006 2005 ---- ---- ---- ---- (000's omitted, except per share data) Net sales $ 0 $ 0 $ 0 $ 0 Cost of goods sold 0 0 0 0 ----------------------------------- Gross profit (loss) from continuing operations 0 0 0 0 Selling, general and administrative expenses 176 148 347 324 ----------------------------------- Loss before other income and income taxes (176) (148) (347) (324) Other income: Investment and interest income 12 6 16 17 Gain on disposal of assets from "Monarch Services, Inc." (net of income tax benefit of $0 for the three months and six months ended October 31, 2006, respectively 20 0 20 0 ----------------------------------- Loss from continuing operations before income tax benefit (144) (142) (311) (307) Income tax (benefit) expense 0 0 0 0 ----------------------------------- Net loss from continuing operations (144) (142) (311) (307) ----------------------------------- Discontinued Operations: Operating loss from "Peerce's Plantation" (net of income tax of $0 and $0) for the three months and six months ended October 31, 2006 and 2005, respectively (7) (133) (42) (207) Operating loss from "Girls' Life" (net of income tax of $0 and $0) for the three months and six months ended October 31, 2006 and 2005, respectively (8) 77 (89) (79) Gain on sale of Girls' Life magazine (net of income tax expense of $98 for the three months and six months ended October 31, 2006, respectively 2,363 0 2,363 0 Gain on disposal of assets from "Peerce's Plantation" (net of income tax benefit of $0 and $0) for the three months and six months ended October 31, 2006, respectively 10 0 10 0 ----------------------------------- Gain (loss)from discontinued operations 2,358 (56) 2,242 (286) ----------------------------------- Net Income (loss) $ 2,214 $(198) $ 1,931 $(593) Other comprehensive income net of tax 0 0 0 0 ----------------------------------- Comprehensive Income (loss) $ 2,214 $(198) $ 1,931 $(593) =================================== Net loss per common share basic and diluted: Loss from continuing operations per share $ (0.09) (0.09) (0.19) (0.19) Gain (loss) from discontinued operations 1.46 (.03) 1.38 (.18) ----------------------------------- Net Gain (loss) per common share - basic and diluted $ 1.37 (0.12) 1.19 (0.37) ----------------------------------- Dividends per share $ .00 .00 .00 .00 ----------------------------------- Weighted average number of shares outstanding - basic and diluted 1,619,620 1,619,620 1,619,620 1,619,620 --------------------------------------- See notes to Consolidated Financial Statements. MONARCH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended October 31, ------------------- 2006 2005 ----- ---- (000's Omitted, except per share data) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) $ 1,931 $ (593) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 30 75 Loss on sale of marketable securities available for sale 8 0 Gain on sale of assets (2,383) 0 Increase/decrease in operating assets and liabilities: Accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses and deferred subscription revenue (73) (77) ------ ------ Total cash provided (used) by operating activities (487) (595) ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, intangible assets and improvements (2) (22) Maturity/redemption of certificates of deposit 0 527 Proceeds from sale of marketable securities available for sale 39 0 Proceeds from disposal of Monarch and Peerce's Plantation assets 42 0 ------ ------ Total cash provided by investing activities 79 505 ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: None 0 0 ------ ------ NET DECREASE IN CASH AND CASH EQUIVALENTS (408) (90) CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 493 112 ------ ------ CASH AND CASH EQUIVALENTS END OF PERIOD $ 85 $ 22 ======= ======= See Notes to Consolidated Financial Statements. MONARCH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include Monarch Services, Inc. ("Monarch"), the discontinued operations of Girls' Life, Inc. which was sold on August 18, 2006 to Girls' Life Acquisition Corporation and the discontinued operations of Peerce's Plantation GL, LLC which was closed permanently on June 27, 2006 (collectively referred to herein as the "Company") Girls' Life and Peerce's Plantation sales for the three months and six months ending October 31, 2006 and 2005, have been reclassified as Discontinued Operations. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications have been made to amounts previously reported to conform with the current classifications. In the opinion of management, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. All material intercompany balances between Monarch and its subsidiaries have been eliminated in consolidation. Operating results for the three months ending October 31, 2006 and the six months ending October 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2007. There has been no significant change to the Company's accounting policies as disclosed in the annual report. For further information, reference should be made to the financial statements and notes included in the Company's annual report on Form 10-KSB for the fiscal year ended April 30, 2006. Publishing Business Prior to August 18, 2006, the discontinued subsidiary Girls' Life, Inc., published a bi-monthly magazine for young girls ages ten to fifteen. On August 18, 2006, Girls' Life, Inc. entered into an Asset Purchase Agreement pursuant to which it sold the magazine publishing business. See Note J, SUBSEQUENT EVENT. Girls' Life magazine was published by Girls' Life, Inc. six times per year. Normally two issues were published in the second and fourth calendar quarters and one issue was published in each of the first and third calendar quarters. Girls' Life magazine subscriptions were sold through traditional sources such as direct-mail solicitation, insert cards and subscription agents. The magazine was also sold on newsstands, and subscriptions could be obtained or renewed through the internet on the Girls' Life website located at (www.girlslife.com). Newsstand copies were distributed nationally and internationally. The subscription price of a one-year Girls' Life subscription was between $14.95 and $19.95; however, the amount realized by the Company was a small portion of this amount if a subscription service was used. The suggested newsstand price of a single issue of Girls' Life in the United States was $3.50. Girls' Life also derived revenue from external and advertising services. Magazines mailed to the individual subscriber or to Girls' Life newsstand distributors were not returned to Girls' Life. If a subscriber canceled a subscription, the subscriber was reimbursed for the balance of unshipped magazines for the subscription period on a pro-rated basis. Magazines shipped to Girls' Life newsstand distributors which were not sold on the newsstand were destroyed by the newsstand distributors. The average number of magazines sold for three issues during the first six months of fiscal year 2007 and fiscal year 2006 are set forth in the following table. Distribution Channel Number of Magazines Distributed -------------------- ------------------------------- 2007 2006 ---- ---- Newsstand Sales 61,000 69,000 Subscription Sales 299,000 281,000 ------- -------- Total Paid Circulation 360,000 350,000 Complementary Copies 1,000 1,000 The following table sets forth the average number of magazines sold in domestic and international markets during the first six months of fiscal year 2007 and fiscal year 2006. Geographic Distribution Number of Subscription Magazines Sold ----------------------- ------------------------------------- 2007 2006 ---- ---- United States 297,000 279,000 International 2,000 2,000 The magazine was generally protected by registered trademarks and copyrights in the United States and foreign countries to the extent that such protection was available. Discontinued Retail Business In Fiscal Year 2007 In June 2001, we purchased three adjoining parcels of real estate located in Baltimore County, Maryland for approximately $2 million in cash. The acquisition included "Peerce's Plantation", a 350 seat fine dining restaurant, catering facility and bar with liquor license, off premise sales, an adjoining 6,000 square-foot house and 14.74 acres with a horse stable zoned for residential development. Renovations of Peerce's Plantation began in the spring of 2002 and were completed in September 2003. The restaurant and bar opened for business on September 26, 2003. Peerce's Plantation had incurred losses in each quarter since its opening and had never been profitable. Because the Company did not expect that Peerce's Plantation would add to the Company's profitability in the future, management determined that Peerce's Plantation restaurant, bar and catering business was no longer viable. As a result of those losses and management's beliefs as to its future prospects, we closed Peerce's Plantation permanently on June 27, 2006. All sales and costs associated with Peerce's restaurant have been reclassified as Discontinued Operations for the three months and six months ending October 31, 2006 and October 31, 2005, respectively. NOTE B - ACCOUNTS RECEIVABLE None NOTE C - INVENTORIES None NOTE D - PREPAID PUBLISHING EXPENSES None NOTE E - INCOME TAXES The Company has only recorded tax benefits to the extent carryback claims are available, and has not recorded any tax benefit associated with the future realization of operating losses. The Company recorded an estimated income tax liability in the amount of approximately $98,000 due to the sale of Girls' Life, Inc. magazine on August 18, 2006 to Girls' Life Acquisition Corporation. NOTE F - DISCONTINUED OPERATIONS Effective June 27, 2006, "Peerce's Plantation Restaurant" was closed. All sales and costs associated with Peerce's restaurant have been reclassified as Discontinued Operations for the three months and six months ending October 31, 2006 and the three months and six months ending October 31, 2005, respectively. Net sales and losses from discontinued operations of "Peerce's Plantation Restaurant" are as follows (in thousands): Three Months Ended October 31, 2006 2005 ------------------------------ Net sales $ 0 $ 296 Loss from discontinued operations (7) (133) Gain on disposal of assets 10 0 Six Months Ended October 31, 2006 2005 ----------------------------- Net sales $ 197 $ 677 Loss from discontinued operations (42) (207) Gain on disposal of assets 10 0 Effective August 18, 2006, "Girls' Life" magazine was sold. All sales and costs associated with Girls' Life magazine have been reclassified as Discontinued Operations for the three months and six months ending October 31, 2006 and the three months and six months ending October 31, 2005, respectively. Net sales and losses from discontinued operations of "Girls' Life magazine" are as follows (in thousands): Three Months Ended October 31, 2006 2005 ------------------------------ Net sales $ 398 $ 1,302 Gain (loss) from discontinued operations (8) 77 Gain on disposal of assets 2,363 0 Six Months Ended October 31, 2006 2005 ----------------------------- Net sales $ 964 $ 1,892 Loss from discontinued operations (89) (79) Gain on disposal of assets 2,363 0 NOTE G - STOCK-BASED COMPENSATION ARRANGEMENTS STOCK-BASED COMPENSATION ARRANGEMENTS: The Company applied APB Opinion No. 25 and related interpretations in accounting for stock-based compensation arrangements. Accordingly, no compensation expense has been recognized. For disclosure purposes, pro-forma results have been determined based on the fair value method consistent with SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure". No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The table below illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation", to stock-based employee compensation for the six months ended October 31, 2006. All stock options were cancelled during the fiscal year ended April 30, 2006. In December 2004, the FASB issued SFAS No. 123R (as amended) which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values starting with the next fiscal year that begins after December 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 are longer an alternative to financial statement recognition. The Company was required to adopt SFAS No. 123R beginning May 1, 2006. The adoption of SFAS No. 123R did not have a material impact on its consolidated results of operations and earnings per share. Six Months Ended October 31, 2006 ------------------------------------------------------------------------ (In thousands, except per share data) Net loss, as reported $ (443) Less proforma stock-based employee compensation expense determined under fair value based method, net of related tax effects 0 ------- Pro forma net loss $ (443) ======= Net loss per share: Basic - as reported $ (0.27) Basic - pro forma $ (0.27) Diluted - as reported $ (0.27) Diluted - pro forma $ (0.27) NOTE H - MARKETABLE SECURITIES None NOTE I - SEGMENT INFORMATION With the closing of "Peerce's Plantation Restaurant" on June 27, 2006 and the sale of "Girls' Life Magazine" on August 18, 2006, as of October 31, 2006, the Company did not operate in any industry segment. Our primary operations during the three months and six months ending July 31, 2005 was the publication of "Girls' Life" magazine in the publishing segment and Peerce's Plantation restaurant, bar and catering facility in the restaurant segment. All sales and costs for Girls' Life and Peerce's Plantation have been classified as Discontinued Operations for the three months and six months ending October 31, 2006 and 2005, respectively. NOTE J - SUBSEQUENT EVENT On August 18, 2006, Girls' Life, Inc. ("Girls' Life"), a wholly-owned subsid- iary of the Company, sold the assets owned by Girls' Life used in connection with the business of publishing, promoting and distributing Girls' Life magazine (the "Magazine") to Girls' Life Acquisition Corporation ("Buyer"), pursuant to an Asset Purchase Agreement dated August 18, 2006 by and among Girls' Life, Buyer and Monarch. The Buyer is owned by Karen Bokram, the CEO of the Buyer who has run Girls' Life's business since the Magazine's inception. The purchase price for the assets was $900,000 plus the assumption of accounts payable of Girls' Life of approximately $500,000, in addition, the buyer has assumed the obligation to publish Girls Life as a result, Buyer will recognize deferred subscription revenue of $1,443,000. The $900,000 was paid by the delivery of a promissory note to Girls' Life (the "Note"), which provides for the accrual of interest at a rate of six percent (6%) per annum for a period of 90 days, at which time the principal and all accrued interest under the Note was to become due and payable. The Note is secured by a pledge of 100% of the capital stock of the Buyer (the "Pledged Shares") pursuant to a pledge agreement. On November 28, 2006, the Company received $315,090 from the Buyer as partial payment of the note which included $15,090 in accrued interest. Also, on November 28, 2006, the Company and Girls' Life entered into a modification agreement with the Buyer, which among other things, extended the maturity date of the Note until August 16, 2007. The $600,000 remaining balance of the note as of November 28, 2006 and accrued interest through August 16, 2007 will be paid to the Company on August 16, 2007. Pursuant to the Modification Agreement, the Buyer executed a Security Agreement, pursuant to which it granted Girls' Life a security interest in the Buyer's assets to secure payment under the Note. Karen Bokram also executed a Guaranty Agreement in favor of Girl's Life to guarantee payment under the note. In connection with the execution of the Modification Agreement, Girls' Life entered into a Subordination Agreement with M&T Bank, a lender to the Buyer, pursuant to which Girl's Life agreed to subordinate its remedies under the Note, the Pledge Agreement, the Security Agreement and the Guaranty Agreement until August 16, 2007. The Board of Directors of Monarch Services, Inc., decided it was in the best interests of the Company to enter into the modification agreement. Monarch intends to use any proceeds it receives from Girl's Life in respect to the asset sale to pay off its existing debt. ITEM 2. MONARCH SERVICES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CERTAIN CAUTIONARY INFORMATION This Report on Form 10-QSB contains forward-looking statements. Forward- looking statements include, among other things, statements concerning sales growth in the publishing and restaurant segments, expenditures related to increased or decreased costs of materials, and estimated expenditures for possible new product lines or business opportunities. In some cases, forward- looking statements can be identified by terminology such as "may," "will," "could," "should," "expects'", "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward- looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors are discussed elsewhere herein and in our annual report on Form 10-KSB for the fiscal year ended April 30, 2006 and in other reports filed by us from time to time with the Securities and Exchange Commission. APPLICATION OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition are based upon our consolidated financial statements which have been prepared in accordance with US generally accepted accounting principles. The preparation of these financial statements required us to make estimates and judgments that affect the reported amounts of income from newsstand sales. On an on-going basis we evaluate our estimates for each quarter of our fiscal year and for our fiscal year end. These estimates, assumptions, and judgments were based on informa- tion available as of the date of the financial statements; accordingly, as that information changed, the financial statements could reflect different estimates, assumptions and judgments. We believe that our most important accounting policies related to revenue associated with the discontinued Girls' Life segment of our business. Actual results could have differed from those estimates, assumptions and judgments. Revenue Recognition Newsstand revenues in the publishing segment were estimated based on information supplied to us by the Girls' Life newsstand distributor and from actual cash payments received. We based our estimates on reports supplied to us by the Girls' Life newsstand distributors and from actual cash revenues received during the fiscal year. Those estimates, assumptions, and judgments were based on information available as of August 17, 2006, the date of the sale of Girls' Life to Girls' Life Acquisition Corporation; accordingly, as that information changed, the financial statements could reflect different estimates, assumptions, and judgments. The following discussion should be read in conjunction with the financial statements and the notes thereto in Item I of this report and the "Liquidity and Sources of Capital" section of Item 6 and Note N to our consolidated financial statements contained in Item 7 of Part II of our annual report on Form 10-KSB for the fiscal year ended April 30, 2006. For the three months and six months ending October 31, 2006 and October 31, 2005, we had two operating subsidiaries. The discontinued "Girls' Life, Inc." published a magazine, and the discontinued "Peerce's Plantation GL, LLC" operated a restaurant, catering facility and bar open to the general public. Peerce's Plantation began doing business in the quarter ended October 31, 2003. Peerce's Plantation Restaurant was closed effective June 27, 2006. Despite some success in attracting the target market, Peerce's Plantation was unable to generate significant or steadily increasing revenues since its opening. Because the Company did not expect that Peerce's Plantation would add to the Company's profitability in the future, management determined that Peerce's Plantation restaurant, bar and catering business was no longer viable. As a result, Peerce's Plantation was closed. The revenues of Girls' Life, Inc. were seasonal in nature. Girls' Life magazine was published six times per year. The typical publication schedule usually resulted in the accrual of revenues for one issue in the first and third quarters of the fiscal year and the accrual of revenues for two issues in the second and fourth quarters of the fiscal year. The publication schedule was subject to revision without notice. There were six issues of Girls' Life magazine in each of the fiscal year 2006 and fiscal year 2005. Newsstand revenue and Cost of Goods Sold for the six issues of Girls' Life magazine sold on the newsstand for fiscal years 2006 and 2005 were estimated based on information furnished to us by the Girls' Life distribution agent which distributed Girls' Life newsstand copies nationally and internationally. We made adjustments quarterly and annually to the actual revenues based on cash payments actually received, less fees and expenses deducted by the Girls' Life distribution agent. Final adjustments with respect to an issue of Girls' Life were generally completed within six months of the appearance of such issue on newsstands. As a result of the sale of Girl's Life magazine to Girls' Life Acquisition Corporation and the closing of Peerce's Plantation, all sales and expenses for the three months and six months ending October 31, 2006 and the three months and six months ending October 31, 2005, have been reclassified as discontinued operations. RESULTS FOR THE SECOND QUARTER OF FISCAL YEAR 2007 AND 2006 Due to the closing of Peerce's Plantation and the sale of Girls' Life, Inc. to Girls Life Acquisition Corporation, all sales and expenses for both segments of the business for the quarter ending October 31, 2006 and 2005, respect- ively, were reclassified as discontinued operations. Only income and expenses of Monarch Services, Inc. (corporate overhead) have been shown in the financial statements under the category of continuing operations. Selling, general and administrative expenses for corporate overhead increased by approximately $28,000 for the second quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006. Selling, general and administrative expenses for corporate overhead was $176,000 in second quarter of fiscal year 2007 compared to $148,000 in the second quarter of fiscal year 2006. The increase in selling, general and administrative expenses was primarily due to a increase in utilities, taxes, insurance and maintenance expenses due to the closing of Peerce's Plantation. Since the closing of Peerce's Plantation, Monarch Services, Inc. has absorbed all the costs associated with the rest- aurant. Other income increased $6,000 for the second quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006. The increase was primarily due to the accrued interest on the Note Receivable from Girls' Life Acquisition Corporation, offset by a decrease in interest income due to decreased cash balances. RESULTS FOR THE FIRST SIX MONTHS OF FISCAL YEAR 2007 AND 2006 Due to the closing of Peerce's Plantation and the sale of Girls' Life, Inc. to Girls Life Acquisition Corporation, all sales and expenses for both segments of the business for the six months ending October 31, 2006 and 2005, respect- ively were reclassified as discontinued operations. Only income and expenses of Monarch Services, Inc. (corporate overhead) have been shown in the financial statements under the category of continuing operations. Selling, general and administrative expenses for corporate overhead increased by approximately $23,000 for the first six months of fiscal year 2007 compared to the first six months of fiscal year 2006. Selling, general and admin- istrative expenses for corporate overhead was $347,000 in the first six months of fiscal year 2007 compared to $324,000 in the first six months of fiscal year 2006. The increase in selling, general and administrative expenses was primarily due to a increase in utilities, taxes, insurance and maintenance expenses due to the closing of Peerce's Plantation. Since the closing of Peerce's Plantation, Monarch Services, Inc. has absorbed all the costs associated with the restaurant. Other income decreased $1,000 for the first six months of fiscal year 2007 compared to the first six months of fiscal year 2006. The decrease was primarily due to a decrease in interest income due to decreased cash balances. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred significant losses from continuing operations in each of the last five years and for the first six months of fiscal year 2007. These losses have resulted in negative operating cashflow since 2002. If the Company continues to experience losses at rates similar to historic loss rates, the Company's current balance of current assets could be depleted in fiscal year 2007 and our ability to continue as a going concern through fiscal 2007 would be in doubt. Management is currently attempting to sell the 6,000 square foot luxury home zoned for residential use and sell the land consisting of 14.74 acres currently zoned residential to raise additional funds in the current operating fiscal year. Peerce's Plantation restaurant was closed on June 27, 2006, and management is currently attempting to sell or lease the restaurant. As discussed above, Girls' Life sold the magazine publishing business on August 18, 2006, and partial proceeds of $315,090 from the sale were received on November 28, 2006. If we are unable to sell these properties at reasonable prices or cannot find profitable uses for them, or if we do not receive the balance of the proceeds from the sale of the magazine publishing business, then we may have to cease operations and liquidate our assets or declare bankruptcy. At October 31, 2006, the Company had cash and cash equivalents of approximately $20,000, a decrease of $141,000 from the amount at April 30, 2006. At October 31, 2006, the Company had $65,000 in certificates of deposit with a stated maturity date of November 26, 2006. To date, the Company has had immediate access to these funds without incurring a penalty or a reduction in the interest rate. At October 31, 2006, the Company had a loan payable in the amount of $100,000. The loan was made to the Company by Ester Dott, wife of A. Eric Dott, the chairman of Monarch Services, Inc. The loan has no interest and was to be repaid by October 31, 2006. Payment of the loan has been extended. ITEM 3. CONTROLS AND PROCEDURES Disclosure Controls We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities and Exchange Act of 1934 with the Securities and Exchange Commission, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to our management team, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Addit- ionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. An evaluation of the effectiveness of these disclosures were carried out as of October 31, 2006 under the supervision and with the participation of our management team, including the CEO and CFO. Based on that evaluation, our management team, including the CEO and CFO, has concluded that our disclosure controls and procedures are effective. Changes in Internal Controls During the first six months of our fiscal year ended April 30, 2007, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEMS 1 THROUGH 5 NONE / NOT APPLICABLE Item 4. Submission of Matters to a Vote of Security Holders. The 2006 Annual Meeting of Stockholders was held at 10:00 a.m. on October 25, 2006, at Monarch Services, Inc., 4517 Harford Road, Baltimore, Maryland 21214. Results of the proposal for the election of A. Eric Dott and Trent Walklett as Class III Directors of the Company to serve until the 2009 annual meeting of stockholders and until their successors are elected and qualified. Votes For Votes Withheld Abstained --------- -------------- --------- A. Eric Dott and Trent Walklett 1,244,344 138,973 25 Directors continuing in office after meeting: David F. Gonano is serving as a Class I Director of the Company until the 2007 annual meeting of stockholders and until his successor is duly elected and qualified. Jackson Y. Dott is serving as a Class II Director of the Company until the 2008 annual meeting of stockholders and until his successor is duly elected and qualified. Results of the proposal to ratify Stegman & Company as independent auditors of the Company for the fiscal year ending April 30, 2007. Votes For Votes Against Votes Abstained --------- ------------- ---------------- 1,441,241 11,010 1,000 Item 5. OTHER INFORMATION The Company has made no changes to the procedures by which security holders may recommend nominees to the Company's Board of Directors since the Company last provided disclosure regarding such procedures. ITEM 6. EXHIBITS Exhibits Number Description ------ ----------- 3(a)(1) The Company's Articles of Incorporation dated September 22, 2000 (incorporated by reference to Exhibit 3A.1 to the Company's Form 8-K filed December 28, 2000). 3(a)(2) The Company's Articles Supplementary dated December 21, 2000 (incorporated by reference to Exhibit 3A.2 to the Company's 8-K filed December 29, 2000). 3(b) The Company's by-laws dated July 25, 2001 (incorporated by reference to Exhibit 3 to the Company's Form 10-KSB for the fiscal year ended April 30, 2001). 10(a) Lease Agreement dated July 2, 1973 between the Company as Lessee and A. Eric Dott and Esther J. Dott as lessors (incorporated by reference to Exhibit 10(a) to the Company's Form 10-KSB for the fiscal year ended April 30, 1995). 10(b) Lease renewal and Amendment of Lease Agreement dated July 1, 1983 between the Company and A. Eric Dott and Esther J. Dott, renewing and amending terms of the Lease Agreement in Exhibit 10(a) (incorporated by reference to Exhibit 10(b) to the Company's Form 10-KSB for the fiscal year ended April 30, 1995). 10(c) Lease renewal and Amendment of Lease Agreement dated July 1, 1997 between the Company and A. Eric Dott and Esther J. Dott, renewing and amending terms of the Lease Agreement in Exhibit 10(a) (incorporated by reference to Exhibit 10(b) to the Company's Form 10-QSB for the quarter ended October 31, 1998). 10(d) Monarch Services, Inc. Omnibus Stock Plan (incorporated by reference to Ex. 4 to the Company's Form S-8 (file no. 333-31536) as filed with the Securities and Exchange Commission on March 2, 2000). 10(e) Asset Purchase Agreement dated August 18, 2006 (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on August 23, 2006). 10(f) Non-Negotiable Secured Promissory Note of Girls' Life Acquisition Corporation (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on August 23, 2006). 10(g) Stock Pledge Agreement between Karen Bokram and Girls' Life, Inc. (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on August 23, 2006). 10(h) Modification Agreement by and among the Company, TNK, Inc. (f/k/a Girls' Life, Inc.), Girls' Life Acquisition Corporation and Karen Bokram dated November 28, 2006 (incorporated by reference to Exhibit 2.1 of the Company's Form 8-k/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(i) Security Agreement between TNK, Inc. (f/k/a Girls' Life, Inc.) and Girls Life Acquisition Corporation (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(j) Guaranty Agreement between TNK, Inc. and Karen Bokram (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(k) Subordination Agreement between TNK, Inc. and Manufacturers Traders Trust Company (incorporated by reference to Exhibit 10.3 of the Company's 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 31.1 Certificate of the Company's CEO required by Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of the Company's CEO required by Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of the Company's CEO required by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certificate of the Company's CFO required by Section 906 of the Sarbanes-Oxley Act of 2002. In accordance with the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MONARCH SERVICES, INC. Date December 15, 2006 By: /s/ Jackson Y. Dott ----------------- ------------------------------- Chief Executive Officer Date December 15, 2006 /s/ Marshall Chadwell ----------------- ------------------------------- Marshall Chadwell, Controller Chief Financial Officer (Principal Accounting and Financial Officer) EXHIBIT INDEX Number Description ------ ----------- 3(a)(1) The Company's Articles of Incorporation dated September 22, 2000 (incorporated by reference to Exhibit 3A.1 to the Company's Form 8-K filed December 28, 2000). 3(a)(2) The Company's Articles Supplementary dated December 21, 2000 (incorporated by reference to Exhibit 3A.2 to the Company's 8-K filed December 29, 2000). 3(b) The Company's by-laws dated July 25, 2001 (incorporated by reference to Exhibit 3 to the Company's Form 10-KSB for the fiscal year ended April 30, 2001). 10(a) Lease Agreement dated July 2, 1973 between the Company as Lessee and A. Eric Dott and Esther J. Dott as lessors (incorporated by reference to Exhibit 10(a) to the Company's Form 10-KSB for the fiscal year ended April 30, 1995). 10(b) Lease renewal and Amendment of Lease Agreement dated July 1, 1983 between the Company and A. Eric Dott and Esther J. Dott, renewing and amending terms of the Lease Agreement in Exhibit 10(a) (incorporated by reference to Exhibit 10(b) to the Company's Form 10-KSB for the fiscal year ended April 30, 1995). 10(c) Lease renewal and Amendment of Lease Agreement dated July 1, 1997 between the Company and A. Eric Dott and Esther J. Dott, renewing and amending terms of the Lease Agreement in Exhibit 10(a) (incorporated by reference to Exhibit 10(b) to the Company's Form 10-QSB for the quarter ended October 31, 1998). 10(d) Monarch Services, Inc. Omnibus Stock Plan (incorporated by reference to Ex. 4 to the Company's Form S-8 (file no. 333-31536) as filed with the Securities and Exchange Commission on March 2, 2000). 10(e) Asset Purchase Agreement dated August 18, 2006 (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on August 23, 2006). 10(f) Non-Negotiable Secured Promissory Note of Girls' Life Acquisition Corporation (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on August 23, 2006). 10(g) Stock Pledge Agreement between Karen Bokram and Girls' Life, Inc. (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on August 23, 2006). 10(h) Modification Agreement by and among the Company, TNK, Inc. (f/k/a Girls' Life, Inc.), Girls' Life Acquisition Corporation and Karen Bokram dated November 28, 2006 (incorporated by reference to Exhibit 2.1 of the Company's Form 8-k/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(i) Security Agreement between TNK, Inc. (f/k/a Girls' Life, Inc.) and Girls Life Acquisition Corporation (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(j) Guaranty Agreement between TNK, Inc. and Karen Bokram (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 10(k) Subordination Agreement between TNK, Inc. and Manufacturers Traders Trust Company (incorporated by reference to Exhibit 10.3 of the Company's 8-K/A filed on December 7, 2006, amending the Form 8-K filed on December 4, 2006). 31.1 Certificate of the Company's CEO required by Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of the Company's CFO required by Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of the Company's CEO required by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certificate of the Company's CFO required by Section 906 of the Sarbanes-Oxley Act of 2002. See Notes to Consolidated Financial Statements.