SEC Info  
   Home     Search     My Interests     Help     Sign In     Please Sign In  

Monarch Staffing, Inc. · 10KSB · For 12/31/06

Filed On 3/30/07, 6:39pm ET   ·   Accession Number 1140377-7-54   ·   SEC File 0-49915

  in   Show  and 
Help... Wildcards:  ? (any letter),  * (many).  Logic:  for Docs:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).
 
  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 4/02/07  Monarch Staffing, Inc.            10KSB      12/31/06    5:274K                                   Edts/FA

Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Form 10KSB at December 31, 2006                      100±   453K 
 2: EX-21       Exhibit 21.1                                           1      4K 
 3: EX-31       Exhibit 31.1                                           2±     8K 
 4: EX-31       Exhibit 31.2                                           2±     8K 
 5: EX-32       Exhibit 32.1                                           1      6K 


10KSB   —   Form 10KSB at December 31, 2006
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Monarch Staffing, Inc
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
"Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 8B. Other Matters
"Item 9. Directors and Executive Officers of the Company
"Part I
"Item 1. Business
"Item 2. Property
"Part Ii
"Penny Stock
"Company Call Option and Prepayment Rights
"Item 7. Financial Statements
"Report of Independent Registered Public Accounting Firm
2Accounting Changes and Error Corrections
"Accounting for Servicing of Financial Assets
"Fair Value Measurements
"Part Iii
"Item 10. Executive Compensation
"Item 11. Security Ownership of Certain Beneficial Owners and Management
"Item 12. Certain Relationships and Related Party Transactions
"Item 13. Exhibits
"Item 14. Principal Accountant Fees and Services
"Audit Fees
"Signatures
10KSB1st "Page" of 2TOCTopPreviousNextBottomJust 1st
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended December 31, 2006 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-49915  MONARCH STAFFING, INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 88-0477056 --------------------------------- ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 30950 Rancho Viejo Rd #120 San Juan Capistrano, CA 92675 ------------------------------------------------------------ (Address of principal executive offices, including zip code) Registrant's Telephone No., including area code: (949)-260-0150 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $.001 per share -------------------------------------------- (Title of Class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one): Yes [ ]; No [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold as of March 22, 2007, was approximately $747,104 based on a price on such date. The number of shares issued and outstanding of the Common Stock as of March 22, 2007 was 9,961,384. Documents incorporated by reference. There are no annual reports to security holders, proxy information statements, or any prospectus filed pursuant to Rule 424 of the Securities Act of 1933 incorporated herein by reference. Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [X] TABLE OF CONTENTS PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 2. PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . .24  ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . .24  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . .24 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25  ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . .25  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . .27 ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . .40  ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . .78 ITEM 8A. CONTROL AND PROCEDURES . . . . . . . . . . . . . . . . . . .79  ITEM 8B. OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . .80 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80  ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . . . . . .80 ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . .82 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . .84 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . .85 ITEM 13. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . .89 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . .91 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . .92 CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . .93  PART I SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-KSB, including discussions of our business strategies and market factors influencing our results, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ materially from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to offer new services and increase sales in markets characterized by rapid technological evolution, consolidation within our target marketplace and among our competitors, and competition from larger, better capitalized competitors. Many other economic, competitive, governmental and technological factors could impact our ability to achieve our goals. Interested persons are urged to review the risks described under "Item 1. Business. Risk Factors" and in "Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in the Company's other public disclosures and filings with the Securities and Exchange Commission ("SEC"). All forward- looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law.  ITEM 1. BUSINESS COMPANY OVERVIEW We provide healthcare staffing services to both commercial and government sector customers. We are focused on building a nationally recognized healthcare staffing company by growing our current customer bases, expanding our service offerings, and acquiring and growing profitable healthcare staffing services companies. We operate our healthcare staffing services business through our wholly owned subsidiary Drug Consultants, Inc. ("DCI"). DCI furnishes personnel to perform a range of pharmacy, nursing and other health care services in support of the operations of government and commercial facilities, including its largest client, the State of California Department of Corrections and Rehabilitation ("CDCR"). DCI was formed in 1977 and is located in San Juan Capistrano, California. DCI has experience in providing its services in rural areas of California where many state facilities are located and healthcare professionals are not readily available. This experience and DCI's database of healthcare professionals have allowed it to competitively price its services and expand its business to meet these unique requirements of the CDCR. DCI currently operates under three master contracts with the CDCR. The master contracts are for terms of three years and currently expire between September 30, 2007 and June 30, 2008. DCI's contracts with the CDCR do not provide for a minimum purchase commitment of our services and can be terminated by the CDCR at any time on 30 days' notice. In April 2006, a federal court-appointed receiver assumed total control over CDCR's healthcare delivery system to address the court's findings of substandard medical care. Among the receiver's objectives is to reduce the CDCR's reliance on staffing service providers like DCI. Since the receiver's appointment, DCI has experienced a loss of several of its healthcare professionals who have accepted positions with the CDCR. We believe that the ongoing implications of the receiver's management of the CDCR's 4 healthcare delivery system include lower demand from the CDCR for DCI's services, higher attrition of our healthcare professionals, increased competition for recruiting healthcare professionals to fill positions with the CDCR and reduced margins for the services we provide CDCR. GROWTH STRATEGY Our goal is to build a nationally recognized healthcare staffing company. The key components of our business strategy include: - INCREASE PENETRATION OF EXISTING CLIENT RELATIONSHIPS. We have built strong relationships with our existing clients, particularly the State of California. We will seek to increase the penetration of our services to agencies of the State which we do not currently serve. - LEVERAGE PROCESSES AND EXPERIENCE TO ENTER NEW MARKETS. We have experience in meeting the staffing needs of government entities, particularly in rural areas. We will seek to leverage our experience and associated processes and contacts to provide similar services to government entities in other high-growth states such as Arizona, Nevada, Oregon and Utah. - EXPAND SERVICE OFFERINGS THROUGH NEW STAFFING SOLUTIONS. In order to enhance the growth in our business and improve our competitive position, we continue to explore new service offerings. As our clients' needs change, we will explore what additional services we can provide to better serve our clients. - EXPAND OUR CUSTOMER BASE. We have experience in servicing the needs of government entities that we will transfer to the commercial client market. - CAPITALIZE ON ACQUISITION OPPORTUNITIES. The markets we serve are highly fragmented. In order to enhance our competitive position, we intend to aggregate multiple smaller staffing service providers. Our general criteria for acquisition targets are: companies who provide similar services to our own in other geographic areas, companies who have strong client relationships, companies who offer vertical services that complement our own, and companies that generate positive cash flow and have the prospect for year-over-year revenue growth. - BUILD OUR MANAGEMENT TEAM AND CORE BACK-OFFICE FUNCTIONS. We intend to expand our executive, sales and operations management teams to support the growth of our business. In addition, we plan to build centralized administrative support systems to support our business model across business units. COMPANY BACKGROUND Prior to August 2003, we were a development stage company. Although we were incorporated only six years ago, we have undergone a number of changes in our business strategy and organization. The Company was originally incorporated in Nevada under the name JavaJuice.net on September 13, 2000. The Company's business plan was to engage in the operation of an Internet Cafe, in Reno, Nevada. On August 8, 2003, the Company acquired M.T. Marketing Int. Corp "(MTM") and control of the Company shifted to the former MTM shareholders. MTM operated a payroll nurse staffing and homecare business. JavaJuice was considered a "shell" at the time of the acquisition; therefore, the transaction was treated as a reverse merger. As a result of a change in business focus due to the acquisition, the Company changed its name to MT Ultimate Healthcare Corp. 5 The Company expanded its operations through the acquisition of B.P. Senior Care, Inc. ("BP"), a provider of healthcare services to senior citizens in New Jersey), the operation of which was terminated in June 2005, and Abundant Healthcare, Inc. ("Abundant"), a provider of medical staffing services in Pennsylvania). All of the business and operations of MTM and Abundant have been discontinued and disposed of by the Company in connection with the disposition of Marathon Healthcare Corporation described below. On August 31, 2004, the Company entered into a securities purchase agreement with four accredited investors for the sale of secured convertible notes having an aggregate principal amount of $700,000, a 10% annual interest rate (payable quarterly), and a term of two years. We also agreed to sell warrants to purchase up to an aggregate of 7,777 shares of our Common Stock at $40.50 per share. We only sold $500,000 principal amount of secured convertible notes under the 2004 agreement. As a result, we sold to the investors warrants to purchase up to an aggregate of 5,556 shares of our Common Stock at $40.50 per share. The investors have agreed to purchase the remaining $200,000 commitment under the terms of our 2005 securities purchase agreement with the investors. On November 4, 2005, we entered into an additional securities purchase agreement with the same accredited investors, for the sale of secured convertible notes having an aggregate principal amount of $3,000,000, an 8% annual interest rate (payable quarterly), and a term of three years. We also agreed to sell warrants to purchase up to an aggregate of 166,667 shares of our Common Stock at $9.00 per share. On March 29, 2007, the Company obtained an amendment to the 2005 securities purchase agreement whereby interest payments are payable at the same time the corresponding principal balance is due and payable, whether at maturity or upon acceleration or by prepayment. As of December 31, 2006, we had issued under the two securities purchase agreements dated August 31, 2004 and November 4, 2005: - $3,075,000 aggregate principal amount of secured convertible notes, - Warrants to purchase 5,556 shares of our Common Stock at $40.50 per shares, and - Warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and - Warrants to purchase 166,667 shares of our Common Stock at $4.50 per share. As mentioned above, the investors are required to purchase an additional $625,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share and warrants to purchase 23,611 shares of our Common Stock at $9.00 per share five days following the date that a registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied. On November 4, 2005, we acquired 100% of the issued and outstanding shares of Drug Consultants International, Inc.('DCII"), formerly known as iTechexpress, Inc., a provider of technical staffing services, in exchange for 9,203,704 newly issued shares of our Common Stock. On November 7, 2005, DCII purchased all of the outstanding shares of Drug Consultants, Inc. for a purchase price of $1,800,000, of which $1,600,000 was paid at closing and $200,000 shall be paid pursuant to a secured promissory note, which was subsequently paid in January 2006. 6 As part of our focus on growing profitable operations, we decided to discontinue and dispose of certain operations which we determined did not demonstrate suitable growth or profitability prospects. On December 15, 2005, we completed the disposition of all of the outstanding capital stock of Marathon Healthcare Corporation ("Marathon"), a newly formed holding company, to Macdonald Tudeme and Marguerite Tudeme, the former controlling shareholders of the Company. At the time of the disposition, Marathon's assets included substantially all of the corporate names, business, operations, assets, properties, intellectual properties, trademarks, service marks, trade names, uniform resource locators, telephone numbers, and goodwill of the Company and its subsidiaries (other than DCII and DCI). These assets included all of the operations of the Company's former operating subsidiaries MTM and Abundant. In exchange for all of the outstanding capital stock of Marathon and payments to the Tudemes of $80,441, the Company received from the Tudemes 396,569 shares of the Company's Common Stock. In connection with the disposition of Marathon, we also (a) assumed and released the Tudemes from certain liabilities and (b) pledged to Marathon 222,222 shares of our Common Stock as collateral to secure the performance and payment of a promissory note payable to Lisa Stern originally entered into as part of the Company's purchase of Abundant. If we fail to pay any principal of or interest on the note when due, we will be in default of our obligations and Marathon will be able to retain and sell the pledged Common Stock to satisfy our obligations. On March 31, 2006, we completed the following corporate actions: (a) we changed our corporate name to "Monarch Staffing, Inc." from "MT Ultimate Healthcare Corp.", (b) we effected a one-for-ninety reverse stock split of our Common Stock, (c) we re-authorized for issuance 400,000,000 shares of Common Stock, par value $.001 per share, after giving effect to the reverse stock split and (d) we authorized 5,000,000 shares of "blank check" preferred stock. INDUSTRY AND MARKET OVERVIEW Temporary healthcare staffing industry revenues are expected to grow at a compound annual growth rate of approximately 8% from 1997 through 2008, according to industry estimates. The industry has grown each year except 2003 and 2004, in which it declined on an annual basis primarily due to economic conditions and resulting pressures on healthcare facilities to reduce outsourced staffing solutions. Industry revenues for 2007 are expected to grow by 7% to $11.4 billion as compared to 2006. COMPETITION AND COMPETITIVE STRATEGY The healthcare staffing industry is both highly fragmented and highly competitive. There are a large number of firms engaged in the provision of healthcare personnel. A significant number of these companies are very small competitors operating on a localized basis. There are however, a few larger companies that operate on a national basis. Some of our larger competitors in the temporary healthcare staffing sector include AMN Healthcare Services, Cross Country Healthcare, InteliStaf Healthcare, CHG Healthcare Services, Inc., Medical Staffing Network and On Assignment. We compete in the healthcare staffing industry based primarily on our long- standing customer relationships, experience in meeting the needs of government entities, particularly with rural facilities, as well as with superior client service. 7 OUR BUSINESS MODEL Recruitment ----------- Our recruitment methods include recruiting trained, experienced healthcare staff from schools and universities. Some of our temporary healthcare professionals are independent contractors due to their requirement to hold specialized licenses. Additionally, because they require specialized licenses, they are in high demand and often work with more than one agency. Screening and Quality Management -------------------------------- We screen all candidates prior to placement, and we continue to evaluate our temporary healthcare professionals after they are placed to provide adequate performance and manage risk, as well as to determine feasibility for future placements. Our internal processes are designed to determine whether our temporary healthcare professionals have the appropriate experience, credentials and skills for the assignments that they accept. Our screening and quality management process includes three principal stages: INITIAL SCREENING. Each new temporary healthcare professional candidate who submits an application with us must meet certain criteria, including appropriate prior work experience and proper educational and licensing credentials. We independently verify each applicant's work history and references in an effort to improve the ability of our clients to depend on our temporary healthcare professionals for competency and personal reliability. ASSIGNMENT SPECIFIC SCREENING. Once an assignment is accepted by a temporary healthcare professional, we track the necessary documentation and license verification required for the temporary healthcare professional to meet the requirements set forth by us, the client and, when required, the applicable state licensing authorities. Additionally, where state and federal laws apply with regard to the employment of healthcare workers, we believe we have in place the necessary procedures to comply with material requirements. These requirements may include obtaining copies of specific health records, drug screening, criminal background checks and certain certifications or continuing education courses. ONGOING EVALUATION. We evaluate our temporary healthcare professionals' performance through a verbal and written evaluation process. We receive these evaluations directly from our clients, and use the feedback to determine appropriate future assignments. Account Management and Placement -------------------------------- Our account managers are responsible for soliciting and receiving orders from our clients and working with our recruiters to fill those orders with qualified temporary healthcare professionals and technicians. As an example, we operate under master contracts with the State of California to provide temporary health professionals. We receive requests or "orders" from specific state healthcare facilities for temporary healthcare professionals to fill assignments. Depending upon their size and specific needs, one healthcare facility client may have from one to over fifty open orders at one time. Because clients often list their orders with multiple service providers, open orders may also be listed with our competitors. An order will generally be filled by the company that provides a suitable candidate first, highlighting the need for a large network of temporary healthcare professionals and technicians and responsive client service 8 Billing and Payroll ------------------- Our staffing services are generally provided on a time-and-materials basis, meaning that we bill our clients for the number of hours worked in providing services to the client. Hourly bill rates are typically determined based on contractual rates or the level of skill and experience of the temporary healthcare professional assigned and the supply and demand in the current market for those qualifications. Alternatively, the bill rates for some assignments are based on a mark-up over compensation and other direct and indirect costs. We maintain a variable cost model in which we compensate most of our temporary healthcare professionals only for those hours that we bill to our clients. The temporary healthcare professionals who perform services for our clients consist of our employees as well as independent contractors and subcontractors. With respect to those temporary healthcare professionals who are employees, we are responsible for all employment-related costs, including medical and health care costs, workers' compensation and federal social security and state unemployment taxes GOVERNMENT REGULATION The healthcare industry is subject to extensive and complex federal and state laws and regulations related to professional licensure, conduct of operations, payment for services and payment for referrals. Our business, however, is not directly impacted by or subject to the extensive and complex laws and regulations that generally govern the healthcare industry. The laws and regulations that are applicable to our hospital and healthcare facility clients could indirectly impact our business to a certain extent, but because we provide services on a contract basis and are paid directly by our hospital and healthcare facility clients, we do not have any direct Medicare or managed care reimbursement risk. Most of our temporary healthcare professionals are required to be individually licensed or certified under applicable state laws. We take prudent steps to ensure that they possess all necessary licenses and certifications in all material respects. EMPLOYEES The Company employs approximately 27 total employees, with 24 of those full-time and 3 part-time. None of our employees are covered by collective bargaining agreements, and management believes that its relationships with its employees are good. RISK FACTORS The more prominent risks and uncertainties inherent in our business are described below. However, additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. Any of these or other factors could harm our business and future results of operations and may cause you to lose all or part of your investment. 9 RISKS RELATING TO OUR BUSINESS --------------------------------------------------------------------------- WE MAY CONTINUE TO BE UNPROFITABLE AND MAY NOT GENERATE PROFITS TO CONTINUE OUR BUSINESS PLAN. --------------------------------------------------------------------------- We have historically lost money. As of December 31, 2006, we had $617,812 in accumulated deficit. There is a risk that our healthcare staffing services business will fail. If our business plan is not successful, we will likely be forced to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock. --------------------------------------------------------------------------- WE DO NOT HAVE SUFFICIENT CASH ON HAND AND CASH FLOW FROM OPERATIONS TO MEET OUR LIQUIDITY REQUIREMENTS, AND WILL REQUIRE ADDITIONAL NEAR-TERM FINANCING TO CONTINUE OUR BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY. --------------------------------------------------------------------------- We project that our cash on hand and cash flow generated from operations will not be sufficient to fund operational liquidity requirements. As a result, our ability to continue our operations and growth strategy depends on our ability to access the capital markets in the near term. Our secured convertible note investors are required to purchase an additional $625,000 principal amount of secured convertible notes and related warrants five days following the date that a registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied. There can be no assurance that we will satisfy the conditions to funding or, if we do, that we will do so on a timetable that meets our operational liquidity needs There also can be no assurance that capital from other outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, we could be forced to restructure or to default on our obligations or to curtail or abandon our business plan, any of which may devalue or make worthless an investment in the Company. --------------------------------------------------------------------------- OUR AUDITORS HAVE EXPRESSED AN OPINION THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. --------------------------------------------------------------------------- Our auditors have expressed an opinion that there is substantial doubt about our ability to continue as a going concern primarily because we have yet to generate sufficient working capital to support our operations and our ability to pay outstanding employment taxes. Our most recent financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments that might result from our inability to continue as a going concern. If we are unable to continue as a going concern, investors will lose their entire investment in our Common Stock. 10 --------------------------------------------------------------------------- OUR OPERATIONS ARE RECENTLY ACQUIRED WHICH MEANS THAT WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION. --------------------------------------------------------------------------- Prior to August 2003, we were a development stage company. Although we were incorporated only six years ago, we have undergone a number of changes in our business strategy and organization. In August 2003, we entered the payroll nurse staffing and homecare business. We adjusted our business strategy again in November 2005 by broadening our service offerings and to focus our activities on growing profitable operations. We have begun to implement this strategy by acquiring DCII and DCI. The operations of DCII and DCI, which will represent our entire business for the foreseeable future, were acquired in November 2005. Accordingly, we have a limited operating history upon which an evaluation of our prospects can be made. Our strategy is unproven and the revenue and income potential from our strategy is unproven. Our business strategy may not be successful and we may not be able to successfully address these risks. If we are unsuccessful in the execution of our current strategic plan, we could be forced to reduce or cease our operations. If this happens, investors could lose their entire investment in our Common Stock. --------------------------------------------------------------------------- WE WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL TO REPAY MONIES BORROWED BY US, CONTINUE OUR BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY. --------------------------------------------------------------------------- We have sold $3,075,000 in secured convertible notes and have agreed to sell an additional $625,000 of secured convertible notes to the note investors. We do not currently have enough capital to repay any of these amounts and we may never generate enough revenue to repay the amounts owed. As a result, we could be forced to curtail or abandon our business plan, making any investment in our Common Stock worthless. Our continued operations and growth strategy depend on our ability to access the capital markets. There can be no assurance that capital from outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, it would have a material adverse impact upon our ability to continue our business operations and pursue our growth strategy. In the event we do not raise additional capital, it is likely that our growth will be restricted and that we may be forced to scale back or curtail implementing our business plan. If this happens, investors would likely experience a devaluing of our Common Stock. --------------------------------------------------------------------------- WE MAY BE FORCED TO SELL SHARES OF COMMON STOCK AND/OR ENTER INTO ADDITIONAL CONVERTIBLE NOTE FINANCING AGREEMENTS IN ORDER TO REPAY AMOUNTS OWED AND CONTINUE OUR BUSINESS PLAN. --------------------------------------------------------------------------- Assuming the sale of all of our secured convertible notes, we will owe approximately $3,700,000 to the holders of the notes (not including any accrued interest). We do not currently have enough capital to repay any of these amounts and we may never generate enough revenue to repay the amounts owed. We may be forced to raise additional funds to repay these amounts through the issuance of equity, equity-related or convertible debt securities. The issuance of additional common stock dilutes existing stockholdings. Additionally, in furtherance of our convertible secured note 11 transaction, we may issue additional shares of common stock throughout the term, and accordingly, our stockholders may experience significant dilution. Further procurement of additional financing through the issuance of equity, equity-related or convertible debt securities or preferred stock may further dilute existing stock. The perceived risk of dilution may cause the holders of our secured convertible notes, as well as other holders, to sell their shares, which would contribute to downward movement in the price of your shares. Additionally, if such additional shares are issued, investors would likely experience a devaluing of our Common Stock. --------------------------------------------------------------------------- WE HAVE PLEDGED ALL OF OUR ASSETS TO EXISTING CREDITORS. --------------------------------------------------------------------------- Our secured convertible notes are secured by a lien on substantially all of our assets, including our equipment, inventory, contract rights, receivables, general intangibles, and intellectual property. A default by us under the secured convertible notes would enable the holders of the notes to take control of substantially all of our assets. The holders of the secured convertible notes have no operating experience in our industry and if we were to default and the note holders were to take over control of our Company, they could force us to substantially curtail or cease our operations. If this happens, investors could lose their entire investment in our Common Stock. DCII and DCI, our principal operating subsidiaries, have pledged substantially all of their accounts receivable to secure the payment of accounts receivable sold under a factoring agreement with Systran Financial Services Corporation ("Systran"). If Systran is unable to collect our accounts receivable purchased from us, they could take control of all of our accounts receivable, which would substantially reduce our working capital and could force us to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock. In addition, the existence of these asset pledges to the holders of the secured convertible notes and to Systran will make it more difficult for us to obtain additional financing required to repay monies borrowed by us, continue our business operations and pursue our growth strategy. --------------------------------------------------------------------------- THE SECURED CONVERTIBLE NOTES BECOME IMMEDIATELY DUE AND PAYABLE UPON DEFAULT AND WE MAY BE REQUIRED TO PAY AN AMOUNT IN EXCESS OF THE OUTSTANDING AMOUNT DUE UNDER OF THE SECURED CONVERTIBLE NOTES, AND WE MAY BE FORCED TO SELL ALL OF OUR ASSETS. --------------------------------------------------------------------------- The secured convertible notes become immediately due and payable upon an event of default including: - failure to obtain effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and exercise of the warrants on or before October 31, 2007 (or November 25, 2007) if the Company is making good faith efforts to respond to Securities and Exchange Commission comments with respect to the registration statement); - failure to pay interest and principal payments when due; - a breach by us of any material covenant or term or condition of the secure convertible notes or any agreement made in connection therewith; 12 - a breach by us of any material representation or warranty made in the 2005 securities purchase agreement or in any agreement made in connection therewith; - we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us; - the entering of any money judgment, writ or similar process against us or any of our subsidiaries or any of our property or other assets for more than $50,000; - any form of bankruptcy or insolvency proceeding is instituted by or against us; and - our failure to timely deliver shares of Common Stock when due upon conversions of the secured convertible notes. If we default on the secured convertible notes and the holders demand all payments due and payable, we will be required to pay the holders of the secured convertible notes an amount equal to the greater of (x) 130% times the sum of the outstanding amount of the secured convertible notes per month plus accrued and unpaid interest on the secured convertible notes plus additional amounts owed to the holders of the notes under the 2004 securities purchase agreement and the 2005 securities purchase agreement and related documents or (y) the value of the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to the amount calculated under clause (x) determined based on the highest closing price of the Common Stock during the period beginning on the date of default and ending on the date of the payment described herein. We do not currently have the cash on hand to repay this amount. If we are unable to raise enough money to cover this amount we may be forced to restructure, file for bankruptcy, sell assets or cease operations. If any of these events happen, investor could lose their entire investment in our Common Stock. --------------------------------------------------------------------------- WE MAY BE SUBJECT TO LIQUIDATED DAMAGES IN THE AMOUNT OF 3% OF THE OUTSTANDING AMOUNT OF THE SECURED CONVERTIBLE NOTES PER MONTH PLUS ACCRUED AND UNPAID INTEREST ON THE SECURED CONVERTIBLE NOTES FOR BREACHES BY US OF OUR REPRESENTATIONS AND WARRANTIES AND CERTAIN COVENANTS UNDER THE 2005 SECURITIES PURCHASE AGREEMENT. --------------------------------------------------------------------------- In the 2005 securities purchase agreement relating to our secured convertible notes, we made certain representations and warranties and agreed to certain covenants that are customary for securities purchase agreements. In the event that we breach those representations, warranties or covenants, we will be subject to liquidated damages in the amount of 3% of the outstanding amount of the secured convertible notes, per month, plus accrued and unpaid interest on the notes for such breaches. As of the March 21, 2007, the outstanding amount of the secured convertible notes was $3,075,000. We have not previously been required to pay any liquidated damages, however if we do breach the representations, warranties or covenants, we will be forced to pay liquidated damages to the note holders. If we do not have enough cash on hand to cover the amount of the liquidated damages, we could be forced to sell part or all of our assets, which could force us to scale back our business operations. If this happens, investors would likely experience a devaluing of our Common Stock. 13 --------------------------------------------------------------------------- WE ARE HEAVILY DEPENDENT ON THE OPERATIONS OF DCI FOR OUR REVENUES, WHICH ITSELF IS HIGHLY DEPENDENT ON THE STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS AND REHABILITATION AS ITS MAJOR CUSTOMER. --------------------------------------------------------------------------- We anticipate approximately 95% of our revenues for the foreseeable future will come from the operations of DCI. Approximately 95% of DCI's revenue comes from the CDCR. DCI's agreements with the CDCR do not provide for a minimum purchase commitment of our services and can be terminated by the CDCR at any time on 30 days' notice. Our dependence on the CDCR as our major customer subjects us to significant financial risks in the operation of our business if the CDCR were to terminate or materially reduce, for any reason, its business relationship with us. We recently have experienced a decrease in revenues from our services provided to the CDCR (as well as the loss of several of our healthcare professionals who have accepted positions with the CDCR) due to a federal court-appointed receiver's management of the CDCR healthcare delivery system. See "THE COURT-APPOINTED RECEIVER MANAGING THE CDCR'S HEALTHCARE DELIVERY SYSTEM INTENDS TO REDUCE THE CDCR'S UNTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI" below. Further, the CDCR is subject to unique political and budgetary constraints and has special contracting requirements that may affect our ability to obtain additional contacts or business. In addition, future sales to the CDCR and other governmental agencies, if any, will depend on our ability to meet government contracting requirements, certain of which may be onerous or impossible to meet, resulting in our inability to obtain a particular contract. Common requirements in government contracts include bonding; provisions permitting the purchasing agency to modify or terminate, at will, the contract without penalty; and provisions permitting the agency to perform investigations or audits of our business practices. If we are unable to maintain our contracts in the CDCR and/or gain new contracts in California and elsewhere, we could be forced to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock. --------------------------------------------------------------------------- THE COURT-APPOINTED RECEIVER MANAGING THE CDCR'S HEALTHCARE DELIVERY SYSTEM INTENDS TO REDUCE UTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI. --------------------------------------------------------------------------- In April 2006, a federal court-appointed receiver assumed total control over CDCR's healthcare delivery system to address the court's findings of substandard medical care. Among the receiver's objectives is to reduce the CDCR's reliance on staffing service providers like DCI. Since the receiver's appointment, DCI has experienced a loss of several of its healthcare professionals who have accepted positions with the CDCR. We believe that the ongoing implications of the receiver's management of the CDCR's healthcare delivery system include lower demand from the CDCR for DCI's services, higher attrition of our healthcare professionals, increased competition for recruiting healthcare professionals to fill positions with the CDCR and reduced margins for the services we provide the CDCR. These factors will have a material adverse impact on our results of operations, and could have an adverse effect on the value of our Common Stock, unless we can successfully reduce our dependence on the CDCR and obtain higher margin contracts with other customers. 14 --------------------------------------------------------------------------- WE HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT OUR TEMPORARY HEALTHCARE PROFESSIONALS SHOULD BE CLASSIFIED AS EMPLOYEES AND NOT INDEPENDENT CONTRACTORS. --------------------------------------------------------------------------- We have received notice from the Internal Revenue Service (the "IRS") that the IRS had concluded that our subsidiary DCI was a third-party payer to and thus employer of a pharmacist who provided services to DCI's client, the California Department of Corrections. Although the IRS notice applies only to the case of the individual pharmacist, if unchanged, it could require DCI to classify other pharmacists and nurses in its registry who provide services to DCI's clients as employees of DCI. Accordingly, compensation payable to such pharmacists and nurses would be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have a material adverse effect on our business, financial condition and results of operations. The Company is evaluating its response to the IRS notice. --------------------------------------------------------------------------- WE FACE SIGNIFICANT COMPETITION FOR OUR SERVICES AND AS A RESULT, WE MAY BE UNABLE TO COMPETE IN THE HEALTHCARE STAFFING INDUSTRY. --------------------------------------------------------------------------- We face significant competition for our staffing services. The markets for our services are intensely competitive and we face significant competition from a number of different sources. Several of our competitors have significantly greater name recognition as well as substantially greater financial, technical, service offerings, product development and marketing resources than we do. Additionally, competitive pressures and other factors may result in price or market share erosion that could have a material adverse effect on our business, results of operations and financial condition. --------------------------------------------------------------------------- THERE IS A SHORTAGE OF WORKERS IN THE HEALTHCARE INDUSTRY THAT MAY IMPEDE OUR ABILITY TO ACQUIRE QUALIFIED HEALTHCARE PROFESSIONALS FOR OUR CONTINUED GROWTH. --------------------------------------------------------------------------- Presently, the healthcare industry is experiencing a growing shortage of healthcare professionals. As the operations of DCI are in part based on the placement of healthcare professionals, there can be no assurance that we will be able to acquire qualified healthcare professionals to meet our growing needs. Any shortage in the number of professionals in the healthcare industry could impede the Company's ability to place such healthcare professionals into jobs and/or impede our growth rate. If we are unable to find qualified healthcare professionals to place in jobs, it would prevent us from continuing our current business strategy. If this happens, investors would likely experience a devaluing of our Common Stock. 15 --------------------------------------------------------------------------- WE ARE ACTIVELY SEEKING TO ACQUIRE COMPANIES RELATED TO OUR BUSINESS OPERATIONS, BUT OUR EFFORTS MAY NOT MATERIALIZE INTO DEFINITIVE AGREEMENTS. --------------------------------------------------------------------------- Our business model is dependent upon growth through acquisition of other staffing service providers. We completed the acquisition of DCI in November 2005. Although we currently have no commitments with respect to any other acquisitions, we expect to continue making acquisitions that will enable us to expand our staffing services and build our customer base. There can be no assurance that we will be successful in identifying suitable acquisition candidates or in coming to definitive terms with respect to any negotiations which we may enter into, or, assuming that we reach definitive agreements, that we will close the acquisitions. In the event that we do not reach any additional definitive agreements or close any additional acquisitions, our expansion strategy will not proceed as intended which will have a material adverse effect on our growth. --------------------------------------------------------------------------- OUR FUTURE ACQUISITIONS, IF ANY, MAY BE COSTLY AND MAY NOT REALIZE THE BENEFITS ANTICIPATED BY US. --------------------------------------------------------------------------- We may engage in future acquisitions, which may be expensive and time- consuming and from which we may not realize anticipated benefits. We may acquire additional businesses, technologies, products and services if we determine that these additional businesses, technologies, products and services are likely to serve our strategic goals. We currently have no commitments or agreements with respect to any acquisitions. The specific risks we may encounter in these types of transactions include the following: - Potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets, which could adversely affect our results of operations and financial conditions; - The possible adverse impact of such acquisitions on existing relationships with third-party partners and suppliers of services; - The possibility that staff or customers of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships; - The possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, intellectual property issues, key personnel issues or legal and financial contingencies; and - Difficulty in integrating acquired operations due to geographical distance, and language and cultural differences. A failure to successfully integrate acquired businesses for any of these reasons could have a material adverse effect on our results of operations. 16 --------------------------------------------------------------------------- WE MAY BE UNABLE TO MANAGE OUR GROWTH. --------------------------------------------------------------------------- Any growth that we experience is expected to place a significant strain on our managerial and administrative resources. We have limited employees who perform management or administrative functions. Further, if our business grows, we will be required to manage multiple relationships with various clients, healthcare professionals and third parties. These requirements will be exacerbated in the event of further growth. There can be no assurance that our other resources such as our systems, procedures or controls will be adequate to support our growing operations or that we will be able to achieve the rapid execution necessary to successfully offer our services and implement our business plan. Assuming that our business grows, our future success will depend on our ability to add additional management and administrative personnel to help compliment our current employees as well as other resources. If we are unable to add additional managerial and administrative resources, it will prevent us from continuing our business plan, which calls for expanding our operations, and could have an adverse effect on the value of our Common Stock. --------------------------------------------------------------------------- WE HEAVILY DEPEND ON OUR CHIEF EXECUTIVE OFFICER, JOEL WILLIAMS, AND OUR CHAIRMAN, DAVID WALTERS. --------------------------------------------------------------------------- The success of the Company heavily depends upon the personal efforts and abilities of Joel Williams and David Walters. Mr. Williams serves as the Company's Chief Executive Officer and Mr. Walters serves as our Chairman and together they are primarily responsible for the operation of the Company's wholly owned subsidiaries DCII and DCI. If either were to leave unexpectedly; we may not be able to execute our business plan. Our future performance depends in significant part upon the continued service of Mr. Williams and Mr. Walters as they have acquired specialized knowledge and skills with respect to our business. Additionally, because we have a relatively small number of employees when compared to other leading companies in the same industry, our dependence on maintaining our relationship with Mr. Williams and Mr. Walters is particularly significant. We cannot be certain that we will be able to retain Mr. Williams or Mr. Walters in the future. The loss of Mr. Williams or Mr. Walters could have a material adverse effect on our business and operations and cause us to expend significant resources in finding a replacement, which could cause the value of our Common Stock to decline or become worthless. --------------------------------------------------------------------------- DAVID WALTERS AND KEITH MOORE CAN VOTE AN AGGREGATE OF 83.9% OF OUR COMMON STOCK AND CAN EXERCISE CONTROL OVER CORPORATE DECISIONS INCLUDING THE APPOINTMENT OF NEW DIRECTORS. --------------------------------------------------------------------------- David Walters and Keith Moore can vote an aggregate of 8,283,334 shares (or 83.9%) of our outstanding Common Stock. Accordingly, Mr. Walters and Mr. Moore will exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. All of our other stockholders are minority stockholders and as such will have little to no say in the direction of the Company and the election of Directors. Additionally, it will be difficult if not impossible for stockholders to remove Mr. Walters and Mr. Moore as Directors of the Company, which will mean they will remain in control of who serves as officers of the Company as well as whether any changes are made in the Board of Directors. 17 --------------------------------------------------------------------------- OUR RESULTS OF OPERATIONS HAVE FLUCTUATED IN THE PAST AND AS A RESULT, THE RESULTS OF ONE QUARTER MAY NOT BE INDICATIVE OF OUR YEARLY RESULTS, MAKING ANY INVESTMENT IN US SPECULATIVE. --------------------------------------------------------------------------- Our quarterly operating results and revenue has historically fluctuated in the past and may do so in the future from quarter to quarter and period to period, as a result of a number of factors including, without limitation: - the size and timing of orders from clients; - changes in pricing policies or price reductions by us or our competitors; - changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board or other rule-making bodies; - our success in expanding our sales and marketing programs; - execution of or changes to Company strategy; - personnel changes; and - general market/economic factors. - Due to all of the foregoing factors, it is possible that our operating results may be below the expectations of public market analysts and investors. In such event, the price of our Common Stock would likely decline and any investment in us could become worthless. --------------------------------------------------------------------------- WE FACE POTENTIAL LIABILITY FOR SECURITY BREACHES RELATING TO OUR TECHNOLOGY. --------------------------------------------------------------------------- We face the possibility of damages resulting from internal and external security breaches, and viruses. The systems with which we may interface, such as the Internet and related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. The effect of these security breaches and related issues could reduce demand for our services. Accordingly, we believe that it is critical that these facilities and related infrastructures not only be secure, but also be viewed by our customers as free from potential breach. Maintaining such standards, protecting against breaches and curing security flaws, may require us to expend significant capital. --------------------------------------------------------------------------- RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT --------------------------------------------------------------------------- IF THE REGISTRATION STATEMENT COVERING THE RESALE OF THE SHARES OF OUR COMMON STOCK ISSUABLE UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND EXERCISE OF THE WARRANTS IS NO DECLARED EFFECTIVE BEFORE OCTOBER 31, 2007, WE MAY BE FORCED TO INCUR SUBSTANTIAL PENALTIES. --------------------------------------------------------------------------- The Company is subject to a $53,000 per month penalty payable to the secured convertible note holders, if the registration statement fails to become effective on or before October 31, 2007 (or November 25, 2007 if the Company is making good faith efforts to respond to Securities and Exchange Commission comments with respect to the registration statement). If this penalty becomes payable, the Company will likely be forced to pay this amount out of the proceeds of the sale of the secured convertible notes. This will likely have a materially adverse affect on the Company's financial condition, and could force the Company to curtail its business plan. 18 --------------------------------------------------------------------------- THE ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. --------------------------------------------------------------------------- As of March 22, 2007, we had 9,961,384 shares of Common Stock issued and outstanding. We plan to register the shares of Common Stock issuable upon conversion of $3,700,000 of secured convertible notes and related warrants (341,112 shares as of March 22, 2007). As sequential conversions and sales take place, the price of our Common Stock may decline, and as a result, the holders of the secured convertible notes could be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, to the detriment of the investors in this Offering. All of the shares issuable upon conversion of the secured convertible notes and upon exercise of the warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our Common Stock. --------------------------------------------------------------------------- THE ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS REPRESENT OVERHANG. --------------------------------------------------------------------------- In addition, the Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants may represent overhang that may also adversely affect the market price of our Common Stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the company's Common Stock will decrease, and any additional shares which shareholders attempt to sell in the market will only decrease the share price even more. The secured convertible notes may be converted at a conversion price of $0.01 per share, as of March 22, 2007. Warrants to purchase 5,556 shares of our Common Stock may be exercised at a price of $40.50 per share, warrants to purchase 143,056 shares of our Common Stock may be exercised at a price of $9.00 per share, and warrants to purchase 166,667 shares of our Common Stock may be exercised at $4,50 per share. As of March 22, 2007, the market price for one share of our Common Stock was $0.075. Therefore, the secured convertible notes and warrants may be converted into Common Stock at a discount to the market price, providing holders with the ability to sell their Common Stock at or below market and still make a profit. In the event of such overhang, holders will have an incentive to sell their Common Stock as quickly as possible. If the share volume of the Company's Common Stock cannot absorb the discounted shares, the market price per share of our Common Stock will likely decrease. --------------------------------------------------------------------------- THE ISSUANCE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION. --------------------------------------------------------------------------- The issuance of Common Stock upon conversion of the secured convertible notes and exercise of the warrants by the holders of the notes and warrants will result in immediate and substantial dilution to the interests of other stockholders since the note holders may ultimately receive and sell the full amount issuable on conversion or exercise. Although the note holders may not convert their secured convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.9% of our outstanding Common Stock, this restriction does not prevent the note holders from converting and/or exercising some of their holdings, selling those shares, and then converting the rest of their holdings, while still staying below the 4.9% limit. In this way, the note holders could sell more than this limit while never actually holding more shares than this limit allows. If the note holders choose to do this it will cause substantial dilution to the holders of our Common Stock. 19 --------------------------------------------------------------------------- THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS. --------------------------------------------------------------------------- Our existing stockholders will experience substantial dilution of their investment upon conversion of the secured convertible notes and exercise of the warrants by the holders thereof. The secured convertible notes are convertible into shares of our Common Stock at the lesser of $0.90 or 50% of the average of the three lowest trading prices of our Common Stock during the 20 trading day period ending one trading day before the date that a holder sends us a notice of conversion. If converted on March 22, 2007, the secured convertible notes would be convertible into approximately 394,889,600 shares of Common Stock based upon a conversion price of $0.01. The number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our Common Stock that would cause dilution to our existing stockholders. The sale of shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants may adversely affect the market price of our Common Stock. As sequential conversions and sales take place, the price of our Common Stock may decline and if so, the holders of secured convertible notes would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders. Additionally, there are no provisions in the 2005 securities purchase agreement, the secured convertible notes, the warrants, or any other document which restrict the holders' ability to sell short our Common Stock, which they could do to decrease the price of our Common Stock and increase the number of shares they would receive upon conversion and thereby further dilute other stockholders. The following is an example of the amount of shares of our Common Stock that are issuable upon conversion of the secured convertible notes based on conversion prices that are 25%, 50% and 75% below the conversion price as of March 22, 2007 of $0.01. Percentage Below Conversion Price as of March 22, 2007 Estimated [Download Table] Percentage Below Estimated Approximate % of Conversion Price Conversion Number of Outstanding As of March 22, 2007 Price Shares Issuable (1) Common Stock (1,2) -------------------- ----------- ------------------- ------------------ 25% $0.008 526,519,467 98.14% 50% $0.005 789,779,200 98.75% 75% $0.003 1,579,558,400 99.37% (1) Includes shares of Common Stock issuable upon conversion of the secured convertible notes. Does not include 341,112 shares of Common Stock issuable upon exercise of outstanding warrants. (2) As of March 22, 2007, we had 9,961,384 shares of Common Stock issued and outstanding. As illustrated, the number of shares of Common Stock issuable upon conversion of the secured convertible notes will increase if the conversion price of our Common Stock declines, which will cause dilution to our existing stockholders. 20 --------------------------------------------------------------------------- THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE SECURED CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS, INCLUDING THE NOTE HOLDERS, TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK. --------------------------------------------------------------------------- The secured convertible notes are convertible into shares of our Common Stock at the lesser of $0.90 or 50% of the average of the three lowest trading prices of our Common Stock during the 20 trading day period ending one trading day before the date that a holder sends us notice of conversion. The significant downward pressure on the price of our Common Stock as the note holders convert and sell material amounts of our Common Stock could encourage investors, including the selling stockholders, to short sell our Common Stock. This could place further downward pressure on the price of our Common Stock. In addition, not only the sale of shares issued upon conversion of the secured convertible notes or exercise of the warrants, but also the mere perception that these sales could occur, may adversely affect the market price of our Common Stock. --------------------------------------------------------------------------- WE MUST SATISFY CERTAIN CONDITIONS BEFORE THE INVESTORS ARE OBLIGATED TO PURCHASE THE REMAINING SECURED CONVERTIBLE NOTES AND WARRANTS. --------------------------------------------------------------------------- As of March 22, 2007, we had issued to the secured convertible note investors $3,075,000 aggregate principal amount of secured convertible notes, warrants to purchase 5,556 shares of our Common Stock at $40.50 per share, warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and warrants to purchase 166,667 shares of our Common Stock at $4.50 per share. The investors are required to purchase an additional $625,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share and warrants to purchase 23,611 shares of Common Stock at $9.00 per share five days following the date that the registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and conditioned upon certain other conditions, including: (i) the Company's representations and warranties contained in the 2005 securities purchase agreement being true and correct in all material respects on the date when made and as of the date of such purchase; (ii) the Company having performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the 2005 agreement; (iii) there being no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the 2005 agreement; (iv) no event having occurred which could reasonably be expected to have a material adverse effect on the Company; and (v) the shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants having been authorized for quotation on the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin Board having not been suspended by the Securities and Commission or the OTC Bulletin Board. If the registration statement is not declared effective within the agreed- upon time frame or we fail to satisfy these additional conditions, the investors have no obligation to purchase the remaining secured convertible notes and warrants. If the investors do not purchase the remaining secured convertible notes and warrants, the Company may be required to curtail or abandon its business plan, which would decrease the value of our Common Stock. 21 --------------------------------------------------------------------------- THE NOTE HOLDERS MAY EXPLOIT A MAJOR ANNOUNCEMENT MADE BY THE COMPANY TO CONVERT THE SECURED CONVERTIBLE NOTES AT A PRICE SUBSTANTIALLY LOWER THEN THE CONVERSION PRICE WOULD BE OTHERWISE. --------------------------------------------------------------------------- Under the terms of the secured convertible notes, the conversion price which the note holders must pay is changed after major announcements by the Company, discussed below. In the event the Company makes a major announcement, the conversion price of the secured convertible notes is equal to the lower of the conversion price that would be in effect on the date the announcement is made or the current conversion price at the time the note holders wish to convert. Therefore, if the Company's stock price was to increase substantially after a major announcement the note holders could still convert the secured convertible notes the lower price which applied before the announcement. In this way, the note holders could hold shares of Common Stock worth much more then the note holders originally paid for them. Therefore, the note holders could sell the shares at a price lower then the current market prices, still making a profit on their investment which would drive down the price of the Common Stock. --------------------------------------------------------------------------- IF THE COMPANY WISHES TO MERGE OR CONSOLIDATE ITS ASSETS WITH ANOTHER COMPANY PRIOR TO FULLY PAYING BACK THE SECURED CONVERTIBLE NOTES, IT COULD LEAD TO A DEFAULT UNDER THE NOTES, MAKING THEM IMMEDIATELY DUE. --------------------------------------------------------------------------- Under the terms of the secured convertible notes, any sale, conveyance or disposition of all or substantially all of the assets of the Company in which more than 50% of the voting power of the Company is disposed of, or the consolidation, merger or other business combination of the Company with or into any other entity when the Company is not the survivor shall either: (i) be deemed to be an event of default under the notes which could cause the Company to pay substantial penalties, or (ii) require the Company to get written approval by the successor entity that such successor entity assumes the obligations of the secured convertible notes. Additionally, if the Company makes any issuance of shares of Common Stock, options for shares of Common Stock, or issuances any additional convertible notes for consideration less than the conversion price then in effect, the conversion price of the secured convertible notes will become the price the shares or options were issued for or the price the additional convertible notes will be convertible for. If the Company is forced to pay penalties under the secured convertible notes or the conversion price of the notes is decreased substantially, the Company could be forced to curtail its business operations or issue more shares of Common Stock, which would have a dilutive effect on then shareholders. RISKS RELATING TO OUR COMMON STOCK --------------------------------------------------------------------------- THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE. --------------------------------------------------------------------------- The market price of our Common Stock historically has fluctuated significantly based on, but not limited to, such factors as: general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate new revenues, conditions and trends in the healthcare industry and in the industries in which our customers are engaged. 22 Our Common Stock is traded on the OTC Bulletin Board. In recent years the stock market in general has experienced extreme price fluctuations that have oftentimes have been unrelated to the operating performance of the affected companies. Similarly, the market price of our Common Stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our Common Stock. --------------------------------------------------------------------------- OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE COMMISSION WHICH LIMITS THE TRADING MARKET IN OUR COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK. --------------------------------------------------------------------------- Our Common Stock is considered a "penny stock" as defined in Rule 3a51-1 promulgated by Commission under the Securities Exchange Act of 1934. In general, a security which is not quoted on NASDAQ or has a market price of less than $5 per share where the issuer does not have in excess of $2,000,000 in net tangible assets (none of which conditions the Company meets) is considered a penny stock. The Commission's Rule 15g-9 regarding penny stocks impose additional sales practice requirements on broker- dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus, the rules affect the ability of broker-dealers to sell our Common Stock should they wish to do so, because of the adverse effect that the rules have upon liquidity of penny stocks. Unless the transaction is exempt under the rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the "penny stock" rules, the market liquidity for our Common Stock may be adversely affected by limiting the ability of broker-dealers to sell our Common Stock and the ability of purchasers to resell our Common Stock. Additionally, the value of the Company's securities may be adversely affected by the "penny stock" rules, because of the additional disclosures required by broker-dealers, which take additional time and effort from broker-dealers, decreasing the likelihood that broker-dealers will sell the Company's Common Stock. This may in turn have an adverse effect on the liquidity of the Company's securities which in turn could adversely affect the price of the Company's securities. In addition, various state securities laws impose restrictions on transferring "penny stocks" and as a result, investors in the Common Stock may have their ability to sell their shares of the Common Stock impaired. --------------------------------------------------------------------------- THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS. --------------------------------------------------------------------------- The Company has paid no cash dividends on its Common Stock to date and it is not anticipated that any cash dividends will be paid to holders of the Company's Common Stock in the foreseeable future. While the Company's dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance the future expansion of the Company. 23  ITEM 2. PROPERTY The Company's executive offices are located in San Juan Capistrano, California in a shared office space with Monarch Bay Management Company. To date, the Company has not been assessed any rental charges for the use of this space. The Company also leases 385 square feet of office space in Moreno Valley California. This lease requires monthly payments of $539 and expires November 30, 2007. We also have personnel who provide services to us from their home offices. We do not subsidize home office expenses. We believe that our current facilities are adequate for its current level of operations and that suitable additional or alternative space will be available as needed. We own a variety of computers and other computer equipment for our operational needs. We believe that our equipment is suited for our present needs and that additional or alternative computer equipment will be available as needed.  ITEM 3. LEGAL PROCEEDINGS On January 19, 2006, Community Capital Bank filed a complaint in the Supreme Court of the State of New York (Kings County) against the Company, Macdonald S. Tudeme (our former CEO) and Marguerite Tudeme (our former Secretary). The complaint seeks payment of three loans made by Community Capital Bank having a total outstanding principal amount of $202,527.67 plus unpaid interest. The Company believes that the Community Capital Bank loans were made to MTM, a former subsidiary that was disposed of on December 15, 2005 as part of the disposition of Marathon (as described in Note 1), and are guaranteed by the Tudemes. As a result, the Company does not believe it is obligated to repay any amounts due under the Community Capital Bank loans. On January 25, 2006, the Company received notice from the Internal Revenue Service (the "IRS") that the IRS had concluded that the Company's subsidiary (DCI) was a third-party payer to and thus employer of a pharmacist who provided services to DCI's client, the California Department of Corrections. Although the IRS notice applies only to the case of the individual pharmacist, if unchanged, it could require DCI to classify other pharmacists and nurses in its registry who provide services to DCI's clients as employees of DCI. Accordingly, compensation payable to such pharmacists and nurses would be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have a material adverse effect on the Company's business, financial condition and results of operations. The Company disagrees with the conclusion of the IRS notice, believes that the pharmacist in question was properly classified as an independent contractor and is in the process of contesting the conclusion of the IRS. On June 5, 2006, Phillip Evans, a former contractor of DCI, filed a complaint in the Superior Court of California (Riverside County) against DCI. The complaint alleges, among other things, libel and unfair business practices, and seeks general special and punitive damages of $2,170,000. The Company believes the claims are without merit and is contesting the suit.  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the shareholders during the fourth quarter of the year covered by this report by a solicitation of proxies or otherwise. 24  PART II.  ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock currently trades on the OTC Bulletin Board under the trading symbol "MSTF". The high and low trading prices, on the OTC Bulletin Board, recorded for our common stock, for each quarter during the last two fiscal years is set forth below: [Download Table] Fiscal Year Ended December 31, 2006 December 31, 2005 ---------------------- ---------------------- High Low High Low ---------- ---------- ---------- ---------- Quarter 1 $ 0.45 $ 0.09 $ 15.30 $ 0.90 Quarter 2 $ 1.00 $ 0.20 $ 5.40 $ 0.27 Quarter 3 $ 0.29 $ 0.07 $ 3.60 $ 0.45 Quarter 4 $ 0.20 $ 0.03 $ 2.70 $ 0.45 The market for our common stock has been limited and the prices for our common stock quoted by brokers are not necessarily a reliable indication of the value of our common stock. There are approximately 27 holders of our common stock in certificate form according to our stockholder list and over 452 holders in street name. There have been no cash dividends declared on our common stock since our inception. Dividends will be declared at the sole discretion of our Board of Directors, provided that so long as our convertible secured notes remain outstanding, we cannot, without the prior written consent of the holders of the notes, directly or indirectly declare or pay any dividends, other than dividends paid to us or any of our wholly-owned subsidiaries. Securities Offered for Issuance Under Equity Incentive Plans Our 2005 Stock Incentive Plan (the "2005 Plan") was adopted by our Board of Directors on December 1, 2005 and approved by the our stockholders on March 27, 2006. The 2005 Plan reserves 1,111,111 shares of the Company's common stock for grant under the plan to directors, key employees and independent contractors who provide services to the Company. The 2005 Plan is administered by the Board of Directors. Our Board of Directors, in its sole discretion, will determine the exercise price of any options granted under the 2005 Plan. The exercise price of an incentive stock option cannot be less than (i) 100% of the fair market value of the common stock on the date of grant or (ii) in the case of an incentive stock option granted to an individual who owns (or is deemed to own pursuant to Section 424(d) of the Internal Revenue Code), at the time of grant, stock possessing more than 10% of the total combined voting power of all classes of our stock (a "10% Stockholder"), 110% of the fair market value of the common stock on the date of grant. The exercise price of a nonqualified stock option may be less than 100% of the fair market value of the common stock on the date of grant; provided, however, that the exercise price of each nonqualified stock option granted under the 2005 Plan cannot in any event be less than the par value per share of our Common Stock. 25 Our Board of Directors, in its sole discretion, will determine the expiration date of any options granted under the 2005 Plan; provided that with respect to an incentive stock option the expiration date must be within (i) ten years from the date of grant, or such shorter period as may be specified by our board of directors, or (ii) in the case of a 10% Stockholder, five years from the date of grant. The following schedule provides additional information on our equity incentive plans: [Download Table] Plan Category Number of Weighted-average Number of securities Securities exercise price remaining available to be issued of outstanding for future issuance upon exercise options, warrants under equity of outstanding and rights compensation options, warrants plans (excluding and rights (a) securities reflected in column (a) ----------------- ----------------- --------------------- Equity compensation plans approved by security holders 931,589 $0.63 179,522 Equity compensation plans not approved by security holders 0 NA 0 ----------------- ----------------- --------------------- Total 931,589 $0.63 179,522  Penny Stock Our common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) (1) incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our common stock is deemed to be a penny stock, trading in the shares will be subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. "Accredited investors" are persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock and may affect the ability of our shareholders to sell their shares. 26  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion should be read in conjunction with our consolidated financial statements and related notes and the other financial information included elsewhere in this report. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS Except for the historical information and discussions contained herein, statements contained in this Form 10-KSB may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements generally include our management's plans and objectives for future operations, including plans, objectives and expectations relating to our future economic performance, business prospects, revenues, working capital, liquidity, ability to obtain financing, generation of income and actions of secured parties not to foreclose on our assets. The forward-looking statements may also relate to our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements generally can be identified by the use of the words "believe," "intend," "plan," "expect," "forecast," "project," "may," "should," "could," "seek," "pro forma," "estimate," "continue," "anticipate" and similar words. The forward-looking statements and associated risks may include, relate to, or be qualified by other important factors, including, without limitation: - anticipated trends in our financial condition and results of operations (including expected changes in our gross margin and general, administrative and selling expenses); - our ability to finance our working capital and other cash requirements; - our business strategy for expanding our presence in the information security products and services markets; and - our ability to distinguish ourselves from our current and future competitors. We do not undertake to update, revise or correct any forward-looking statements. The forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating forward-looking statements include: - changes in external competitive market factors or in our internal budgeting process that might impact trends in our results of operations; - changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the markets; and - various other factors that may prevent us from competing successfully in the marketplace. OVERVIEW We provide healthcare staffing services to both commercial and government sector customers. We are focused on building a nationally recognized healthcare staffing company by growing our current customer bases, expanding our service offerings, and acquiring and growing profitable staffing services companies. 27 We operate our healthcare staffing services business through our wholly owned subsidiary Drug Consultants, Inc. DCI furnishes personnel to perform a range of pharmacy technician, nursing and other health care services in support of the operations of government and commercial facilities, including its largest client, the State of California Depart of Corrections and Rehabilitation (which accounted for approximately 99% of DCI's 2006 revenue). DCI currently operates under three master contracts with the CDCR. The master contracts are for terms of three years and currently expire between September 30, 2007 and June 30, 2008. Historically, DCI has been able to obtain replacement contracts for its services to the CDCR upon expiration of its master contracts. DCI's contracts with the CDCR do not provide for a minimum purchase commitment of our services and can be terminated by the CDCR at any time on 30 days' notice. In April 2006, a federal court-appointed receiver assumed total control over CDCR's healthcare delivery system to address the court's findings of substandard medical care. Among the receiver's objectives is to reduce the CDCR's reliance on staffing service providers like DCI. Since the receiver's appointment, DCI has experienced a loss of several of its healthcare professionals who have accepted positions with the CDCR. We believe that the ongoing implications of the receiver's management of the CDCR's healthcare delivery system include lower demand from the CDCR for DCI's services, higher attrition of our healthcare professionals, increased competition for recruiting healthcare professionals to fill positions with the CDCR and reduced margins for the services we provide the CDCR. Our revenues generally consist of fees received from clients to whom we provide temporary healthcare professionals. Our costs of revenue generally consist of amounts paid to the temporary healthcare professionals who provide services to our clients. On November 4, 2005, we acquired 100% of the issued and outstanding shares of DCII (formerly, iTechexpress, Inc.) in exchange for shares of our Common Stock representing approximately 93% of our outstanding Common Stock after issuance. As a result, we have accounted for the DCII acquisition as a reverse takeover of the Company by the shareholders of DCII and a recapitalization of DCII. Accordingly, our consolidated financial statements represent a continuation of DCII and the discussion below relates to the financial results of DCII. COMPARISON OF OPERATING RESULTS RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005 Revenues for the year ended December 31, 2006 totaled $7,727,646 compared to $1,851,148 for the year ended December 31, 2005. This is an increase of $5,876,498 or 317% and is attributable to the acquisition of DCI in November 2005 and the inclusion of 12 months of operations in our 2006 revenues. Cost of revenues for the year ended December 31, 2006 totaled $6,597,677 compared to $1,154,862 for the year ended December 31, 2005. This is an increase of $5,442,815 or 471% and is attributable to the acquisition of DCI in November 2005 and the inclusion of 12 months of operations in our 2006 cost of revenues. 28 Operating expenses for the year ended December 31, 2006 totaled $1,355,933 compared to $1,273,817 for the year ended December 31, 2005. This is an increase of $82,116 or 6% and is attributable to the acquisition of DCI in November 2005 and the inclusion of 12 months of operating expenses in our 2006 operating expenses. These increases were partially offset by the acquisition costs of DCII and DCI which were included in our 2005 operating expenses and not in 2006. Other income (expense) for the year ended December 31, 2006 totaled $640,487 in expense compared to other income of $876,762 for the year ended December 31, 2005. The increase in expense can be primarily attributed to an increase in interest expense of $907,588 due to additional borrowings under our secured convertible notes as well as the fact that 2005 interest expense reflected approximately two months of expense from the November 2005 financing versus a full year in 2006. A decrease in the gain on derivative valuation can also be attributed to the overall increase in other expense compared to the prior year. These factors were partially offset by the loss on disposition of subsidiary and loss on discontinued operations which were included in the 2005 results of operations. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2006, we had negative net working capital of $546,798. Our current assets of $1,300,061 consisted of cash and cash equivalents of $1 and accounts receivable, net of $1,300,060. Our current liabilities of $1,846,859 consisted of accounts payable and accrued expenses of $910,841; a factoring liability of $579,780; accrued interest of $266,670; notes payable, current of $59,401; and, accounts payable related parties of $30,167. As of December 31, 2006, we had long-term debt of $1,842,971, consisting of $175,046 in derivatives, $1,547,648 outstanding under our convertible secured notes and $120,277 in notes payable. Net cash used in operating activities for the year ended December 31, 2006 was $1,360,683, compared to net cash provided by operating activities of $243,190 for the year ended December 31, 2005. Our increase of net cash used in operating activities in 2006 is primarily attributable to an increase in accounts receivables and a decrease in accounts payable compared to the prior year. There was no cash provided by or used in investing activities during the year ended December 31, 2006. Net cash used in investing activities for the year ended December 31, 2005 was $1,600,000 and reflects the purchase of DCI in November 2005. Net cash provided by financing activities for the year ended December 31, 2006 was $319,251 compared with net cash provided by financing activities of $2,361,078 for the year ended December 31, 2005. Net cash provided by financing activities in 2006 includes $425,000 of proceeds from our issuance of convertible secured notes compared with $2,150,000 of proceeds in 2005. Payments made on notes payable totaled $350,396 for the year ended December 31, 2006 compared with payments of $124,054 in 2005. Our consolidated financial statements are prepared using the accrual method of accounting in accordance with GAAP, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We had $617,812 in accumulated deficit at December 31, 2006. Our management has taken various steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue its operations for the next twelve months. 29 In view of our net working capital deficit, operating cash flow deficit, long-term debt and the other matters described above, recoverability of a major portion of the recorded asset amounts shown in our consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to raise additional capital, obtain financing and to succeed in our future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. We project that our cash on hand and cash flow generated from operations will not be sufficient to fund operational liquidity requirements. As a result, our ability to continue our operations and growth strategy depends on our ability to access the capital markets in the near term. Our secured convertible note investors are required to purchase an additional $625,000 principal amount of secured convertible notes and related warrants five days following the date that a registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied. There can be no assurance that we will satisfy the conditions to funding or, if we do, that we will do so on a timetable that meets our operational liquidity needs There also can be no assurance that capital from other outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, we could be forced to restructure or to default on our obligations or to curtail or abandon our business plan, any of which may devalue or make worthless an investment in the Company. The operations of DCII and DCI, which will represent our entire business for the foreseeable future, were acquired in November 2005. Accordingly, we have a limited operating history upon which an evaluation of our prospects can be made. Our strategy is unproven and the revenue and income potential from our strategy is unproven. It is difficult for us to predict future liquidity requirements with certainty and our forecast is based upon certain assumptions, which may differ from actual future outcomes. Over the longer term, we must successfully execute our plans to increase revenue and income streams that will generate significant positive cash flow if we are to sustain adequate liquidity without impairing growth or requiring the infusion of additional funds from external sources. We had an operating cash flow deficit in 2006. We do not currently have enough capital to repay our outstanding convertible secured notes and other liabilities and we may never generate enough revenue to repay the amounts owed. In addition, execution of our acquisition-based growth strategy will likely acquire significant additional capital. 30 As a result, our continued operations, ability to repay outstanding liabilities and growth strategy all depend on our ability to access the capital markets. We do not have any commitments or identified sources of additional capital from third parties, other than the commitment from the convertible secure note investors and Systran mentioned above, or from its officers, directors or majority shareholders. There can be no assurance that capital from outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, it would have a material adverse impact upon our ability to continue our business operations and pursue our growth strategy. In the event we do not raise additional capital, it is likely that our growth will be restricted and that we may be forced to scale back or curtail implementing our business plan. RECEIVABLES FACTORING FACILITY On November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation. The purchase price for each invoice sold is the face amount of the invoice less a discount of 1.5%. On July 24, 2006, the Factoring Agreement was amended and under the terms of the amendment a fee equal to prime plus 1.50% shall be charged on a daily basis based upon total of invoices purchased by Systran that remain unpaid and outstanding, less the deposit held by Systran. Further, the purchase price for each invoice sold was amended to be the face amount of the invoice less a discount of 0.65%. Additionally, a one time fee of 0.50% on all invoices that remain unpaid from the date sold shall be incurred on the 91st day from the date sold. All accounts sold are with recourse by Systran. Systran may defer making payment to DCII of a portion of the purchase price payable for all accounts purchased which have not been paid up to 10.0% of such accounts (reserve). All of DCII's and DCI's accounts receivable are pledged as collateral under the agreement. The initial term is for thirty-six months and will automatically renew for an additional twelve months at the end of the term, unless the Company gives thirty days written notice of its intention to terminate the factoring agreement. CONVERTIBLE SECURED NOTES On August 31, 2004, the Company entered into a securities purchase agreement with four accredited investors for the sale of secured convertible notes having an aggregate principal amount of $700,000, a 10% annual interest rate payable quarterly, and a term of two years. We also agreed to sell warrants to purchase up to an aggregate of 7,777 shares of our Common Stock at $40.50 per share. We only sold $500,000 principal amount of secured convertible notes under the 2004 agreement. As a result, we sold to the investors warrants to purchase up to an aggregate of 5,556 shares of our Common Stock at $40.50 per share. The investors have agreed to purchase the remaining $200,000 commitment under the terms of our 2005 securities purchase agreement with the investors. On November 4, 2005, we entered into an additional securities purchase agreement with the same accredited investors, for the sale of secured convertible notes having an aggregate principal amount of $3,000,000, an 8% annual interest rate (payable quarterly), and a term of three years. We also agreed to sell warrants to purchase up to an aggregate of 166,667 shares of our Common Stock at $9.00 per share. 31 On March 29, 2007, the Company obtained an amendment to the 2005 securities purchase agreement whereby interest payments are payable at the same time the corresponding principal balance is due and payable, whether at maturity or upon acceleration or by prepayment. As of March 22, 2007, we had issued under the two securities purchase agreements: - $3,075,000 aggregate principal amount of secured convertible notes, - Warrants to purchase 5,556 shares of our Common Stock at $40.50 per shares, - Warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and - Warrants to purchase 166,667 shares of our Common Stock at $4.50 per share. The investors are required to purchase an additional $625,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share and warrants to purchase 23,611 shares of our Common Stock at $9.00 per share five days following the date that the registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied, including: (i) the Company's representations and warranties contained in the 2005 securities purchase agreement being true and correct in all material respects on the date when made and as of the date of such purchase; (ii) the Company having performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the 2005 agreement; (iii) there being no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the 2005 agreement; (iv) no event having occurred which could reasonably be expected to have a material adverse effect on the Company; and (v) the shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants having been authorized for quotation on the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin Board having not been suspended by the Securities and Exchange Commission or the OTC Bulletin Board. On November 1, 2006, we obtained an amendment to the 2005 securities purchase agreement extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to April 30, 2007 (or May 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments) in exchange for issuing warrants to purchase 166,667 shares of our Common Stock at $4.50 per share to the holders of the secured convertible notes. On March 29, 2007, we obtained an amendment extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments). 32 In connection with the 2005 securities purchase agreement, we entered into a security agreement, whereby we granted the investors a continuing, first priority security interest in the Company's general assets including all of the Company's: - Goods, including without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated; - Inventory (except that the proceeds of inventory and accounts receivable; - Contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds; - Receivables including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each receivable, including any right of stoppage in transit; and documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing and the Company's intellectual property. Additionally, we entered into an intellectual property security agreement with the investors, whereby we granted them a security interest in all of the Company's software programs, including source code and data files, then owned or thereafter acquired, all computers and electronic processing hardware, all related documentation, and all rights with respect to any copyrights, copyright licenses, intellectual property, patents, patent licenses, trademarks, trademark licenses or trade secrets. Additional material terms of the 2005 securities purchase agreement, the secured convertible notes and the warrants are described below: Conversion and Conversion Price ------------------------------- The secured convertible notes are convertible into our Common Stock, at the investors' option, at the lower of (i) $0.90 or (ii) 50% of the average of the three lowest intraday trading prices for the Common Stock on a principal market for the 20 trading days before but not including the conversion date. Accordingly, there is in fact no limit on the number of shares into which the notes may be converted. The conversion price is adjusted after major announcements by the Company. In the event the Company makes a public announcement that the Company intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's Common Stock (or any other takeover scheme) then the conversion price will be equal to the lower of the conversion price that would be effect on the date the announcement is made or the current conversion price at the time the secured convertible note holders wish to convert. 33 The secured convertible notes also provide anti-dilution rights, whereby the conversion price shall be adjusted in the event that the Company issues or sells any shares of Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The conversion price is also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The conversion price is also adjusted in the event the Company effects a consolidation, merger or sale of substantially all its assets (which may also be treated as an event of default) or if the Company declares or makes any distribution of its assets (including cash) to holders of its Common Stock, as provided in the secured convertible notes. If a note holder gives the Company a notice of conversion relating to the secured convertible notes and the Company is unable to issue such note holder the shares of Common Stock underlying the secured convertible note within five days from the date of receipt of such notice, the Company is obligated to pay the note holder $2,000 for each day that the Company is unable to deliver such Common Stock underlying the secured convertible note. The secured convertible notes contain a provision whereby no note holder is able to convert any part of the notes into shares of the Company's Common Stock, if such conversion would result in beneficial ownership by the note holder and its affiliates of more than 4.99% of the Company's then outstanding shares of Common Stock. In addition, we have the right under certain circumstances described below under "Company Call Option and Prepayment Rights" to prevent the note holders from exercising their conversion rights during any month after a month in which we have exercised certain prepayment rights.  Company Call Option and Prepayment Rights ----------------------------------------- Each secured convertible note contains a call option in favor of the Company, whereby as long as no event of default under the note has occurred, the Company has a sufficient number of authorized shares reserved for issuance upon full conversion of the secured convertible notes and our Common Stock is trading at or below $0.90 per share (subject to adjustment in the secured convertible note), the Company has the right to prepay all or a portion of the note. The prepayment amount is equal to the total amount of principal and accrued interest outstanding under the note, and any other amounts which may be due to the note holders, multiplied by 130%. In the event that the average daily trading price of our Common Stock for each day of any month is below $0.90, the Company may at its option prepay a portion of the outstanding principal amount of the secured convertible notes equal to 104% of the principal amount thereof divided by thirty-six plus one month's interest on the secured convertible notes, or the amount of the remaining principal and interest, whichever is less. No note holder is entitled to convert any portion of the secured convertible notes during any month after the month on which the Company exercises this prepayment option. 34 Events of Default ----------------- Upon an event of default under the secured convertible notes, and in the event the note holders give the Company a written notice of default, an amount equal to 130% of the amount of the outstanding secured convertible notes and interest thereon shall become immediately due and payable or another amount as otherwise provided in the notes. Events of default under the secured convertible notes include the following: - failure to pay any amount of principal or interest on the notes; failure to issue shares to the selling stockholders upon conversion of the notes, and such failure continues for ten days after notification by the note holders; - failure to obtain effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants on or before October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments), or an effective registration statement covering such shares ceases to be effective for any ten consecutive days or any twenty days in any twelve month period; - breaches by the Company of any of the convents contained in the notes; - breaches by the Company of any representations and warranties made in the 2005 securities purchase agreement or any related document; - appointment by the Company of a receiver or trustee or makes an assignment for the benefit of creditors; - filing of any judgment against the Company for more than $50,000; - bringing of bankruptcy proceedings against the Company and such proceedings are not stayed within sixty days of such proceedings being brought; or - delisting of the Common Stock from the OTC Bulletin Board or equivalent replacement exchange. Stock Purchase Warrants ----------------------- The warrants expire five years from their date of issuance. The warrants include anti-dilution rights, whereby the exercise price of the warrants shall be adjusted in the event that the Company issues or sells any shares of the Company's Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Company's Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The exercise price of the warrants are also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The exercise price is also adjusted pursuant to the warrants in the event the Company effects a consolidation, merger or sale of substantially all of its assets and/or if the Company declares or makes any distribution of its assets (including cash) to holders of its common stock as a partial liquidating dividend, as provided in the warrants. 35 The warrants also contain a cashless exercise, whereby after February 2, 2006, and if a registration statement covering the warrants is not effective, the warrant holders may convert the warrants into shares of the Company's restricted Common Stock. In the event of a cashless exercise under the warrants, in lieu of paying the exercise price in cash, the selling stockholders can surrender the warrant for the number of shares of Common Stock determined by multiplying the number of warrant shares to which it would otherwise be entitled by a fraction, the numerator of which is the difference between (i) the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise and (ii) the exercise price, and the denominator of which is the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise. For example, if the selling stockholder is exercising 100,000 warrants with a per warrant exercise price of $0.75 per share through a cashless exercise when the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise is $2.00 per share, then upon such cashless exercise the warrant holder will receive 62,500 shares of the Company's Common Stock. Registration Rights Agreement ----------------------------- We also entered into a registration rights agreement with the investors that grants the investors demand registration rights with respect to 200% of the Common Stock underlying the secured convertible notes and 200% of the Common Stock underlying the warrants. The Company will be subject to the payment of certain damages in the event that it does not satisfy its obligations including its obligation to have a registration statement with respect to the Common Stock underlying the secured convertible notes and warrants declared effective by the Securities and Exchange Commission on or prior to October 31, 2007; in the event that after the registration statement is declared effective, sales of the Company's securities cannot be made pursuant to the registration statement; and in the event that the Company's Common Stock is not listed on the OTC Bulletin Board or the NASDAQ, New York or American stock exchanges. The damages are equal to 0.02 times the number of months (prorated for partial months) that any such event occurs (subject to adjustment as provided in the registration rights agreement). Side Letter Agreement --------------------- We entered into a aide letter agreement with the investors on November 10, 2005. The Side Letter Agreement provided that in consideration for the November 2005 sale of the secured convertible notes, the investors agreed that the face amount of the $500,000 of secured convertible notes issued to the investors in August 2004 and the $200,000 in secured convertible notes which remained to be issued under the 2004 securities purchase agreement upon the effectiveness of a registration statement covering such secured convertible notes shall be included in the amount advanced to the Company under the November 2005 secured convertible notes. The side letter agreement also provided that the terms of the 2005 securities purchase agreement shall supercede the prior 2004 securities purchase agreement and that all interest, penalties, fees, charges or other obligations accrued or owed by the Company to the investors pursuant to the 2004 securities purchase agreement are waived, provided that in the event of any material breach of the 2005 securities purchase agreement by the Company, which breach is not cured within five days of receipt by the Company of written notice of such breach, the novation of the 2004 securities purchase agreement and the waiver of the prior obligations thereunder shall be revocable by the selling stockholders and all such prior obligations shall be owed as if the 2004 securities purchase agreement was never superceded. 36 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Critical Accounting Policies ---------------------------- We prepare our consolidated financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Monarch Staffing, Inc. (formerly MT Ultimate Healthcare Corp.) (Monarch), and its wholly-owned subsidiaries, Drug Consultants International, Inc., formerly known as iTechexpress, Inc., (DCII) and Drug Consultants, Inc. (DCI), and DCII's wholly-owned subsidiary, Success Development Group, Inc. (SDG). All significant intercompany balances and transactions have been eliminated in the consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Accounts Receivable and Allowance for Doubtful Accounts ------------------------------------------------------- Accounts receivable consists of amounts billed to customers upon performance of service. The Company performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customer current creditworthiness, as determined by its review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any customer-specific collection issues that it has identified. Accounts receivable are shown net of an allowance for doubtful accounts of $0 at December 31, 2006 and 2005, respectively. An allowance is established whenever receivables are over 90 days old and the customer has not responded to efforts to reconcile differences. Such receivables are deemed to be uncollectible after 180 days. There were no such receivables for the current year or prior year. Cash ---- Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition. 37 Long-Lived Assets ----------------- The Company accounts for its long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value. Goodwill -------- The excess of purchase price and related costs over the fair value of net assets of entities acquired is recorded as goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company evaluates goodwill annually for impairment at the reporting unit level and whenever circumstances occur indicating that goodwill might be impaired. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with the reporting unit's carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the expected present value of future cash flows, giving consideration to the market valuation approach. If the carrying amount of the Company's reporting units exceeds the reporting unit's fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the Company's reporting unit's goodwill with the carrying amount of that goodwill. At December 31, 2006 and 2005, the Company performed the annual impairment test and determined there was no impairment of goodwill. Beneficial Conversion Feature ----------------------------- From time to time, the Company has debt with conversion options that provide for a rate of conversion that is below market value. This feature is normally characterized as a beneficial conversion feature ("BCF"), which is recorded by the Company pursuant to Emerging Issues Task Forces ("EITF") Issue No. 98-5 ("EITF 98-05"), "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments." If a BCF exists, the Company records it as a debt discount and amortizes it to interest expense over the life of the debt on a straight-line basis, which approximates the effective interest method. 38 Derivative Financial Instruments -------------------------------- The Company's derivative financial instruments consist of embedded derivatives related to the convertible notes, since the notes are not conventional convertible debt. These embedded derivatives include certain conversion features, monthly payment options, variable interest features, call options, liquidated damages clauses in the registration rights agreement and certain default provisions. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value of these instruments will be recorded as non- operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income. The derivative and warrant liabilities are recorded as long-term liabilities in the consolidated balance sheet. Revenue Recognition ------------------- Revenues and costs of revenues from services are recognized during the period in which the services are provided. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements ("SAB 104"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured. The Company has contracts with various governments and governmental agencies. Government contracts are subject to audit by the applicable governmental agency. Such audits could lead to inquiries from the government regarding the allowability of costs under applicable government regulations and potential adjustments of contract revenues. To date, the Company has not been involved in any such audits. Income Taxes ------------ The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations. We currently have recorded a valuation allowance against all of our deferred tax assets. We have considered future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance. If actual results differ favorably from these estimates, we may be able to realize some or all of the deferred tax assets, which could favorably impact our operating results. 39 Issuance of Shares for Non-Cash Consideration --------------------------------------------- The Company accounts for the issuance of equity instruments to acquire goods and/or services based on the fair value of the goods and services or the fair value of the equity instrument at the time of issuance, whichever is more reliably determinable. The majority of equity instruments have been valued at the market value of the shares on the date issued. The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and EITF 00-18, "Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees." The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes.  ITEM 7. FINANCIAL STATEMENTS The Reports of Independent Registered Public Accounting Firms and the consolidated financial statements of the Company and the notes thereto appear on the following pages. 40 CONTENTS  Report of Independent Registered Public Accounting Firm. . . . . . . . .3 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . .4 Consolidated Statements of Operations. . . . . . . . . . . . . . . . . .5 Consolidated Statements of Stockholders' Equity (Deficit). . . . . . . .6 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . .7 Notes to the Consolidated Financial Statements . . . . . . . . . . . . .8 /Letterhead/  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Monarch Staffing, Inc. and Subsidiaries (formerly MT Ultimate Healthcare Corp.) San Juan Capistrano, California We have audited the accompanying consolidated balance sheet of Monarch Staffing, Inc. and Subsidiaries (formerly MT Ultimate Healthcare Corp.) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the PCAOB (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal controls over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Monarch Staffing, Inc. and Subsidiaries (formerly MT Ultimate Healthcare Corp.) as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a stockholders' deficiency and has suffered significant losses to date, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. /S/ Chisholm, Bierwolf & Nilson, LLC Chisholm Bierwolf & Nilson, LLC Bountiful, Utah March 1, 2007 F-3
10KSBLast "Page" of 2TOC1stPreviousNextBottomJust 2nd
 MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Consolidated Balance Sheet ASSETS ------- [Enlarge/Download Table] December 31, December 31, 2006 2005 ------------ ------------ CURRENT ASSETS Cash and cash equivalents (Note 1) $ 1 $ 1,041,433 Accounts receivable, net (Note 1) 1,300,060 736,547 ------------ ------------ Total Current Assets 1,300,061 1,777,980 ------------ ------------ OTHER ASSETS Other receivable 75,006 - Goodwill (Note 1) 1,245,481 1,245,481 ------------ ------------ Total Other Assets 1,320,487 1,245,481 ------------ ------------ TOTAL ASSETS $ 2,620,548 $ 3,023,461 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- CURRENT LIABILITIES Accounts payable $ 491,990 $ 886,125 Accounts payable - related party (Note 3) 30,167 52,967 Accrued expenses 418,851 527,882 Accrued interest 266,670 - Factoring liability (Note 6) 579,780 335,132 Notes payable - current portion (Note 4) 59,401 350,394 ------------ ------------ Total Current Liabilities 1,846,859 2,152,500 ------------ ------------ LONG-TERM DEBT Derivatives 175,046 603,401 Notes payable (Note 4) 120,277 179,680 Callable secured convertible notes payable (net of debt discount of $1,527,352 and $2,237,070 at December 31, 2006 and 2005, respectively) 1,547,648 412,930 ------------ ------------ Total Long-Term Debt 1,842,971 1,196,011 ------------ ------------ Total Liabilities 3,689,830 3,348,510 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 8) - - STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.001 par value; 400,000,000 shares authorized; 9,862,691 outstanding at December 31, 2006 and 2005, respectively 9,863 9,863 Additional paid-in capital (461,333) (583,553) Retained Earnings (Accumulated deficit) (617,812) 248,640 ------------ ------------ Total Stockholders' Equity (Deficit) (1,069,281) (325,050) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,620,548 $ 3,023,461 ============ ============ The accompanying notes are an integral part of these consolidated financial statements F-4  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Consolidated Statement of Operations [Enlarge/Download Table] For the Years Ended December 31, -------------------------- 2006 2005 ------------ ------------ NET REVENUES $ 7,727,646 $ 1,851,148 COST OF REVENUES 6,597,677 1,154,862 ------------ ------------ GROSS PROFIT $ 1,129,969 $ 696,286 ------------ ------------ OPERATING EXPENSES Salaries and wages (including stock compensation expense) 390,067 399,368 Consulting 313,474 110,500 Professional fees 303,512 246,309 General and administrative 345,395 494,466 Bad debt expense 3,485 23,174 ------------ ------------ Total Operating Expenses 1,355,933 1,273,817 ------------ ------------ INCOME (LOSS) FROM OPERATIONS (225,964) (577,531) ------------ ------------ OTHER INCOME (EXPENSE) Interest income 1,672 196 Loss on discontinued operations (Note 7) - (15,825) Loss on disposition of subsidiary (Note 7) - (699,616) Gain (loss) on disposition of asset - (1,062) Gain (loss) on derivative valuation 540,578 1,868,218 Interest expense (1,182,737) (275,149) ------------ ------------ Total Other Income (Expense) (640,487) 876,762 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (866,452) 299,231 Provision for income taxes - - ------------ ------------ NET INCOME (LOSS) $ (866,452) $ 299,231 ============ ============ BASIC INCOME (LOSS) PER SHARE $ (0.09) $ 0.03 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,862,691 9,862,691 ============ ============ The accompanying notes are an integral part of these consolidated financial statements F-5  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Consolidated Statements of Stockholders' Equity (Deficit) Years Ended December 31, 2006 and 2005 [Download Table] Retained Common Stock Additional Earnings ------------------------- Paid-in (Accumulated Shares Amount Capital Deficit) ------------ ----------- ------------ ------------ Balance, January 1, 2005 9,203,704 $ 9,204 $ (582,894) $ (50,591) Common stock issued to acquire DCII (Note 1) 1,055,556 1,056 (1,056) - Common stock cancelled through spinoff of subsidiary (Note 1) (396,569) (397) 397 - Net income for the year ended December 31, 2005 - - - 299,231 ------------ ----------- ------------ ------------ Balance, December 31, 2005 9,862,691 $ 9,863 $ (583,553) $ 248,640 ------------ ----------- ------------ ------------ Valuation of stock options - - 122,220 - Net loss for the year ended December 31, 2006 - - - (866,452) ------------ ----------- ------------ ------------ Balance, December 31, 2006 9,862,691 $ 9,863 $ (461,333) $ (617,812) ============ =========== ============ ============ The accompanying notes are an integral part of these financial statements F-6  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Consolidated Statements of Cash Flows [Download Table] For the Years Ended December 31, ------------------------- 2006 2005 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (866,452) $ 299,231 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation - 1,649 Amortization of debt discount 821,942 108,480 Loss on disposition of subsidiary - 699,616 Loss on disposition of asset - 1,062 Change in fair value of derivative liabilities (540,578) (1,742,150) Bad debt expense 3,485 322,727 Non-cash stock option expense 122,220 - Changes in operating assets and liabilities: Accounts receivable (566,998) 381,161 Other assets (75,006) - Accounts payable (416,935) 133,187 Accrued expenses and other current liabilities 157,638 38,226 ------------ ------------ Net Cash Provided by (Used in) Operating Activities (1,360,683) 243,190 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of subsidiary - (1,600,000) ------------ ------------ Net Cash Provided by (Used in) Investing Activities - (1,600,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments made on notes payable (350,396) (124,054) Net advances from factored receivables 244,648 335,132 Proceeds received on convertible debt 425,000 2,150,000 ------------ ------------ Net Cash Provided by (Used in) Financing Activities 319,251 2,361,078 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,041,432) 1,004,268 ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,041,433 37,165 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1 $ 1,041,433 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash Payments For: Interest $ 53,472 $ 14,670 Income taxes $ - $ - The accompanying notes are an integral part of these consolidated financial statements F-7  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization The consolidated financial statements presented are those of Monarch Staffing, Inc. (formerly MT Ultimate Healthcare Corp.) (Monarch), and its wholly-owned subsidiaries, Drug Consultants International, Inc.., formerly known as iTechexpress, Inc., (DCII) and Drug Consultants, Inc. (DCI), and DCII's wholly-owned subsidiary, Success Development Group, Inc. (SDG). Collectively, they are referred to herein as the "Company". Monarch was originally incorporated in Nevada under the name JavaJuice.net on September 13, 2000. The Company filed amended Articles of Incorporation with the State of Nevada on August 15, 2003 to change the name to MT Ultimate Healthcare Corp. On March 31, 2006, the name was changed to Monarch Staffing, Inc. Monarch was organized to operate a payroll nurse staffing and homecare business, and provided healthcare professionals to hospitals, nursing homes, licensed home care service agencies, other health-related businesses, to the homes of the elderly, sick and incapacitated. Prior to the Spinoff Agreement as described below, Monarch also included Abundant Nursing, Inc. (Abundant) (a Pennsylvania corporation), wholly-owned by Monarch through an acquisition agreement dated October 1, 2004. Abundant provided staffing in the central area of Pennsylvania and the Lancaster area. In addition, as disclosed in prior filings of the Company, Monarch included a wholly-owned subsidiary, BP Senior Care, Inc. (BP), acquired on May 20, 2004. The acquisition agreement between Monarch and BP, however, was rescinded during 2005. The financial statements do not include any amounts related to the operations of BP. On November 4, 2005, Monarch and DCII and the former DCII shareholders entered into a Share Exchange and Reorganization Agreement (the "Exchange" or "Acquisition") whereby DCII became a wholly-owned subsidiary of Monarch. As part of the Exchange, Monarch acquired 100% of the issued and outstanding shares of DCII in exchange for 828,333,333 (9,203,704 post-split) newly issued shares of Monarch's common stock. As the number of shares issued represented approximately 92% of the outstanding common stock of Monarch after issuance, the transaction has been accounted for as a reverse takeover of Monarch by the shareholders of DCII. Accordingly, the transaction has been treated for accounting purposes as a recapitalization of DCII; therefore, these consolidated financial statements represent a continuation of DCII, not Monarch, the legal survivor. DCII is treated as the survivor for accounting purposes and Monarch is the survivor for legal purposes. The historical financial statements presented are those of DCII rather than Monarch. F-8  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) a. Organization (Continued) On November 7, 2005, DCII entered into a Stock Purchase Agreement ("Purchase") with Drug Consultants, Inc. ("DCI"), whereby DCI became a wholly-owned subsidiary of DCII. As part of the Purchase, DCII purchased all of the outstanding shares of DCI from the former shareholder of DCI for a purchase price of $1,800,000, of which $1,600,000 was paid at the closing of the Purchase and $200,000 shall be paid pursuant to a Secured Promissory Note (see Note 5). The Promissory Note is secured by a Stock Pledge Agreement ("Pledge Agreement"), whereby DCII pledged to the former DCI shareholder 51% of the stock of DCI ("DCI Stock") held by DCII to secure the full and prompt payment and performance by DCII of the Promissory Note. Pursuant to this Purchase, the Company recorded goodwill of $1,245,481. Effective December 15, 2005, Macdonald Tudeme and Marguerite Tudeme (collectively, the "Tudemes"), the former controlling shareholders of the Company and the Company entered into a Spinoff Agreement ("Spinoff") which provided for (1) the transfer of the corporate names, business, operations, assets, properties, intellectual properties, trademarks, service marks, trade names, uniform resource locators, telephone numbers, and goodwill of the Company and its subsidiaries (other than DCII and DCI), together with the operating business of Abundant, to be placed into to a newly-formed Delaware corporation wholly-owned by the Company ("Marathon"), (2) the acquisition and cancellation by the Company from the Tudemes of their outstanding shares of capital stock of the Company, totaling 35,691,200 (396,569 post-split) shares, (3) the assumption and release by the Company and its subsidiaries and the Tudemes of certain liabilities, and (4) the sale to the Tudemes of all of the outstanding capital stock of Marathon, and the payment to the Tudemes of $80,441 for amounts owed to the Tudemes and other creditors by the Company, of which $50,000 was paid prior to December 31, 2005. The Company also entered into a Security Agreement ("Security Agreement") with Marathon, whereby the Company pledged to Marathon 20,000,000 (222,222 post-split) shares of its common stock as collateral ("Collateral") to secure its performance and payment of the promissory note payable to Lisa Stern ("Stern Note") originally entered into as part of Monarch's purchase of Abundant during 2004. The Company will be in default under the Security Agreement upon the failure to pay any principal or interest of the Stern Note when due. Upon default, Marathon is able to retain the Collateral and apply the consideration received from the Collateral against any principal and interest due. F-9  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) a. Organization (Continued) DCII, established in 1999 and located in Irvine, California, places technicians into technical jobs in both commercial and government sectors on a national basis. DCII performs various IT and staffing services for Equant. DCII's wholly-owned subsidiary, SDG, a Nevada corporation, established in April 2000, provides management services on behalf of DCII and other clients of DCII. DCI, established in 1977 and located in Irvine, California, is engaged in furnishing personnel to perform a range of pharmacy technician, nursing and other health care services in support of the operations of government and commercial facilities. DCI currently operates under three State of California contracts, three years in length. DCI's largest client is the State of California and DCI provides many of its services in rural areas of California where health care professionals are not readily available. As a result of the above transactions, the operations of the Company going forward will be comprised of the operations of DCII, DCI and SDG. Effective March 31, 2006, the Company completed the following corporate actions: (a) effected a one-for-ninety (1 for 90) reverse stock split of its outstanding common stock, (b) re-authorized for issuance 400,000,000 shares of Common Stock, par value $.001 per share, (c) authorized 5,000,000 shares of "blank check" preferred stock. The reverse stock split resulted in corresponding adjustments to the calculation of the conversion price of the Company's secured convertible notes and the exercise price of the Company's outstanding warrants. The accompanying financial statements have been adjusted to retroactively reflect this stock split. b. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") for the presentation of financial information. These consolidated financial statement, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the consolidated balance sheet, consolidated operating results and consolidated cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. c. Accounting Methods The Company's consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 year end. F-10  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Cash and Cash Equivalents Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition. e. Principles of Consolidation The consolidated financial statements include the accounts of Monarch Staffing, Inc. (formerly MT Ultimate Healthcare Corp.) (Monarch), and its wholly-owned subsidiaries, Drug Consultants International, Inc., formerly known as iTechexpress, Inc., (DCII) and Drug Consultants, Inc. (DCI), and DCII's wholly-owned subsidiary, Success Development Group, Inc. (SDG). All significant intercompany balances and transactions have been eliminated in the consolidation. f. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. g. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable consists of amounts billed to customers upon performance of service. The Company performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customer current creditworthiness, as determined by its review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any customer-specific collection issues that it has identified. Accounts receivable are shown net of an allowance for doubtful accounts of $0 at December 31, 2006 and 2005, respectively. An allowance is established whenever receivables are over 90 days old and the customer has not responded to efforts to reconcile differences. Such receivables are deemed to be uncollectible after 180 days. There were no such receivables for the current year or prior year. F-11  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) h. Basic Income Per Share The computations of basic income per share of common stock are based on the weighted average number of common shares outstanding during the period of the consolidated financial statements. Common stock equivalents, consisting of employee stock options of 931,589, and stock warrants, in the amount of 315,277, have been considered but have not been included in the calculation as their effect is antidilutive for the periods presented. [Download Table] December 31, -------------------------- 2006 2005 ------------ ------------ Numerator - Net income (loss) $ (866,452) $ 299,231 Denominator - weighted average number of shares outstanding 9,862,691 9,862,691 ------------ ------------ Net income (loss) per share $ (0.09) $ 0.03 ------------ ------------ i. Revenue Recognition Revenues and costs of revenues from services are recognized during the period in which the services are provided. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements ("SAB 104"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured. j. Provision for Income Taxes The Company has adopted the provisions of Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. The Company currently has no issues that create timing differences that would mandate deferred tax expense. Net operating losses would create possible tax assets in future years. Due to the uncertainty as to the utilization of net operating loss carry forwards, a valuation allowance has been made to the extent of any tax benefit that net operating losses may generate. No provision for income taxes has been recorded due to net operating loss carryforwards totaling approximately $2,039,000 as of December 31, 2005 that will be offset against future taxable income. These NOL carryforwards begin to expire in the year 2021. No tax benefit has been reported in the consolidated financial statements because the Company believes there is a 50% or greater chance the carryforwards will expire unused. F-12  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) j. Provision for Income Taxes (continued) Deferred tax asset and the valuation account is as follows: [Download Table] December 31, -------------------------- 2006 2005 ------------ ------------ Deferred tax asset: NOL Carryforward $ 693,260 $ 494,360 Valuation allowances (693,260) (494,360) ------------ ------------ Total $ - $ - ============ ============ The components of income tax expense are as follows: Current Federal Tax $ - $ - Current State Tax - - Change in NOL benefit 198,900 453,709 Change in valuation allowance (198,900) (453,709) ------------ ------------ $ - $ - ============ ============ k. Goodwill The excess of purchase price and related costs over the fair value of net assets of entities acquired is recorded as goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company evaluates goodwill annually for impairment at the reporting unit level and whenever circumstances occur indicating that goodwill might be impaired. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with the reporting unit's carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the expected present value of future cash flows, giving consideration to the market valuation approach. If the carrying amount of the Company's reporting units exceeds the reporting unit's fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the Company's reporting unit's goodwill with the carrying amount of that goodwill. At December 31, 2006 and 2005, the Company performed the annual impairment test and determined there was no impairment of goodwill. As previously discussed, effective November 7, 2005, the Company acquired the business and certain related assets of DCI, an unrelated company. The purchase price of $1,800,000 was satisfied by the Company paying $1,600,000 in cash and a $200,000 pursuant to a secured promissory note. The acquisition was an arm's length transaction and has been accounted for using the purchase method. F-13  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Newly Adopted Pronouncements  Accounting Changes and Error Corrections In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections." This new standard replaces APB Opinion No. 20, "Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements," and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005 . The adoption of this statement in 2006 did not have a material impact on the Company's consolidated financial position or results of operations. Accounting for Uncertainty in Income Taxes In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109," ("FIN 48"). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company is currently evaluating the impact of FIN 48 on its consolidated results of operations and financial position but has not yet determined or reasonably estimated the impact as of December 31, 2006. The Company is required to adopt this interpretation effective January 1, 2007. Accounting for Certain Hybrid Financial Instruments In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments an Amendment of FASB Statements No. 133 and No. 140." This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements. F-14  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Newly Adopted Pronouncements (continued)  Accounting for Servicing of Financial Assets In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS No. 156"). This Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and that the separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable. This Statement is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement in 2007 is not expected to have a material impact on the Company's consolidated financial position or results of operations.  Fair Value Measurements In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This statement defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. The effective date of this statement is for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of the adoption of SFAS No. 157. Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans an Amendment of FASB Statements No. 87, 88, 106 and 132(R)." This statement improves financial reporting by requiring an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity of changes in unrestricted net assets of a not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Company's consolidated financial statements. F-15  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Newly Adopted Pronouncements (continued) Considering the Effects of Prior Year Misstatements When Quantifying Current Year Misstatements In September 2006, the Securities and Exchange Commission, or the SEC, released Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Current Year Misstatements, or SAB No. 108, to address diversity in practice regarding consideration of the effects of prior year errors when quantifying misstatements in current year financial statements. The SEC staff concluded that registrants should quantify financial statement errors using both a balance sheet approach and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 states that if correcting an error in the current year materially affects the current year's income statement, the prior period financial statements must be restated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 in the fourth quarter of 2006 did not have a material impact on our consolidated financial statements. The Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the fiscal year beginning on or before November 15, 2007, provided the provisions of SFAS No. 157 are applied. We will adopt SFAS No. 159 on January 1, 2008. We are evaluating SFAS No. 159 and have not yet determined the impact the adoption, if any, will have on our consolidated financial statements. F-16  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) m. Derivative Financial Instruments The Company's derivative financial instruments consist of embedded derivatives related to the convertible notes entered into on August 31, 2004, since the notes are not conventional convertible debt (see Note 5). The embedded derivatives include the conversion feature, monthly payment options, variable interest features, call options, liquidated damages clauses in the registration rights agreement and certain default provisions. The accounting treatment of derivative financial instruments requires that the Company records the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the convertible debt, the Company is required to classify all other non-employee stock options as warrants and derivative liabilities and mark them to market at each reporting date (see Note 5). Conversion-related derivatives were valued using the Binomial Option Pricing Model. The interest rate adjustment provision was valued using discounted cash flows and probability analysis. Options and warrants were valued using the Black-Sholes model. The following assumptions were used in valuing the derivative and warrant liabilities as of December 31: [Download Table] 2006 2005 -------------- -------------- Risk-free interest rate 4.70 - 4.85 % 4.35 - 4.36 % Volatility 200 % 238 % Expected dividend yield 0 % 0 % The valuation of the conversion derivatives also considered probability analysis related to trading volume restrictions. Any change in fair value of these instruments will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income. The derivative and warrant liabilities are recorded as liabilities in the consolidated balance sheet. F-17  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) n. Fair Value of Financial Instruments The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt. Pursuant to SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," the Company is required to estimate the fair value of all financial instruments at the balance sheet date. The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair values. o. Concentrations of Credit Risk The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral. Approximately 99% of the Company's revenue comes from the State of California for the years ended December 31, 2006 and 2005, respectively. Accounts receivable from the State of California totaled $1,295,186 and $705,680 as of December 31, 2006 and 2005, respectively. The Company also had $841,219 on deposit with a financial institution at December 31, 2005. Such deposits were not insured beyond the federally insured limit of $100,000 per account. p. Beneficial Conversion Feature The Company has adopted Emerging Issues Task Force ("EITF") Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios", and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments." The Company incurred debt whereby the convertible feature of the debt provides for a rate of conversion that is below market value. This feature is recorded by the Company as a beneficial conversion feature pursuant to EITF Issue No. 98-5 and 00-27. q. Fixed assets Property and equipment are recorded at cost less accumulated depreciation. Depreciation on property and equipment is calculated using the straight-line method based on the estimated useful lives of the assets. Useful lives as follows: Computer equipment 3 years Furniture and fixtures 5-7 years Expenditures for repairs and maintenance are expensed as incurred. Expenditures for major renewals and betterments that extend the useful lives of existing property and equipment are capitalized and depreciated. Upon retirement or disposition of property and equipment, any resulting gain or loss is recognized in the consolidated statement of operations. Depreciation expense for the years ended December 31, 2006 and 2005 was $0 and $1,649, respectively. At December 31, 2005, the Company recorded a loss on disposition of assets totaling $1,062 for the remaining book value of assets previously recorded. Accordingly, property and equipment at December 31, 2005 was $0. The Company did not have any fixed asset additions during the year ended December 31, 2006. F-18  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 2 - GOING CONCERN The Company's consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We had $617,813 in accumulated deficit at December 31, 2006 as well as a net loss of $866,452. These factors combined, raise substantial doubt about the Company's ability to continue as a going concern. Management has taken various steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue its operations for the next twelve months. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 3 - RELATED PARTY TRANSACTIONS As part of the Spinoff Agreement as described in Note 1 and Note 7, a remaining amount of $30,441 is owed by the Company to the former controlling shareholders of the Company. The amount is non-interest bearing, unsecured, and payable on demand. In November 2005, the Company agreed to issue an aggregate of 8,283,334 shares of common stock, to two entities, 4,141,667 shares to MEL Enterprises, Ltd., beneficially owned by Keith Moore, a Director of the Company and 8,283,334 shares to Monarch Bay Capital Group, LLC, beneficially owned by David Walters, our Chairman and Chief Financial Officer, in connection with the Company's acquisition of DCII. An amount of $22,800 was owed to Mr. Moore at December 31, 2005 for services rendered to SDG. This amount was non-interest bearing, unsecured, and due on demand. The Company repaid this amount in March 2006. F-19  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) Both Mr. Walters and Mr. Moore entered into Independent Contractor Agreements with DCII on February 1, 2005 (each a "Contractor Agreement" and collectively the "Contractor Agreements"). Mr. Moore's Contractor Agreement provides for him to serve DCII in the capacity of Secretary and Director and Mr. Walters' Contractor Agreement provides for him to serve DCII in the capacity of Chief Executive Officer. The Contractor Agreements were renewed on February 1, 2006 and expire December 31, 2008. The Contractor Agreements renew thereafter on an annual basis unless terminated by either party. Either of the Contractor Agreements may be terminated upon the breach of a term of either Contractor Agreement, which breach remains uncured for thirty (30) days or by either party, for any reason with thirty (30) days written notice. The Contractor Agreements contain confidentiality clauses and work for hire clauses. The Contractor Agreements provide that neither Mr. Walters nor Mr. Moore are employees of DCII. Mr. Walters and Mr. Moore are entitled to be paid $10,000 per month under the Contractor Agreements. The Company paid $350,000 and $170,000 (including $40,000 outstanding as of December 31, 2004) during the years ended December 31, 2006 and 2005, respectively, related to the Contractor Agreements. Amounts owed by the Company totaled $0 and $110,000 at December 31, 2006 and 2005, respectively. The Company also paid $25,000 to both Mr. Moore and Mr. Walters during 2006 for other consultation services which were outside of the scope of the Independent Contractor Agreements described above. In March 2006, the Company entered into an agreement with Monarch Bay Management Company, L.L.C. ("MBMC") for chief financial officer services. David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in, MBMC. Under the chief financial officer services agreement with MBMC, the Company is obligated to pay MBMC a monthly fee of $5,000 in cash. The Company also reimburses MBMC for certain expenses in connection with providing services to the Company. The initial term of the agreement expires on March 31, 2007 and renews thereafter on an annual basis unless terminated by either party. To date, no services have been provided under this agreement, accordingly, no amounts were paid to MBMC and/or accrued as of and for the year ended December 31, 2006. The Company expects that services provided under this agreement will commence in March 2007. On December 20, 2006, MBMC loaned $95,000 to DCII at 10% per annum. The principal balance of loan was repaid in full on December 28, 2006 and accrued interest expense totaled $208 as of December 31, 2006. On February 5, 2007, MBMC loaned $125,000 to DCII at 10% per annum. The principal balance of the loan was repaid in full on February 8, 2007. On February 5, 2007, MBMC also loaned $70,000 to the Company at 10% per annum. The principal balance of the loan was repaid in full on February 15, 2007. In March 2006, DCII made a $7,500 payment to a vendor on behalf of Monarch Bay Associates, L.L.C. ("MBA"). David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in MBA. The amount is non-interest bearing and owed to the Company as of December 31, 2006. The Company received payment in full in March 2007. F-20  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) In December 2006, DCI made two payments totaling $33,502 to vendors on behalf of Solana Technologies, Inc. ("STI"). At the time of the payments, David Walters, our Chairman and Chief Financial Officer, was Chairman and Chief Executive Officer of STI and beneficially owned a majority of the outstanding common stock of STI. The amounts were non-interest bearing. The Company received payment in full in December 2006. On January 2, 2007, the Company purchased office equipment totaling $1,244 from STI. On August 4, 2006, DCI borrowed $150,000 from BounceGPS, Inc. ("BounceGPS") at 10% per annum. At the time of the loan, David Walters, our Chairman and Chief Financial Officer, was the Chairman and Chief Executive Officer of the parent company of BounceGPS and beneficially owned a majority of the outstanding common stock of such parent company. The principal balance was repaid in full on September 11, 2006. On October 4, 2006, the Company borrowed $18,000 from the same related company. The principal balance was repaid in full on October 11, 2006. On October 5, 2006, DCII borrowed $95,000 from the same related company. The principal balance was repaid in full on October 11, 2006. DCII also borrowed $220,000 during late October and early November 2006 from the same related company. The entire outstanding balance of $220,000 was repaid on November 8, 2006. Interest payments of $636 were made during 2006 and accrued interest totaled $1,899 as of December 31, 2006. During 2006, DCI and DCII paid $1,361 and $27,395, respectively, to DataLogic International, Inc. for various services including accounting, payroll, human resource, and other administrative duties. Mr. Moore, our Director, is the Chairman and Chief Executive Officer of DataLogic International, Inc. As discussed in Note 6, on November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation ("Systran"). David Walters and Keith Moore have personally guaranteed $500,000 of the total available facility. Mr. Walters and Mr. Moore did not receive any compensation for this personal guarantee in 2006 or 2005. F-21  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 4 - NOTES PAYABLE [Download Table] December 31, 2006 2005 ------------ ------------ Note payable to the former owner of Abundant Nursing Inc. interest at 7% per annum, principal and interest payments of $5,841 due monthly, matures on October 1, 2009, secured by the stock of Abundant Nursing, Inc. (see Note below). $ 179,678 $ 235,074 Note payable to the former owner of Drug Consultants Inc. interest at 7% per annum, principal and interest due March 6, 2006, secured by a Stock Pledge Agreement (See Stock Pledge Agreement below). - 200,000 Note payable to an individual, non-interest bearing, principal due on demand, unsecured. - 30,000 Note payable to an individual, non-interest bearing, principal due on demand, unsecured. - 65,000 ------------ ------------ Total notes payable 179,678 530,074 Less: current portion (59,401) (350,394) ------------ ------------ Long-term portion of notes payable $ 120,277 $ 179,680 ============ ============ The aggregate principal maturities of notes payable are as follows: [Download Table] Years ending December 31, Amount ----------------------------------------------- 2007 $ 59,401 2008 63,695 2009 56,582 Thereafter - ------------- Total $ 179,678 ============= Note: The Company also entered into a Security Agreement ("Security Agreement") with Marathon (as described in Note 1), whereby the Company pledged to Marathon 20,000,000 (222,222 post-split) shares of its common stock as collateral ("Collateral") to secure its performance and payment of the promissory note payable originally entered into as part of the Company's purchase of Abundant. The Company will be in default under the Security Agreement upon the failure to pay any principal or interest of the Abundant Note when due. Upon default, Marathon is able to retain the Collateral and apply the consideration received from the Collateral against any principal and interest due. Stock Pledge Agreement ---------------------- Pursuant to the acquisition of DCI and the above promissory note, the Company entered into a Stock Pledge Agreement whereby DCII pledged to the former DCI shareholder 51% of the stock of DCI ("DCI Stock") held by DCII to secure the full and prompt payment and performance by DCII of the Promissory Note. DCII fully repaid this Promissory Note during the year ended December 31, 2006. F-22  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES On August 31, 2004, the Company entered into a securities purchase agreement with four accredited investors for the sale of secured convertible notes having an aggregate principal amount of $700,000, a 10% annual interest rate (payable quarterly), and a term of two years. The Company also agreed to sell warrants to purchase up to an aggregate of 7,777 shares of Common Stock at $40.50 per share. The Company only sold $500,000 principal amount of secured convertible notes under the 2004 agreement. As a result, the Company sold to the investors warrants to purchase up to an aggregate of 5,556 shares of our Common Stock at $40.50 per share. The investors have agreed to purchase the remaining $200,000 commitment under the terms of our 2005 securities purchase agreement with the investors. On November 4, 2005, the Company entered into an additional securities purchase agreement with the same accredited investors, for the sale of secured convertible notes having an aggregate principal amount of $3,000,000, an 8% annual interest rate (payable quarterly), and a term of three years. We also agreed to sell warrants to purchase up to an aggregate of 166,667 shares of our Common Stock at $9.00 per share. As of December 31, 2006 the Company had issued under the two securities purchase agreements dated August 31, 2004 and November 4, 2005: - $3,075,000 aggregate principal amount of secured convertible notes, - Warrants to purchase 5,556 shares of our Common Stock at $40.50 per shares, and - Warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and - Warrants to purchase 166,667 shares of our Common Stock at $4.50 per share (due to an amendment discussed below). Stock warrants issued and outstanding during the year ended December 31, 2006 and 2005 are as follows: [Download Table] Average Exercise Common Price Shares Per Share ------------ ------------ Warrants outstanding, December 31, 2004 5,556 $ 40.50 ============ Warrants issued 119,445 9.00 Warrants exercised - - ------------ Warrants outstanding, December 31, 2005 125,001 10.40 ============ Warrants issued 190,278 5.06 Warrants exercised - - ------------ Warrants outstanding, December 31, 2006 315,279 7.18 ============ F-23  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) As mentioned above, the investors are required to purchase an additional $200,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share as well as an additional $425,000 principal amount of secured convertible notes and warrants to purchase 23,611 shares of our Common Stock at $9.00 per share five days following the date that the registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied, including: (i) the Company's representations and warranties contained in the 2005 securities purchase agreement being true and correct in all material respects on the date when made and as of the date of such purchase; (ii) the Company having performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the 2005 agreement; (iii) there being no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the 2005 agreement; (iv) no event having occurred which could reasonably be expected to have a material adverse effect on the Company; and (v) the shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants having been authorized for quotation on the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin Board having not been suspended by the Securities and Exchange Commission or the OTC Bulletin Board. On November 1, 2006, we obtained an amendment to the 2005 securities purchase agreement extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to April 30, 2007 (or May 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments) in exchange for issuing warrants to purchase 166,667 shares of our Common Stock at $4.50 per share to the holders of the secured convertible notes. On March 29, 2007, we obtained an amendment extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments). See Note 11 "Subsequent Events" for further discussion. F-24  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) In connection with the 2005 securities purchase agreement, we entered into a security agreement, whereby we granted the investors a continuing, first priority security interest in the Company's general assets including all of the Company's: - Goods, including without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated; - Inventory (except that the proceeds of inventory and accounts receivable); - Contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds; - Receivables including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each receivable, including any right of stoppage in transit; and - Documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing and the Company's intellectual property. Additionally, we entered into an intellectual property security agreement with the investors, whereby we granted them a security interest in all of the Company's software programs, including source code and data files, then owned or thereafter acquired, all computers and electronic processing hardware, all related documentation, and all rights with respect to any copyrights, copyright licenses, intellectual property, patents, patent licenses, trademarks, trademark licenses or trade secrets. The notes include certain features that are considered embedded derivative financial instruments, such as the conversion feature, a variable interest rate feature, events of default and a liquidated damages clause, which have been recorded at their fair value. These features are described below, as follows: - The notes conversion feature; - Interest on the notes is subject to downward adjustment based on our common stock price; - The registration rights agreement includes a penalty provision based on any failure to meet and/or maintain registration requirements for shares issuable under the conversion of the notes or exercise of the warrants; and - The notes contain certain events of default, wherein we may be required to pay a default interest rate above the normal rate. F-25  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) Because the convertible notes are not conventional convertible debt, the Company is also required to record the related warrants at their fair values. During the year ended December 31, 2005, the value of the derivative and warrant liabilities decreased by $1,674,440 and $67,709, respectively, which is reflected as a component of other income in the accompanying consolidated statements of operations. During the year ended December 31, 2006, the value of the derivative and warrant liabilities decreased by $513,913 and $26,665, respectively. The debt discount is being first offset to the extent of the long-term portion of the convertible debt and then from the current portion of the convertible debt on the consolidated balance sheet and will be amortized over the life of the debt. The Company has recorded amortization expense of $821,942 and $108,480 for the years ended December 31, 2006 and 2005, respectively. The following table summarizes the Company's convertible notes payable by maturity dates at December 31, 2006 [Download Table] Less Debt Principal Discount Amount ------------ ------------ ------------ Year Ending December 31, 2007 - - - 2008 $ 2,650,000 $ 1,460,004 $ 1,189,996 2009 425,000 67,348 357,652 ------------ ------------ ------------ Total Notes Payable by Maturity Date $ 3,075,000 $ 1,527,352 $ 1,547,648 ============ ============ ============ Additional material terms of the 2005 securities purchase agreement, the secured convertible notes and the warrants are described below: Conversion and Conversion Price ------------------------------- The secured convertible notes are convertible into our Common Stock, at the investors' option, at the lower of (i) $0.90 or (ii) 50% of the average of the three lowest intraday trading prices for the Common Stock on a principal market for the 20 trading days before but not including the conversion date. Accordingly, there is in fact no limit on the number of shares into which the notes may be converted. The conversion price is adjusted after major announcements by the Company. In the event the Company makes a public announcement that the Company intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's Common Stock (or any other takeover scheme) then the conversion price will be equal to the lower of the conversion price that would be effect on the date the announcement is made or the current conversion price at the time the secured convertible note holders wish to convert. F-26  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) The secured convertible notes also provide anti-dilution rights, whereby the conversion price shall be adjusted in the event that the Company issues or sells any shares of Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The conversion price is also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The conversion price is also adjusted in the event the Company effects a consolidation, merger or sale of substantially all its assets (which may also be treated as an event of default) or if the Company declares or makes any distribution of its assets (including cash) to holders of its Common Stock, as provided in the secured convertible notes. If a note holder gives the Company a notice of conversion relating to the secured convertible notes and the Company is unable to issue such note holder the shares of Common Stock underlying the secured convertible note within five days from the date of receipt of such notice, the Company is obligated to pay the note holder $2,000 for each day that the Company is unable to deliver such Common Stock underlying the secured convertible note. The secured convertible notes contain a provision whereby no note holder is able to convert any part of the notes into shares of the Company's Common Stock, if such conversion would result in beneficial ownership by the note holder and its affiliates of more than 4.99% of the Company's then outstanding shares of Common Stock. In addition, we have the right under certain circumstances described below under "Company Call Option and Prepayment Rights" to prevent the note holders from exercising their conversion rights during any month after a month in which we have exercised certain prepayment rights.  Company Call Option and Prepayment Rights ----------------------------------------- Each secured convertible note contains a call option in favor of the Company, whereby as long as no event of default under the note has occurred, the Company has a sufficient number of authorized shares reserved for issuance upon full conversion of the secured convertible notes and our Common Stock is trading at or below $0.90 per share (subject to adjustment in the secured convertible note), the Company has the right to prepay all or a portion of the note. The prepayment amount is equal to the total amount of principal and accrued interest outstanding under the note, and any other amounts which may be due to the note holders, multiplied by 130%. In the event that the average daily trading price of our Common Stock for each day of any month is below $0.90, the Company may at its option prepay a portion of the outstanding principal amount of the secured convertible notes equal to 104% of the principal amount thereof divided by thirty-six plus one month's interest on the secured convertible notes, or the amount of the remaining principal and interest, whichever is less. No note holder is entitled to convert any portion of the secured convertible notes during any month after the month on which the Company exercises this prepayment option. F-27  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) Events of Default ----------------- Upon an event of default under the secured convertible notes, and in the event the note holders give the Company a written notice of default, an amount equal to 130% of the amount of the outstanding secured convertible notes and interest thereon shall become immediately due and payable or another amount as otherwise provided in the notes. Events of default under the secured convertible notes include the following: - failure to pay any amount of principal or interest on the notes; - failure to issue shares to the selling stockholders upon conversion of the notes, and such failure continues for ten days after notification by the note holders; - failure to obtain effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants on or before April 30, 2007 (or May 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments), or an effective registration statement covering such shares ceases to be effective for any ten consecutive days or any twenty days in any twelve month period; - breaches by the Company of any of the convents contained in the notes; - breaches by the Company of any representations and warranties made in the 2005 securities purchase agreement or any related document; - appointment by the Company of a receiver or trustee or makes an assignment for the benefit of creditors; - filing of any judgment against the Company for more than $50,000; - bringing of bankruptcy proceedings against the Company and such proceedings are not stayed within sixty days of such proceedings being brought; or - delisting of the Common Stock from the OTC Bulletin Board or equivalent replacement exchange. Stock Purchase Warrants ----------------------- The warrants expire five years from their date of issuance. The warrants include anti-dilution rights, whereby the exercise price of the warrants shall be adjusted in the event that the Company issues or sells any shares of the Company's Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Company's Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The exercise price of the warrants are also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The exercise price is also adjusted pursuant to the warrants in the event the Company effects a consolidation, merger or sale of substantially all of its assets and/or if the Company declares or makes any distribution of its assets (including cash) to holders of its common stock as a partial liquidating dividend, as provided in the warrants. F-28  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) The warrants also contain a cashless exercise, whereby after February 2, 2006, and if a registration statement covering the warrants is not effective, the warrant holders may convert the warrants into shares of the Company's restricted Common Stock. In the event of a cashless exercise under the warrants, in lieu of paying the exercise price in cash, the selling stockholders can surrender the warrant for the number of shares of Common Stock determined by multiplying the number of warrant shares to which it would otherwise be entitled by a fraction, the numerator of which is the difference between (i) the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise and (ii) the exercise price, and the denominator of which is the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise . For example, if the selling stockholder is exercising 100,000 warrants with a per warrant exercise price of $0.75 per share through a cashless exercise when the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise is $2.00 per share, then upon such cashless exercise the warrant holder will receive 62,500 shares of the Company's Common Stock. Registration Rights Agreement ----------------------------- We also entered into a registration rights agreement with the investors that grants the investors demand registration rights with respect to 200% of the Common Stock underlying the secured convertible notes and 200% of the Common Stock underlying the warrants. The Company will be subject to the payment of certain damages in the event that it does not satisfy its obligations including its obligation to have a registration statement with respect to the Common Stock underlying the secured convertible notes and warrants declared effective by the Securities and Exchange Commission on or prior to April 30, 2007; in the event that after the registration statement is declared effective, sales of the Company's securities cannot be made pursuant to the registration statement; and in the event that the Company's Common Stock is not listed on the OTC Bulletin Board or the NASDAQ, New York of American stock exchanges. The damages are equal to 0.02 times the number of months (prorated for partial months) that any such event occurs (subject to adjustment as provided in the registration rights agreement). Side Letter Agreement --------------------- We entered into a side letter agreement with the investors on November 10, 2005. The Side Letter Agreement provided that in consideration for the November 2005 sale of the secured convertible notes, the investors agreed that the face amount of the $500,000 of secured convertible notes issued to the investors in August 2004 and the $200,000 in secured convertible notes which remained to be issued under the 2004 securities purchase agreement upon the effectiveness of a registration statement covering such secured convertible notes shall be included in the amount advanced to the Company under the November 2005 secured convertible notes. The side letter agreement also provided that the terms of the 2005 securities purchase agreement shall supercede the prior 2004 securities purchase agreement and that all interest, penalties, fees, charges or other obligations accrued or owed by the Company to the investors pursuant to the 2004 securities F-29  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 5 - CALLABLE SECURED CONVERTIBLE NOTES (Continued) purchase agreement are waived, provided that in the event of any material breach of the 2005 securities purchase agreement by the Company, which breach is not cured within five days of receipt by the Company of written notice of such breach, the novation of the 2004 securities purchase agreement and the waiver of the prior obligations thereunder shall be revocable by the selling stockholders and all such prior obligations shall be owed as if the 2004 securities purchase agreement was never superceded. NOTE 6 - FACTORING AND SECURITY AGREEMENT On November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation ("Systran"). The purchase price for each invoice sold is the face amount of the invoice less a discount of 1.5%. On July 24, 2006, the Factoring Agreement was amended and under the terms of the amendment a fee equal to prime plus 1.50% shall be charged on a daily basis based upon total of invoices purchased by Systran that remain unpaid and outstanding, less the deposit held by Systran. Further, the purchase price for each invoice sold was amended to be the face amount of the invoice less a discount of 0.65%. Additionally, a one time fee of 0.50% on all invoices that remain unpaid from the date sold shall be incurred on the 91st day from the date sold. All accounts sold are with recourse by Systran. Systran may defer making payment to DCII of a portion of the purchase price payable for all accounts purchased which have not been paid up to 10.0% of such accounts (reserve). All of DCII's and DCI's accounts receivable are pledged as collateral under this agreement. In addition, David Walters and Keith Moore have personally guaranteed $500,000 of the total available facility. Mr. Walters and Mr. Moore did not receive any compensation for this personal guarantee in 2006 or 2005. The initial term is for thirty six months and will automatically renew for an additional twelve months at the end of the term, unless the Company gives thirty days written notice of its intention to terminate the Factoring Agreement. The amount advanced to the Company by Systran at December 31, 2006 and 2005 totals $579,780 and $335,132, respectively. These amounts are being shown as a liability in the accompanying financial statements as a factoring liability. F-30  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 7 - LOSS ON DISCONTINUED OPERATIONS AND DISPOSITION OF SUBSIDIARY As previously discussed, effective December 15, 2005, the Tudemes, the former controlling shareholders of the Company and the Company entered into a Spinoff Agreement which provided for (1) the transfer of the corporate names, business, operations, assets, properties, intellectual properties, trademarks, service marks, trade names, uniform resource locators, telephone numbers, and goodwill of the Company and its subsidiaries (other than DCII and DCI), together with the operating business of Abundant, to be placed into to a newly-formed Delaware corporation wholly-owned by the Company, (2) the acquisition and cancellation by the Company from the Tudemes of their outstanding shares of capital stock of the Company, totaling 35,691,200 (396,569 post-split) shares, (3) the assumption and release by the Company and its subsidiaries and the Tudemes of certain liabilities, and (4) the sale to the Tudemes of all of the outstanding capital stock of Marathon, and the payment to the Tudemes of $80,441 for amounts owed to the Tudemes and other creditors by the Company, of which $50,000 was paid prior to December 31, 2005. Pursuant to this transaction, the Company recorded a loss on discontinued operations as follows: [Download Table] For the Year Ended December 31, 2005 ------------ REVENUES $ 321,991 OPERATING EXPENSES Cost of revenues 225,988 General and administrative 64,179 Depreciation and amortization 3,796 Bad debt expense 4,239 ------------ Total Operating Expenses 298,202 ------------ INCOME FROM OPERATIONS 23,789 OTHER INCOME (EXPENSE) Interest expense (39,614) ------------ Total Other Income (Expense) (39,614) ------------ NET LOSS FROM DISCONTINUED OPERATIONS $ (15,825) ============ F-31  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 7 - LOSS ON DISCONTINUED OPERATIONS AND DISPOSITION OF SUBSIDIARY (Continued) In addition, the Company recorded a loss on the disposition of subsidiary related to the above transaction totaling $699,616 for the year ended December 31, 2005. The loss represents the excess of assets over liabilities disposed of in the spinoff, as follows: Net assets disposed of in the subsidiary spinoff $ 976,744 Net liabilities released in the subsidiary spinoff (277,128) ------------- Net loss on disposition of subsidiary $ 699,616 ============= NOTE 8 - COMMITMENTS AND CONTINGENCIES On January 19, 2006, Community Capital Bank filed a complaint in the Supreme Court of the State of New York (Kings County) against the Company, Macdonald S. Tudeme (our former CEO) and Marguerite Tudeme (our former Secretary). The complaint seeks payment of three loans made by Community Capital Bank having a total outstanding principal amount of $202,527.67 plus unpaid interest. The Company believes that the Community Capital Bank loans were made to MTM, a former subsidiary that was disposed of on December 15, 2005 as part of the disposition of Marathon (as described in Note 1), and are guaranteed by the Tudemes. As a result, the Company does not believe it is obligated to repay any amounts due under the Community Capital Bank loans. On January 25, 2006, the Company received notice from the Internal Revenue Service (the "IRS") that the IRS had concluded that the Company's subsidiary (DCI) was a third-party payer to and thus employer of a pharmacist who provided services to DCI's client, the California Department of Corrections. Although the IRS notice applies only to the case of the individual pharmacist, if unchanged, it could require DCI to classify other pharmacists and nurses in its registry who provide services to DCI's clients as employees of DCI. Accordingly, compensation payable to such pharmacists and nurses would be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have a material adverse effect on the Company's business, financial condition and results of operations. The Company disagrees with the conclusion of the IRS notice, believes that the pharmacist in question was properly classified as an independent contractor and is in the process of contesting the conclusion of the IRS. On June 5, 2006, Phillip Evans, a former contractor of DCI, filed a complaint in the Superior Court of California (Riverside County) against DCI. The complaint alleges, among other things, libel and unfair business practices, and seeks general special and punitive damages of $2,170,000. The Company believes the claims are without merit and is contesting the suit. F-32  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 9 - ACQUISITIONS On November 7, 2005, the Company acquired the business and certain related assets of Drug Consultants, Inc. ("DCI"), a California corporation. DCI furnishes personnel to perform a range of pharmacy, nursing and other health care services in support of the operations of government and commercial facilities, including its largest client, the State of California. DCI was formed in 1977 and is located in Irvine, California. The purchase price of $1,800,000 was satisfied by the Company paying $1,600,000 in cash and a $200,000 pursuant to a secured promissory note. The acquisition was an arm's length transaction and has been accounted for using the purchase method. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation is based upon management's best estimate of the relative fair values of the identifiable assets acquired and liabilities assumed. [Download Table] Net assets acquired: Accounts receivable $ 1,401,560 Goodwill 1,245,481 ------------ Net assets acquired 2,647,041 Net liabilities assumed: Accounts payable and accrued expenses $ 722,987 Notes payable 124,054 ------------ Net liabilities assumed 847,041 Consideration paid 1,800,000 ------------ Pro Forma Results The unaudited pro-forma consolidated financial statements give effect to the acquisition by Monarch of DCII pursuant to a reverse takeover effective November 4, 2005, and the subsequent acquisition of DCI by DCII effective November 7, 2005. The unaudited pro forma consolidated financial statements have been prepared by management using the accounting principles disclosed in the consolidated financial statements of the Company as of and for the period ended September 30, 2005 as if the acquisition had occurred on January 1, 2005. F-33  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 9 - ACQUISITIONS (continued) The unaudited pro forma consolidated statement of operations for the year ended December 31, 2004 is based on the unaudited financial statements as if the acquisition had occurred on January 1, 2004. The unaudited pro forma combined financial statements are not necessarily indicative of the results of operations that would have been realized for the period presented, nor do they purport to project the results of operations for any future periods. The unaudited pro forma financial statements should be read in conjunction with the consolidated financial statements of the Company as of and for the periods ended December 31, 2004 and September 30, 2005. [Download Table] (Unaudited) ---------------------------- For the Year For the Ended Dec 31, Period Ended 2004 Sept 30, 2005 ------------- ------------- Revenue $ 6,647,053 $ 7,049,314 ============= ============= Gross Profit $ 1,359,726 $ 1,875,317 ============= ============= Operating Loss $ (2,490,552) $ (653,480) ============= ============= Net Loss $ (3,285,010) $ (1,073,180) ============= ============= Net Loss per Common Share - Basic / Diluted $ (0.004) $ (0.001) ============= ============= NOTE 10 - STOCK BASED COMPENSATION On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued SAB No. 107 relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). F-34  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 10 - STOCK BASED COMPENSATION (Continued) The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's consolidated financial statements for the year ended December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation." Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company's consolidated statements of operations, other than as related to option grants to employees and consultants below the fair market value of the underlying stock at the date of grant. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company's consolidated statement of operations for the year ended December 31, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rate for the year ended December 31, 2006, of approximately 0% was based on historical forfeiture experience. The estimated pricing term of option grants for the year ended December 31, 2006 was 5.0 years. In the Company's pro forma information required under SFAS 123(R) for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company's loss position, there were no such tax benefits during the year ended December 31, 2006. Prior to the adoption of SFAS 123(R), those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises. F-35  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 10 - STOCK BASED COMPENSATION (Continued) The fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods. Valuation and Expense Information under SFAS 123(R) The weighted-average fair value of stock-based compensation is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized using the straight-line method over the vesting period of the options. The fair value calculations are based on the following assumptions: [Download Table] 2006 2005 -------------- --------------- Risk-free interest rate 4.47% - 5.12% 4.01% - 4.54% Expected life of the options 5.00 yrs 5.00 yrs Expected volatility 461% - 497% 419% - 497% Expected dividend yield 0 0 The following table summarizes stock-based compensation expense related to stock options and employee stock purchase plan purchases under SFAS 123(R) for the years ended December 31, 2006 and 2005 which was allocated as follows: [Download Table] Year Ended December 31, 2005 ---------------------------- APB Opinion SFAS No. 123R No. 25 ------------- ------------- Net income (loss) $ 299,231 $ 299,231 ============= ============= Net income (loss) per share $ 0.03 $ 0.03 ============= ============= [Download Table] Year Ended December 31, 2006 ----------------------------- APB Opinion SFAS No. 123R No. 25 ------------- ------------- Net income (loss) $ (866,452) $ (744,232) ============= ============= Net income (loss) per share $ (0.09) $ (0.08) ============= ============= F-36  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 10 - STOCK BASED COMPENSATION (Continued) A summary of option activity under the Company's stock equity plans during the year ended December 31, 2006 is as follows: [Download Table] Weighted Average Weighted Remaining Aggregate Number of Average Contractual Intrinsic Shares (In Exercise Term (in Value (In Thousands) Price Years) Thousands) ---------- ---------- ----------- ---------- Outstanding at December 31, 2005 92 $0.72 Granted 840 $0.62 Forfeited - $0.00 Exercised - $0.00 ---------- ---------- Outstanding at December 31, 2006 932 $0.63 4.29 $ 590 ========== ========== =========== =========== Vested and expected to vest at December 31, 2006 342 $ 0.64 4.51 $ 218 ========== ========== =========== =========== Exercisable at December 31, 2006 342 $ 0.64 4.51 $ 218 ========== ========== =========== =========== The per share weighted average fair value of options granted during the years ended December 31, 2006 and 2005 were $0.27 and $0.72, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006 and 2005 was $ 0 and $ 0, respectively, as there we no options exercised during those periods. As of December 31, 2006, total unrecognized forfeiture adjusted compensation costs related to nonvested stock options was $171,067, which is expected to be recognized as an expense over a weighted average period of approximately 1.7 years. Prior to fiscal 2006, the weighted-average fair value of stock-based compensation to employees was based on the single option valuation approach. Forfeitures were recognized as they occurred and it was assumed no dividends would be declared. F-37  MONARCH STAFFING, INC. AND SUBSIDIARIES (Formerly MT Ultimate Healthcare Corp.) Notes to the Consolidated Financial Statements December 31, 2006 and 2005 NOTE 10 - STOCK BASED COMPENSATION (Continued) The estimated fair value of stock-based compensation awards to employees was amortized using the straight-line method over the vesting period of the options. Pro forma results are as follows: [Download Table] For the year ended December 31, 2005 ------------------ Net income - as reported $ 299,231 Stock-based employee compensation expense included in reported net income (loss), net of tax - Total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax 2,760 ------------------ Pro forma net income $ 296,471 ================== Net income per share: Basic and diluted, as reported $ 0.03 ================== Basic and diluted, pro forma $ 0.03 ================== NOTE 11 - SUBSEQUENT EVENTS On February 5, 2007, MBMC loaned $125,000 to DCII at 10% per annum. The principal balance of the loan was repaid in full on February 8, 2007. On February 5, 2007, MBMC also loaned $70,000 to the Company at 10% per annum. The principal balance of the loan was repaid in full on February 15, 2007. See Note 3 for further discussion on related party transactions. On March 29, 2007, the Company obtained an amendment to the 2005 securities purchase agreement whereby interest payments are payable at the same time the corresponding principal balance is due and payable, whether at maturity or upon acceleration or by prepayment. In addition, the amendment extended the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Common Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments). See Note 5 for further discussion. F-38  ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 16, 2005, the Company's Board of Directors accepted the resignation of Clyde Bailey P.C., its independent auditors, due to health and other personal reasons; thus dismissing and terminating the engagement of Clyde Bailey P.C. as its independent auditor. Clyde Bailey P.C. submitted audit reports on the Company's financial statements for the year ended December 31, 2004. The submitted audit reports did not contain any adverse opinions, disclaimers of opinions or other modifications or qualifications. Clyde Bailey P.C. did not, during the applicable periods, advise the Company of any of the enumerated items described in Item 304(a) (1) of Regulation S-K. The decision to change accountants was recommended and approved by the Board of Directors of the Company. During the fiscal year ended December 31, 2004 and the period from January 1, 2005 through the date of dismissal and termination of the engagement of Clyde Bailey P.C., there were no disagreements with Clyde Bailey P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Clyde Bailey P.C., would have caused Clyde Bailey P.C. to make reference thereto in, or in connection with, his reports on financial statements for the years or such interim period. On June 10, 2005 the Company's Board of Directors ratified the engagement of Chisholm Bierwolf & Nilson, LLC, as its auditors. The Company authorized Clyde Bailey P.C. to fully respond to any and all inquiries of Chisholm Bierwolf & Nilson, LLC, concerning the finances and previously performed audits of the Company. During the two most recent fiscal years prior to the date of engagement, and the subsequent interim period prior to engaging Chisholm Bierwolf & Nilson, LLC, neither the Company (nor someone on the Company's behalf) consulted the newly engaged accountant regarding any matter. The Company engaged Corbin & Company LLP to act as its independent auditors, effective November 8, 2005, for DCII for the year ended December 31, 2005. The Company's principal accountant, Chisholm, Bierwolf & Nilson, LLC, acted as its independent auditors for the Company and all subsidiaries during 2006. During the Company's two most recent fiscal years and any subsequent interim period prior to engaging Corbin & Company LLP, the Company has not consulted Corbin & Company LLP regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and Corbin & Company LLP did not provide either a written report or oral advice to the Company that Corbin & Company LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement or a reportable event, each as defined in Item 304 of Regulation S-K. Corbin & Company LLP has not provided due diligence services in connection with proposed and/or consummated investment transactions by the Company and its affiliates. 78 On February 1, 2006, the Company engaged Chisholm, Bierwolf & Nilson, LLC, its independent registered public accounting firm, to re-audit its financial statements for the years ended December 31, 2003 and 2004. This decision was based on; (i) action taken by the Public Company Accounting Oversight Board ("PCAOB") revoking the registration of the Company's prior independent auditor, Clyde Bailey, P.C., due to violations of PCAOB rules and auditing standards and (ii) as part of its analysis of comments made by the staff of the SEC during it's review of a registration statement filed by the Company.  ITEM 8A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by the Exchange Act Rules 13a-15(b) and 15d-15(b). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2006, our disclosure controls and procedures were not effective, due to the identification of the material weaknesses in internal control over financial reporting described below. Notwithstanding the material weaknesses described below, management believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. Material Weaknesses in Internal Control Over Financial Reporting A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with the preparation of our 2006 consolidated financial statements, we have identified the following control deficiencies, which represent material weaknesses in the Company's internal control over financial reporting as of December 31, 2006: - We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles commensurate with our existing financial reporting requirements and the requirements we face as a public company. Accordingly, management has concluded that this control deficiency constitutes a material weakness, and that it contributed to the following material weakness. - We did not maintain effective controls with respect to reviewing and authorizing related party transactions. Specifically, our control procedures did not prevent the Company from making payments on behalf of other related parties. Accordingly, management has concluded that this control deficiency constitutes a material weakness. 79 Management's Remediation Initiatives During the first half of 2007, we plan to remediate these material weaknesses as follows: - We assessed the organization of our accounting personnel and the technical expertise within the accounting function. We plan to appoint a new Chief Financial Officer in order to increase our depth of experience in generally accepted accounting principles and guidelines required by the Securities and Exchange Commission. - We plan to add an independent director to the Company's board of directors. This independent director will approve all related party transactions prior to occurring and ensure appropriate preventative controls are in place.  ITEM 8B. OTHER MATTERS None.  PART III.  ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors and principal executive officers of the Company are as specified on the following table: NAME AGE POSITION --------------------------------------------------------------------------- Joel Williams 51 Chief Executive Officer David Walters 44 Chairman, President, Chief Financial Officer, Treasurer and Director Keith Moore 46 Secretary and Director JOEL WILLIAMS has served as Chief Executive Officer since September 1, 2006. Mr. Williams has been a senior executive of health care staffing companies for the past 14 years. Most recently, he served as a divisional President (2005-July 2006) and Senior Vice President (2003-2005) with Supplemental Health Care, a privately held health care staffing company. Previously, Mr. Williams was a senior executive at Staff Search Health Care, a privately held healthcare staffing company, serving as Chief Operating Officer (2000-2003) and Chief Financial Officer (1999-2000). Prior to Staff Search Health Care, Mr. Williams held financial and corporate development management positions with a variety of other health care staffing and other companies. He received an MBA from the University of Houston and a B.A. in finance from the University of Texas. DAVID WALTERS has served as President, Chief Financial Officer and Treasurer since December 15, 2005. He served as Chief Executive Officer from December 15, 2005 until September 1, 2006 and served as Executive Vice President of the Company from November 4, 2005 to December 15, 2005. He has been a Director of the Company since November 4, 2005 and currently is Chairman of the Board. Since January 2005, he has served as Chairman and Chief Executive Officer of DCII, which since November 4, 2005, has been 80 wholly owned by the Company. Since February 2000, he has served as a managing member of Monarch Bay Capital Group, LLC, a consulting company and, since March 2006, as a managing member of Monarch Bay Management Company, L.L.C., a consulting company.. Mr. Walters has extensive experience in investment management, corporate growth development strategies and capital markets. Mr. Walters earned a B.S. in Bioengineering from the University of California, San Diego in 1985. Mr. Walters also serves as Chairman of the Board of Directors of Remote Dynamics, Inc. and is a member of the Board of Directors of Precision Aerospace Components, Inc. KEITH MOORE has served as a Director of the Company since November 4, 2005 and has extensive experience in growing and financing technology and service companies. Mr. Moore is Chairman and Chief Executive Officer of DataLogic International, Inc., an information technology company, positions he has held since January 2005. Since March 2006, Mr. Moore has also served as a managing member of Monarch Bay Management Company, L.L.C., a consulting company. From April 1999 to January 2005, Mr. Moore served as Chairman and Chief Executive Officer of DCII which since November 4, 2005, has been wholly owned by the Company. Mr. Moore received his Bachelors degree in Finance from Eastern Michigan University in 1982 and his Masters degree from Eastern Michigan University in Finance in 1984. Mr. Moore is also a member of the Board of Directors of Remote Dynamics, Inc. Audit Committee and Financial Expert Disclosures Section 301 of the Sarbanes-Oxley Act of 2003, and SEC regulations implementing that provision require that public companies disclose a determination by their Board of Directors as to the existence of a financial expert on their audit committee and, if none is determined to exist, that the Board of Directors has determined that no one serving on its Board of Directors meets the qualification of a financial expert as defined in the Sarbanes-Oxley Act and implementing regulations. As of December 31, 2006, and as of the date of filing of this report, we have not created any standing committees of the Board of Directors, including an audit committee. Accordingly, our entire Board of Directors serves as our audit committee. We also disclose that our Board has determined that we have not, and we do not, possess on our Board of Directors anyone who qualifies as an audit committee financial expert and, unless and until one is identified and agrees to serve, we will continue to rely on outside professional consultants who advise us with respect to audit matters. Changes to Procedures Regarding Nomination of Directors to the Board of Directors During our fiscal year ended December 31, 2006, there were no material changes to the procedures by which our security holders may recommend nominees to our board of directors. Code of Ethics We do not presently have a Code of Business Conduct and Ethics. We expect to adopt such a Code prior to our annual meeting and will report the adoption of a Code of Business Conduct and Ethics on Form 8-K promptly thereafter. Section 16(a) Beneficial Ownership Reporting Compliance Based upon a review of the reports filed under Section 16 of the Securities Exchange Act during the last fiscal year, all required reports were timely filed, except that Joel Williams filed a late Form 3. 81  ITEM 10. EXECUTIVE COMPENSATION Any compensation received by officers, directors, and management personnel of the Company will be determined from time to time by the Board of Directors of the Company. Officers, directors, and management personnel of the Company will be reimbursed for any out-of-pocket expenses incurred on behalf of the Company. The table set forth below summarizes the annual and long-term compensation for services in all capacities to the Company paid to our most highly compensated executive officers during the last two fiscal years. [Download Table] Name & Stock Option All Other Principal Salary Awards Awards Compen- Position Year ($) Bonus ($) ($) ($) (4) sation (5) Total ---------------- ----- -------- --------- ------ -------- ----------- -------- Joel Williams (2) 2006 $ 49,846 $ - $ - $197,068 $ - $246,914 Chief Executive 2005 $ - $ - $ - $ - $ - $ - Office David Walters (3) 2006 $135,000 $ - $ - $ - $ 145,000 $280,000 Chairman, 2005 $ 86,000 $ - $ - $ - $ 120,000 $206,000 President, Chief Financial Officer, Treasurer and Director (1) Does not include perquisites and other personal benefits in amounts less than 10% of the total annual salary and other compensation. (2) Joel Williams became Chief Executive Officer on September 1, 2006. (3) David Walters became President, Chief Financial Officer and Treasurer of the Company effective December 15, 2005. He served as Chief Executive Officer from December 15, 2005 until September 1, 2006. He had served as Executive Vice President of the Company from November 4, 2005 to December 15, 2005. He has been a Director of the Company since November 4, 2005 and currently is Chairman of the Board. (4) Stock option awards were valued in accordance with SFAS 123 (R). Refer to Footnote 10 "Stock Based Compensation" of the Company's Financial Statements. (5) Mr. Walters entered into an Independent Contractor Agreement with DCII on February 1, 2005 ("Contractor Agreement"). Mr. Walters' Contractor Agreement provides for him to serve DCII in the capacity of Chief Executive Officer. The Contractor Agreement was renewed on February 1, 2006 and expires December 31, 2008. The Contractor Agreement renews thereafter on an annual basis unless terminated by either party. The Contractor Agreement may be terminated upon the breach of a term of the Contractor Agreement, which breach remains uncured for thirty (30) days or by either party, for any reason with thirty (30) days written notice. The Contractor Agreement contains confidentiality clauses and work for hire clauses. The Contractor Agreement provides that Mr. Walters is not an employee of DCII. Mr. Walters is entitled to be paid $10,000 per month under the Contractor Agreement. The Company also paid $25,000 to Mr. Walters during 2006 for other consultation services which were outside of the scope of the Independent Contractor Agreement described above. 82 Summary of Employment Agreements -------------------------------- On March 21, 2006, we entered into an employment agreement with David Walters, our Chairman and Chief Financial Officer (and Chief Executive Officer until September 1, 2006). The employment agreement has an initial term of two years. The agreement provides for an initial payment of $33,750, a base salary of $135,000 for the first year and $160,000 for the second year, and a bonus on terms and conditions to be mutually agreed upon by Mr. Walters and us. If the employment agreement is terminated by us (other than for specified cause events), Mr. Walters will receive full compensation and benefits for the remaining term of the agreement and one year thereafter. On September 1, 2006, we entered into an employment agreement with Joel Williams, our Chief Executive Officer, with an initial term of two years. The employment agreement provides for a base salary of $160,000 (subject to performance-based adjustments) and a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization. If the employment agreement is terminated by us (other than for specified cause events), Mr. Williams will receive his full base salary for the remaining term of the agreement. Pursuant to the agreement, we will grant to Mr. Williams options to purchase a total of 789,552 shares of our common stock. The options will be granted in four equal tranches having exercise prices equal to $0.25 per share, $0.50 per share, $0.75 per share and $1.00 per share, respectively. Each tranche will vest 20% upon grant and thereafter 10% for eight quarters with full vesting upon a change in control. Option Grants in 2006 --------------------- The following table provides details regarding stock options granted in 2006 to our executive officers listed in the Summary Compensation Table above: [Enlarge/Download Table] OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END OPTIONS AWARDS Number of Number of securities securities underlying underlying unexercised unexercised Option Option options options exercise expiration Name (#)Exercisable (#)Unexercisable price ($) date ------------------------------------------------------------------------------------- Joel Williams 59,216 138,172 $0.25 8/31/2011 Joel Williams 59,216 138,172 $0.50 8/31/2011 Joel Williams 59,216 138,172 $0.75 8/31/2011 Joel Williams 59,216 138,172 $1.00 8/31/2011 ------------------------------- Total 236,864 552,688 ------------------------------- Options vested 20% upon grant and thereafter 10% for eight quarters with full vesting upon a change in control. 83 Director Compensation --------------------- The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the directors below for the fiscal year ended December 31, 2006. [Enlarge/Download Table] Fees Earned Stock Option All Other or Paid in Awards Awards Compensation Name (1) Cash($)(2) ($) ($) ($)(3) Total ($) ------------------------------------------------------------------------------------- Keith Moore $ - $ - $ - $ 145,000 $ 145,000 Director & Secretary (1) David Walters, Chairman and Director and Chief Financial Officer, total compensation is reflected in "Summary Compensation Table" above. (2) The Company did not pay any fees for director services. (3) Mr. Moore entered into an Independent Contractor Agreement with DCII on February 1, 2005 ("Contractor Agreement"). Mr. Moore's Contractor Agreement provides for him to serve DCII in the capacity of Secretary and Director. The Contractor Agreement was renewed on February 1, 2006 and expires December 31, 2008. The Contractor Agreement renews thereafter on an annual basis unless terminated by either party. The Contractor Agreement may be terminated upon the breach of a term of the Contractor Agreement, which breach remains uncured for thirty (30) days or by either party, for any reason with thirty (30) days written notice. The Contractor Agreement contains confidentiality clauses and work for hire clauses. The Contractor Agreement provides that Mr. Moore is not an employee of DCII. Mr. Moore is entitled to be paid $10,000 per month under the Contractor Agreement. The Company also paid $25,000 to Mr. Moore during 2006 for other consultation services which were outside of the scope of the Independent Contractor Agreement described above.  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of March 22, 2007 by (i) each person or entity known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each of the Company's directors and named executive officers, and (iii) all directors and executive officers of the Company as a group. 84 [Download Table] Name and Address Shares of Common Stock of Beneficial Owners Beneficially Owned (1) ---------------------------- Number Percent ------------------------------------- ------ ------- David Walters 4,141,667 (2) 42.0% 30950 Rancho Viejo Rd #120 San Juan Capistrano, CA 92675 Keith Moore 4,141,667 (3) 42.0% 30950 Rancho Viejo Rd #120 San Juan Capistrano, CA 92675 Joel Williams 315,821 (4) 3.2% 30950 Rancho Viejo Rd #120 San Juan Capistrano, CA 92675 Nite Capital, L.P. 920,371 (5) 9.3% 101 East Cook Avenue, Suite 201 Libertyville, IL 60048 All officers and directors 8,599,155 (2)(3)(4) 86.3% as a group (3 people) (1) The number of shares of common stock owned are those "beneficially owned" as determined under the rules of the Securities and Exchange Commission, including any shares of common stock as to which a person has sole or shared voting or investment power and any shares of common stock which the person has the right to acquire within 60 days through the exercise of any option, warrant or right. As of March 22, 2007, there were 9,961,384 shares of common stock outstanding. (2) Mr. Walters beneficially owns his shares through Monarch Bay Capital Group, LLC, of which he is the sole member. (3) Mr. Moore beneficially owns his shares through MEL Enterprises, Ltd. (4) Consists of 394,7766 shares of common stock issuable upon exercise of stock options granted under the Company's Stock Incentive Plan. (5) The general partner of Nite Capital, LP is Nite Capital LLC, a Delaware limited liability company. Mr. Keith Goodman, a managing partner of Nite Capital LLC, has voting and investment control with respect to the shares of Common Stock beneficially owned by Nite Capital LP.  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On April 27, 1999, our Director, Keith Moore entered into a Working Capital Line of Credit agreement, with DCII, on January 1, 2001, Mr. Moore entered into a Working Capital Line of Credit agreement with DCII's wholly owned subsidiary, SDG, and on February 1, 2005, our Chairman and Chief Financial Officer, David Walters entered into a Working Capital Line of Credit agreement, with DCII (each a "Line of Credit" and collectively the "Lines of Credit"). Mr. Moore's Line of Credit agreements with DCII and SDG terminated effective December 31, 2005. 85 Mr. Walters' Line of Credit with DCII states that DCII shall pay him the amount owing under the Line of Credit (up to $250,000) on December 31, 2006, plus any interest on the amounts outstanding as of the date the Line of Credit was entered into at the rate of 10% per annum. Interest on the Line of Credit is payable quarterly and becomes part of the principal amount of the Line of Credit if unpaid at the end of each quarter. The total amount outstanding under Mr. Walters' Line of Credit as of the date of December 31, 2006 was $0. In the event of default under the Line of Credit, which includes the failure of DCII to pay the Line of Credit when due, DCII's filing for bankruptcy, or the deterioration of the financial condition of DCII causing Mr. Walters to deem DCII insecure, the amount of unpaid principal and interest shall bear interest at the rate of 13% per annum until such time as it is paid. Mr. Walters' Line of Credit agreement with DCII terminated on December 31, 2006. In November 2005, the Company agreed to issue an aggregate of 8,283,334 shares of common stock, to two entities, 4,141,667 shares to MEL Enterprises, Ltd., beneficially owned by Keith Moore, a Director of the Company and 8,283,334 shares to Monarch Bay Capital Group, LLC, beneficially owned by David Walters, our Chairman and Chief Financial Officer, in connection with the Company's acquisition of DCII. An amount of $22,800 was owed to Mr. Moore at December 31, 2005 for services rendered to SDG. This amount was non-interest bearing, unsecured, and due on demand. The Company repaid this amount in March 2006. Both Mr. Walters and Mr. Moore entered into Independent Contractor Agreements with DCII on February 1, 2005 (each a "Contractor Agreement" and collectively the "Contractor Agreements"). Mr. Moore's Contractor Agreement provides for him to serve DCII in the capacity of Secretary and Director and Mr. Walters' Contractor Agreement provides for him to serve DCII in the capacity of Chief Executive Officer. The Contractor Agreements were renewed on February 1, 2006 and expire December 31, 2008. The Contractor Agreements renew thereafter on an annual basis unless terminated by either party. Either of the Contractor Agreements may be terminated upon the breach of a term of either Contractor Agreement, which breach remains uncured for thirty (30) days or by either party, for any reason with thirty (30) days written notice. The Contractor Agreements contain confidentiality clauses and work for hire clauses. The Contractor Agreements provide that neither Mr. Walters nor Mr. Moore are employees of DCII. Mr. Walters and Mr. Moore are entitled to be paid $10,000 per month under the Contractor Agreements. The Company paid $350,000 and $170,000 (including $40,000 outstanding as of December 31, 2004) during the years ended December 31, 2006 and 2005, respectively, related to the Contractor Agreements. Amounts owed by the Company totaled $0 and $110,000 at December 31, 2006 and 2005, respectively. The Company also paid $25,000 to both Mr. Moore and Mr. Walters during 2006 for other consultation services which were outside of the scope of the Independent Contractor Agreements described above. 86 In March 2006, the Company entered into an agreement with Monarch Bay Management Company, L.L.C. ("MBMC") for chief financial officer services. David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and beneficially own 50% of the ownership interests in, MBMC. Under the chief financial officer services agreement with MBMC, the Company is obligated to pay MBMC a monthly fee of $5,000 in cash. The Company also reimburses MBMC for certain expenses in connection with providing services to the Company. The initial term of the agreement expires on March 31, 2007 and renews thereafter on an annual basis unless terminated by either party. To date, no services have been provided under this agreement, accordingly, no amounts were paid to MBMC and/or accrued as of and for the year ended December 31, 2006. The Company expects that services provided under this agreement will commence in March 2007. On December 20, 2006, MBMC loaned $95,000 to DCII at 10% per annum. The principal balance of loan was repaid in full on December 28, 2006 and accrued interest expense totaled $208 as of December 31, 2006. On February 5, 2007, MBMC loaned $125,000 to DCII at 10% per annum. The principal balance of the loan was repaid in full on February 8, 2007. On February 5, 2007, MBMC also loaned $70,000 to the Company at 10% per annum. The principal balance of the loan was repaid in full on February 15, 2007. In March 2006, DCII made a $7,500 payment to a vendor on behalf of Monarch Bay Associates, L.L.C. ("MBA"). David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and beneficially own 50% of the ownership interests in MBA. The amount is non-interest bearing and owed to the Company as of December 31, 2006. The Company received payment in full in March 2007. In December 2006, DCI made two payments totaling $33,502 to vendors on behalf of Solana Technologies, Inc. ("STI"). At the time of the payments, David Walters, our Chairman and Chief Financial Officer, was Chairman and Chief Executive Officer of STI and beneficially owned a majority of the outstanding common stock of STI. The amounts were non-interest bearing. The Company received payment in full in December 2006. On January 2, 2007, the Company purchased office equipment totaling $1,244 from STI. On August 4, 2006, DCI borrowed $150,000 from BounceGPS, Inc. ("BounceGPS") at 10% per annum. At the time of the loan, David Walters, our Chairman and Chief Financial Officer, was the Chairman and Chief Executive Officer of the parent company of BounceGPS and beneficially owned a majority of the outstanding common stock of such parent company. The principal balance was repaid in full on September 11, 2006. On October 4, 2006, the Company borrowed $18,000 from the same related company. The principal balance was repaid in full on October 11, 2006. On October 5, 2006, DCII borrowed $95,000 from the same related company. The principal balance was repaid in full on October 11, 2006. DCII also borrowed $220,000 during late October and early November 2006 from the same related company. The entire outstanding balance of $220,000 was repaid on November 8, 2006. Interest payments of $636 were made during 2006 and accrued interest totaled $1,899 as of December 31, 2006 During 2006, DCI and DCII paid $1,361 and $27,395, respectively, to DataLogic International, Inc. for various services including accounting, payroll, human resource, and other administrative duties. Mr. Moore, our Director, is the Chairman and Chief Executive Officer of DataLogic International, Inc. 87 On November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation ("Systran"). All of DCII's and DCI's accounts receivable are pledged as collateral under this agreement. In addition, David Walters and Keith Moore have personally guaranteed $500,000 of the total available facility. Mr. Walters and Mr. Moore did not receive any compensation for this personal guarantee in 2006 or 2005. We have entered into an indemnification agreement with each of Mr. Walters, Mr. Moore and Joel Williams, our Chief Executive Officer. We will indemnify them to the fullest extent permitted by law if they become a party to or witness or other participant in, or are threatened to be made a party to or witness or other participant in, any threatened, pending or completed claim by reason of (or arising in part out of) any event or occurrence related to the fact that they are or were a director, officer, employee, agent or fiduciary of ours, or any subsidiary of ours, or they are or were serving at our request as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on their part while serving in such capacity against any and all expenses, judgments, fines, penalties and amounts paid in settlement and any federal, state, local or foreign taxes imposed on them as a result of the actual or deemed receipt of any indemnification payments made by us to or on their behalf. We are entitled to reimbursement of any advance indemnification payments that we make to or on their behalf if, when and to the extent that a disinterested director, group of disinterested directors or independent legal counsel determines that they would not be permitted to be so indemnified under applicable law. We are not obligated to indemnify them for the following: - Acts, omissions or transactions for which they are prohibited from receiving indemnification under applicable law. - Claims initiated or brought voluntarily by them and not by way of defense, except for claims brought to establish or enforce a right to indemnification or in specific cases if our Board of Directors has approved the initiation or bringing of such claim, or as otherwise required under the Nevada Revised Statutes, regardless of whether they ultimately are determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. - Any proceeding instituted by them to enforce or interpret their indemnification agreement, if a court of competent jurisdiction determines that each of the material assertions made by either of them in such proceeding was not made in good faith or was frivolous. - Violations of Section 16(b) of the Exchange Act or any similar successor statute. As part of our focus on growing profitable operations, we decided to discontinue and dispose of certain operations which we determined did not demonstrate suitable growth or profitability prospects. On December 15, 2005, we completed the disposition of all of the outstanding capital stock of Marathon Healthcare Corporation to Macdonald Tudeme and Marguerite Tudeme, the former controlling shareholders of the Company. At the time of the disposition, Marathon's assets included substantially all of the corporate names, business, operations, assets, properties, intellectual properties, trademarks, service marks, trade names, uniform resource locators, telephone numbers, and good will of the Company and its subsidiaries (other than DCII and DCI). These assets included all of the operations of the Company's former operating subsidiaries MT Marketing Int. 88 Corp and Abundant Healthcare, Inc. In exchange for all of the outstanding capital stock of Marathon and a payment to the Tudemes of $80,442, of which $50,000 was paid as of December 31, 2006, the Company received from the Tudemes 396,569 shares of the Company's Common Stock. In connection with the disposition of Marathon, we also (a) assumed and released the Tudemes from certain liabilities and (b) pledged to Marathon 222,223 shares of our Common Stock as collateral to secure the performance and payment of a promissory note in the amount of $257,038 payable to Lisa Stern originally entered into as part of the Company's purchase of a former operating subsidiary. If we fail to pay any principal of or interest on the note when due, we will be in default of our obligations and Marathon will be able to retain and sell the pledged Common Stock to satisfy our obligations.  ITEM 13. EXHIBITS The exhibits required by Item 601 of Regulation S-B are identified below and attached hereto or incorporated by reference as noted in the list. 3.1(1) Articles of Incorporation 3.2(2) Articles of Amendment to Articles of Incorporation 3.3(3) Articles of Amendment to Articles of Incorporation 3.4(4) Articles of Amendment to Articles of Incorporation 3.5(11) Amended and Restated Bylaws 4.1(11) 2005 Stock Incentive Plan. 10.1(5) Securities Purchase Agreement dated August 31, 2004 10.2(5) Callable Secured Convertible Note with AJW Partners, LLC, dated August 31, 2004 10.3(5) Callable Secured Convertible Note with AJW Offshore, Ltd., dated August 31, 2004 10.4(5) Callable Secured Convertible Note with AJW Qualified Partners, LLC, dated August 31, 2004 10.5(5) Callable Secured Convertible Note with New Millennium Capital Partners II, LLC, dated August 31, 2004 10.6(5) Stock Purchase Warrant with AJW Partners, LLC, dated August 31, 2004 10.7(5) Stock Purchase Warrant with AJW Offshore, Ltd., dated August 31, 2004 10.8(5) Stock Purchase Warrant with AJW Qualified Partners, LLC, dated August 31, 2004 10.9(5) Stock Purchase Warrant with New Millennium Capital Partners II, LLC, dated August 31, 2004 10.10(5) Registration Rights Agreement dated August 31, 2004 10.11(5) Security Agreement dated August 31, 2004 10.12(5) Intellectual Property Security Agreement dated August 31, 2004 10.13(5) Guarantee and Pledge Agreement dated August 31, 2004 10.14(6) Modification of Loan Agreement with SBA 10.15(6) Amended and Restated Note with SBA 10.16(7) Share Exchange and Reorganization Agreement with iTech 10.17(7) Securities Purchase Agreement (November 4, 2005) 10.18(7) Callable Secured Convertible Note with AJW Partners, LLC, dated November 4, 2005 10.19(7) Callable Secured Convertible Note with AJW Offshore, Ltd., dated November 4, 2005 10.20(7) Callable Secured Convertible Note with AJW Qualified Partners, LLC, dated November 4, 2005 10.21(7) Callable Secured Convertible Note with New Millennium Capital Partners II, LLC, dated November 4, 2005 10.22(7) Stock Purchase Warrant with AJW Partners, LLC, dated November 4, 2005 89 10.23(7) Stock Purchase Warrant with AJW Offshore, Ltd., dated November 4, 2005 10.24(7) Stock Purchase Warrant with AJW Qualified Partners, LLC, dated November 4, 2005 10.25(7) Stock Purchase Warrant with New Millennium Capital Partners II, LLC, dated November 4, 2005 10.26(7) Registration Rights Agreement, dated November 4, 2005 10.27(7) Intellectual Property Security Agreement, dated November 4, 2005 10.28(7) Security Agreement, dated November 4, 2005 10.29(7) Spinoff Agreement 10.30(7) Security Agreement (with Marathon) 10.31(7) Stock Purchase Agreement (November 7, 2005 - with Drug Consultants, Inc.) 10.32(7) Secured Promissory Note with Drug Consultants 10.33(7) Stock Pledge Agreement with Drug Consultants 10.34(7) Factoring and Security Agreement (to sell accounts receivables to Systran Financial Services Corporation) 10.35(13) First Amendment to Factoring Agreement 10.36(7) Letter Agreement (states that the Company is not in default under 2005 securities purchase agreement unless defaults under 2004 securities purchase agreement) 10.37(7) Working Capital Line of Credit (DCII) with David Walters 10.38(7) Working Capital Line of Credit (DCII) with Keith Moore 10.39(7) Working Capital Line of Credit (SDG) with Keith Moore 10.39(11) Indemnification Agreement with David Walters 10.40(11) Indemnification Agreement with Keith Moore 10.45(14) Indemnification Agreement with Joel Williams 10.41(8) Amendment No. 1 to Securities Purchase Agreement 10.42(11) Amendment No. 2 to Securities Purchase Agreement 10.42(14) Amendment No. 3 to Securities Purchase Agreement 10.42 Amendment No. 4 to Securities Purchase Agreement 10.43(9) Employment Agreement with David Walters 10.44(9) Letter Agreement with Monarch Bay Management Company 10.48(14) Employment Agreement with Joel Williams 16.1(10) Letter from Clyde Bailey P.C. dated June 20, 2005 21.1 Subsidiaries of Registrant 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) Filed as Exhibits to the registration statement on Form 10-SB12G filed on July 15, 2002, and incorporated herein by reference. (2) Filed as an Exhibit to the report on Form 8-K filed on September 2, 2003, and incorporated herein by reference. (3) Filed as an Exhibit to the report on Form 8-K filed on September 30, 2003, and incorporated herein by reference. (4) Filed as an Exhibit to the report on Form 8-K filed on April 4, 2006, and incorporated herein by reference. (5) Filed as an Exhibit to the SB-2 Registration Statement filed on October 5, 2004, and incorporated herein by reference. (6) Filed as Exhibits to the Company's SB-2/A Registration Statement filed with the Securities and Exchange Commission on January 21, 2005, and incorporated herein by reference. 90 (7) Filed as Exhibits to the report on Form 8-K filed on November 14, 2005 and incorporated herein by reference. (8) Filed as an Exhibit to the report on Form 8-K filed on February 24, 2006 and incorporated herein by reference. (9) Filed as an Exhibit to the report on Form 8-K filed on March 27, 2006 and incorporated herein by reference. (10) Filed as an Exhibit to the report on Form 8-K filed on June 21, 2005 and incorporated herein by reference. (11) Filed as an Exhibit to the report on Form 10-KSB filed on May 19, 2006 and incorporated herein by reference. (12) Filed as an Exhibit to the report on Form 10-QSB filed on August 9, 2006 and incorporated herein by reference. (13) Filed as an Exhibit to the report on Form 8-K filed on September 7, 2006 and incorporated herein by reference. (14) Filed as an Exhibit to the report on Form 10-QSB filed on November 14, 2006 and incorporated herein by reference.  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  Audit Fees ---------- The aggregate fees billed in each of the fiscal years ended December 31, 2006 and 2005 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-KSB or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $63,621 and $40,000, respectively. Audit Related Fees ------------------ There were no fees billed for services reasonably related to the performance of the audit or review of the financial statements outside of those fees disclosed above under "Audit Fees" for fiscal years 2006 and 2005. Tax Fees -------- For the fiscal years ended December 31, 2006 and December 31, 2005, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work. All Other Fees -------------- None. 91  SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Juan Capistrano, California, on March 30, 2007. Monarch Staffing, Inc., a Nevada corporation By: /s/ Joel Williams -------------------------------------- Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities in San Juan Capistrano, California, as of the dates indicated. NAME TITLE DATE /s/ David Walters Chief Financial Officer, March 30, 2007 ---------------------- and Chairman David Walter /s/ Keith Moore Director and Secretary March 30, 2007 ---------------------- Keith Moore 92

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10KSB Filing   Date First   Last      Other Filings
4/27/992
9/13/0012
1/1/012
7/15/02210SB12G
8/8/0313, 4, 8-K, 8-K/A
8/15/032
9/2/0328-K
9/30/03210QSB, 10QSB/A, 8-K
12/31/03210KSB, 10KSB/A, NT 10-K
1/1/042
5/20/042
8/31/04124, 8-K
10/1/0428-K
10/5/0428-K, SB-2
12/31/04210KSB, NT 10-K
1/1/052
1/21/052SB-2/A
2/1/052
5/16/052
6/1/052
6/10/052
6/20/052
6/21/0528-K
9/30/05210QSB, NT 10-Q
11/4/05123, 3/A, 8-K, 8-K/A
11/7/0512
11/8/05128-K
11/10/0512NT 10-Q
11/14/0528-K
12/1/051
12/15/0512
12/31/051210KSB, 10KSB/A, NT 10-K
1/1/062
1/19/0612
1/25/0612
2/1/0628-K
2/2/0612
2/24/0628-K
3/6/062
3/21/0628-K
3/27/06128-K
3/31/061210QSB, 8-K, DEF 14C, NT 10-Q
4/4/0628-K
5/19/06210KSB
6/5/0612
7/24/0612
8/4/062
8/9/06210QSB
9/1/0623
9/7/0628-K
9/11/062
9/15/062
10/4/062
10/5/062
10/11/062
11/1/0612
11/8/062
11/14/06210QSB
11/15/062
12/20/062
12/28/062
For The Period Ended12/31/0612
1/1/072
1/2/072
2/5/072
2/8/072
2/15/072
3/1/071
3/21/071
3/22/0712
3/29/0712
Filed On3/30/072
3/31/07210QSB
Filed As Of4/2/07
4/30/07128-K
5/25/0712
9/30/07110QSB
10/31/0712
11/15/072
11/25/0712
11/30/071
12/31/072
1/1/082
6/30/081
12/31/082
10/1/092
 
TopList All Filings


Filing Submission 0001140377-07-000054   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2014 Fran Finnegan & Company.  All Rights Reserved.
AboutPrivacyRedactionsHelp — Thu, 18 Sep 15:42:34.1 GMT